Energy Reform in Mexico May Open Doors to Foreign Investment

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A new energy reform proposal suggested by the President of Mexico could open up the market to foreign investment, if approved. President Nieto has presented a new bill which involves the restructuring of Pemex and proposes the end of the company’s monopoly. This state owned Oil Company has controlled the energy market in Mexico for almost seventy five years. However, it will require dramatic change to the constitution and significant restructure of the inefficient and controversy ridden Pemex.

Pemex has been firmly in their own comfort zone for many years will access to oil fields which were easy to tap. However, these oil fields are now drying up and the company lacks the technology, skills and equipment for exploration of deep water reserves or exploiting shale gas. Pemex’s output has been steadily decreasing over the last decade with production estimated at less than 75 percent of previous figures.

The company has struggled to run effectively and has been forced to use capital to pay annual tax burdens rather than investing in new technology, training or equipment. Unless new methods of production can be brought online quickly, Mexico may find herself in the position of becoming a net energy importer.

Foreign investment seems to be the key to resolving this issue, but it is a very risky political move. Mexico’s oil industry was nationalized in 1938 and many feel foreign investment may compromise Mexico’s independence. The new proposal has not suggested direct investment in the oil fields, but proposes private companies be permitted to bid for Pemex profit-sharing contracts. This approach could allow foreign investment into refining, transportation and petrochemical production, allowing them to work with Pemex rather than in competition.

Many believe this new proposal will allow the private sector to contribute to the energy sector and allow price reductions. This could further boost Mexico’s economy without releasing full control of her assets. Major foreign producers including Repsol, Chevron and Exxon have already expressed an interest in participating in this scheme.

The energy reform proposal needs congressional approval but it would represent a significant change in Mexican attitudes. Many experts believe that Pemex is struggling with outdated technologies and management issues which are severely limiting their potential. Investment capital from foreign companies could provide the opportunity for dramatic improvement which would be of great benefit to the Mexican economy.

This proposal represents a large political gamble for President Peña Nieto. He will require the support of both his party and the National Action Party in order to facilitate the plan going through Congress. Peña Nieto also wants the left wing to come. It would then need approval in at least seventeen of the thirty two state legislatures of the country. There is already significant opposition from two political parties and may struggle to convince the general population.

The Mexican people take a great pride in their nationalized energy industry and many will be against private investment especially from foreign companies. Peña Nieto has assured the people repeatedly that his plan does not involve privatizing the industry but will merely allow private companies to share a percentage of the oil discoveries. With the third biggest proven reserves in Latin America, this represents a significant investment opportunity.

Sources:

http://www.cbc.ca/news/business/story/2013/08/1…

http://www.economist.com/news/business/21583253…