Mexico Energy Update: Legislation Passed
Mexico Energy Update: Legislation Passed
After months of debate, Mexican Congress passed a historic energy reform package granting Pemex greater autonomy and the right to sign incentive-based contracts with private firms.
Reform Passes Congress
Since April, when President Felipe Calderón unveiled his proposal for energy reform, Mexicans have been debating its merits. Following months of uncertainty, which included a takeover of Congress by protesters, citizen consultations, and countless hearings, the country’s three main parties joined together to pass a revised version of the original proposal.
Many observers see the legislation as an important first step toward needed reforms. Because of a lack of new oil field discoveries, Mexico’s reserves have been declining since the mid-1980s. From 2002 to 2007, for example, Mexican reserves fell nearly 30 percent to just under 15 billion barrels. The revenue from these reserves has been funding about 40 percent of the federal government’s budget. But without new finds, the reserves are not expected to last more than ten years.
In addition to modernizing Pemex, Mexico’s state-owned oil company, Calderón and the National Action Party (PAN) hope the reforms will result in private sector participation in deep-water extraction. Pemex currently lacks the technological know-how for the complicated drilling process, and it is believed that there are substantial reserves located in deep water in the Gulf of Mexico.
The New Rules
The reforms include a total of seven bills, with the most important covering administration of Pemex. Replacing the current rules, Pemex will now have greater autonomy and budgetary control—allowing the firm to keep more of its profits—as well as the right to contract with private firms. But the final legislation, while permitting Pemex’s controversial engagement of the private sector, dilutes Calderón’s original proposal. Rather than grant Pemex outright authority to contract with the private sector, the new law prohibits outside participation in transportation, storage, and refining, limiting the private sector role to exploration and production activities. The legislation also stipulates that domestic service providers perform at least one-quarter of contracted work.
Considerable debate focused on the terms of the private-sector contracts. Calderón’s proposal did not include production-sharing contracts, but the opposition raised fears that contracts would reward private companies with a share of Mexico’s oil. The final reforms allow for incentive-based contracts (performance-based bonuses, for example), but clearly state that companies are to be paid only in cash and that the amount cannot be a portion of sales.
The final reform package also permits Pemex to issue “citizen” bonds and increases the Ministry of Energy’s power to plan and regulate oil and gas. Not originally proposed, but passed as part of the reform package, are two bills that promote sustainable and renewable energy.
The fact that the final measures include most of Calderón’s proposals and were passed with overwhelming support in a divided Congress is a victory for the president and the PAN. The two other major parties—the Party of the Democratic Revolution (PRD) and the Institutional Revolutionary Party (PRI)—also consider the legislation a success due to the limits placed on private-sector participation.
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