Mexico’s Energy Reform and the Need for Productive Public Companies

Monday’s energy reform announcement by the government is one of the most important in Mexican recent history, as it is a proposal for a wide-ranging constitutional reform. The proposal was made in an area that has long been a taboo in the country, to the extent that the left took up its usual argument to “not making any changes to the Constitution.” By doing this, they gave preference to the “how’s” instead of to the “what’s”, subsequently excluding themselves from a hugely important and transcendental debate.

The fact that President Peña Nieto only sent the Congress reforms to Constitutional articles 27 and 28 could facilitate the legislative debate. At the same time taking up former President Lazaro Cárdenas’s version of Article 27 is a sign of wisdom and political pragmatism given that, according to the government, its benefits are larger than its costs.

There were no surprises with regards to hydrocarbons policy, given that the reform proposes to limit Pemex’s exclusivity in its exploration and extraction. According to the statement, Pemex and private participants, as well as partnerships between Pemex and them, may participate in exploration and extraction of hydrocarbons.  To do so, these three actors will be subject to the procedures and criteria established by law and government.

Although the initiative does not specify the contractual arrangements to be proposed in the Regulatory Law of Constitutional Article 27, it is surprising that President Peña Nieto’s has placed emphasis on profit-sharing agreements and has left out production-sharing options. It was known that there would be no concessions under the argument that they were expressly forbidden by Lázaro Cárdenas. These contracts will have to be negotiated with a State entity and not Pemex, so it is very important to clarify and define which government body will be responsible for this.

This round of proposals did not include changes that would allow Pemex to operate akin to a business instead of a public body. Excluding Pemex from the Federal Expenditure Budget by lowering its taxes and royalties, and freeing it from the heavy regulations imposed by SHCP and the Ministry for Public Service means that it is no longer considered strategic or a priority. Why then did the government not re-make Pemex as a productive public company? Pemex and CFE should be allowed to compete without any disadvantages with respect to private participants.

Last but not least, although it should not necessarily be a Constitutional amendment, it is strange that President Peña Nieto did not include the creation of a sovereign fund that would prevent the squandering of future oil wealth and allow future generations to take advantage of this resource. Regardless, yesterday was a memorable day in Mexican history, after all President Enrique Peña Nieto presented a wise and courageously long-term initiative with potential to transform the country.