I made an early review of the Mexican Energy Reform. Now it is time to revisit in full. This is part 1 of 3 for a series of posts trying to construe the recently approved Mexican Energy Reform. Despite the political opinions, this Reform sets a new landmark on how Mexico sees the future of energy sector and the free market economy.
Mexico has liberalised the energy market, leaving behind the vision that PEMEX and CFE must have monopoly over hydrocarbons and electricity. Mexican Congress has already declared constitutional the Energy Reform, after having received approval from majority of State Congresses. President has already signed the publishing Decree, and is being published this afternoon. On Monday, the Reform will have effects.
The approval happened despite the opposition of the left-wing party PRD, who proposed an overhaul to PEMEX and not allowing private investment into the energy sector. As PRI/PAN majority on Senate and Representatives approved the Reform, it passed. Regardless of the political opinions, the majority decided. PRD is analysing legal recourses to challenge the Reform, and also suggesting a public consultation that could happen in 2015. Considering that this Reform was to the Constitution, it will be very hard to challenge it, as there are very limited cases where the Constitution can be challenged.
What is firm now?
The Reform has two sets of provisions: The constitutional articles and the transitory articles. The first are firm, and as indicated, it is very hard to challenge due to the circumstances of majority. The second are provisions that rule during vacant time until secondary legislation is enacted. Secondary legislation would be enacted during first quarter of 2014.
The Constitutional Articles that were amended are 25, 27 and 28, and provide for the following:
1. A common mistake is that PEMEX had the monopoly of oil and gas reserves, and CFE from electricity. However, the Mexican State has always been the owner, and decided, as public policy, granting monopolies to PEMEX/CFE, not by Constitution. According to the Reform, Mexican State will keep control of government-owned companies (GOC) in the oil, gas and electricity sector. From the Reform, PEMEX and CFE will remain 100% state-owned, but breaks the customary monopoly, i.e. the State itself can create other GOCs that compete or collaborate into those markets. Creation of diverse GOC is not so uncommon, as happened with CFE and Luz y Fuerza del Centro.
2. Nuclear power and radioactive materials are property of the State, and always will be used for pacific purposes.
3. In electricity sector, the State will keep control of the grid, transmission and distribution. In relation to the generation (and self-generation) of electric power, there will not be licenses, but contracts for private parties. For practical purposes, licenses equal contracts.
4. In oil and hydrocarbons, the State will be their owner and there will be no concessions. However, for the purpose of obtaining economic benefits, it can grant, for exploration and extraction: a) assignments to GOCs, or b) contracts with GOCs or private parties. GOCs can subcontract or partner private parties. Secondary activities like refining, transport, sub-products and retail are not provided for, which would be regulated on detail by secondary legislation.
5. Banco de México will manage a sovereign fund for receiving the rents, manage the investment and distribute the benefits and make payments in relation to oil rents.
6. Executive Branch will have regulatory bodies for hydrocarbons sector (Comisión Nacional de Hidrocarburos) and electricity (Comisión Reguladora de Energía).
For now, many details are to be defined by March 2014. However, the Reform draws four main conclusions: 1) There is not coming back to state-monopoly; 2) The Reform is good enough to start exploring opportunities, 3) PEMEX and CFE will require experience, resources and partners/contractors to compete, as well as private players, and 4) Mexican energy market is being fuelled by growth in the manufacturing industry and public infrastructure.