O’Neil: Mexico’s Historic Energy Reform

MEXICO City, Mexico – Listening to the fireworks for the Virgen de Guadalupe last night from my hotel room in Mexico City, one could have mistaken them for the tumult occurring at the same time in the House of Representatives.

Right before midnight, the representatives passed, by a two-thirds majority, the principles of energy reform (following the Senate’s approval earlier in the day).

Today they hammered out the final details, making a historic change to Mexico’s energy sector, a political sacred cow, by opening it up to the broader world of investment. The constitutional reforms still need to be approved by seventeen of Mexico’s thirty-two state Congresses, but with twenty-five PRI or PAN governors this seems very likely to occur smoothly.

The reform does many things:

It establishes different types of possible contracts: service contracts, profit sharing, production sharing, and licensing (where a firm would pay taxes and royalties in exchange for exploration and drilling rights).

It allows companies to post reserves, though they must specify that the oil and gas belongs to Mexico.

It creates a sovereign fund, the Mexican Petroleum Fund, which will manage the country’s oil revenues. The Fund will allocate the appropriate amount of money to cover the national budget and invest the rest in long term savings. The Bank of Mexico will oversee the fund.

The reform calls for increased transparency and mechanisms to reduce corruption.

It also removes Pemex union members from the state-owned company’s board, reducing their role (and power). It splits the remaining ten board members between five government appointees and five independent consultants.

The changes are profound, even if the reform stops short of giving private companies ownership over subsoil oil (e.g. directly booking reserves). What happens now will largely depend on the secondary legislation—which is yet to be written (or at least introduced and passed). These rules, for example, will determine which oil and gas blocs will be developed and under what terms, and will be presented next year.

If implemented, energy experts predict that oil production would steadily increase in the coming years, and natural gas (given Mexico’s significant reserves) could expand rapidly. This increase in production would likely benefit the Mexican Treasury, as even though taxes collected might be lower, the base will surely be larger. But it will also benefit the Mexican people, lowering consumer gas prices, increasing stability of supply, and making Mexico a more attractive place for foreign investment dollars.

Shannon K. O’Neil is Senior Fellow for Latin America Studies at the Council on Foreign Relations. Her expertise is Latin America, Mexico, Brazil; policy reform; security; trade; energy; and immigration. The above blog first appeared on the Council on Foreign Relations’ website.

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