A few contrary words on Mexico’s oil reform

We checked with our long-time friend George Baker of Energia, who has long cast a discerning and questioning eye at Mexico’s energy policy. We were curious what he would say about the approval last week by the Mexican Senate to approve reforms in the Mexican energy sector that received mostly universal praise as ground-breaking, except from the Mexican left that has never argued for anything other than the status quo.

Not surprisingly, the changes weren’t sweeping enough, in George’s view. Here are a few excerpts of what he shared with us.

“The government lost control of the rationale for an energy reform, and, by inattention, allowed the foreign media to define the purpose in uncomplimentary terms. According to the (media), the purpose is ‘to open the energy market.” Why? Basically because Pemex has failed to keep up oil and production. So the rationale is defined in terms of trying to correct failures of past policies and of the performance of Pemex.

An alternative rationale, which the government should have adopted, is that the State needs the flexibility to respond to evolving technologies, market conditions and business models, and there needs to be a clear separation between constitutional and commercial considerations and restrictions. As matters stood, commercial restrictions had been put into the constitution as far back as 1960 which needed to be removed in order to achieve the flexibility to devise public policies in a responsible manner.”

One thing George has talked about repeatedly is Mexico’s “narrative,” the basic set of beliefs and conventional wisdom that establishes the relationship between the state and Pemex. One of his best examples of how this narrative becomes almost totalitarian in its governance of Mexico’s oil industry is that no other entity is able to control even a drop of petroleum, even to the point of ownership right up to the point when gasoline flows from a dispenser into a motorist’s tank. “The government has not taken any steps to reorient the national energy narrative away from its roots in 1938, and today it is paying the price in the coin of outrage in the congress and on the streets,” Baker writes.

True, but it could also be said that the outrage in the streets is being ginned up by Andres Manuel Lopez Obrador, who garnered all of about 5-6% in last year’s presidential race after almost winning the job in 2006. It’s a group that will never be satisfied but can always generate a lot of people demonstrating in protest. At the ballot box, increasingly, not so much. And on the floor of the Chamber of Deputies, the vote in favor of reform was 353-134.

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George is nothing if not ambitious: “The bold step would have been to have announced an IPO for a Pemex 2.0, a mixed capital company with open shares in the NYSE. It would be this company that would enter into JVs with foreign oil companies in Mexico and beyond.” He also suggested a change in the Pemex board, dumping electricity from the Mexican constitution and cutting up Pemex Gas into marketing, pipelines and processing units.

And maybe the country will get there. But for now, it’s got a reform that will allow foreign oil companies to enter into production sharing agreements and licenses. That would have been unheard of — though widely talked about — seven to eight years ago.

The perfect can always be the enemy of the good.

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  1. Aldyen Donnelly at December 17, 2013 10:11 am

    Is it realistic, let alone a good idea to try to take Pemex from one extreme to another? Wouldn’t a more practical approach be to ask; what would it take to make Pemex look/operate more like Petronas (Indonesia)?


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