Energy

Mexico's President Pushes Reforms for State Oil Company Pemex


President Peña Nieto is trying to open Mexico’s energy industry to more foreign investment

Photograph by Reuters

President Peña Nieto is trying to open Mexico’s energy industry to more foreign investment

Petróleos Mexicanos, known as Pemex, has long been the third rail of Mexican politics. The state-owned company, originally based on oil fields seized from foreign owners over 70 years ago, has produced sizable government revenue and union jobs for hundreds of thousands of Mexicans. Foreign investment has been largely restricted.

But now Pemex’s main asset, the giant Cantarell offshore field, is shrinking fast. The company says it needs to boost annual investment by 46 percent, to $37 billion, to tap undeveloped shale-gas deposits and deep-water reserves. Without some private capital and expertise from abroad, Mexico risks becoming an importer in the next decade. Many of Mexico’s politicians and policymakers have known this for years. Yet Mexican nationalism, resistance from the unions, and the sheer size of the task of transforming Pemex have stood in the way.

The planets may be aligning for a solution: Mexican President Enrique Peña Nieto says he’s negotiating to get the political support he needs to break the state monopoly in oil and gas exploration and production this year in a bid to accelerate Mexico’s economic growth. In the model envisioned by Peña Nieto, Pemex would develop certain fields, while foreign and private companies would tap others. The oil and gas reserves in the ground would still be the property of Mexico. Peña Nieto declines to discuss many details of the proposal or whether it would include a change in the constitution, which limits how private companies can profit from the nation’s energy resources.

He has, however, been sending signals to international oil companies that he needs their help to arrest eight years of decline in Mexico’s crude output. “It’s obvious that Pemex doesn’t have the financial capacity to be in every single front of energy generation,” the 46-year-old president said in an interview in London on June 17, before he traveled to Northern Ireland for meetings with Group of Eight leaders. “Shale is one of the areas where there’s room for private companies, but not the only one.”

Peña Nieto says his administration will send the energy bill to Congress by September, when regular sessions resume. He’s relying on the Pact for Mexico, an alliance of the country’s top three political parties, which have vowed to work together to achieve major reforms. Peña Nieto’s own party, the Institutional Revolutionary Party (PRI), doesn’t have enough votes on its own for a constitutional amendment.

“We’re approaching key deadlines,” Peña Nieto says. “I’m optimistic that this political climate of understanding and agreement will be maintained.” Yet investors have pushed down the price of Pemex bonds in the last month. They’re losing confidence in the president’s ability to achieve the needed changes amid signs that the Pact for Mexico is fraying. Corruption allegations against the PRI have already almost derailed the alliance. In April, the National Action Party, a member of the pact, released video and audio tapes allegedly showing officials from Peña Nieto’s party arranging to use government social programs to win support before local elections. The accord may end if Peña Nieto doesn’t prevent electoral irregularities in states where local contests will take place on July 7, said Jesús Zambrano, head of the Party of the Democratic Revolution, another member of the pact in May.

“If the Pacto por México dies, then what’s the plan?” asks Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington. “We don’t know what the plan is after that.”

Peña Nieto has also waited a long time to make his push for a new oil law. Delays in introducing an energy bill could threaten its depth and support, says Jeremy Martin, an oil specialist at the Institute of the Americas in La Jolla, Calif. “The longer things go, people start taking different directions, and then politicians, his team, start finding reasons why they shouldn’t do something big,” Martin says. In the fall legislative session, an oil bill may also have to compete with the annual budget,a major distraction.

Peña Nieto, who’s been president for seven months, says there’s political momentum to pass more reforms after the approval of new education and telecommunications laws that opened up both sectors to more competition. The education bill created an independent institute to evaluate schools and foster competition for jobs and promotions based on performance, a move that has sparked violent protests from teachers. The government also arrested the powerful head of the teachers’ union, Elba Esther Gordillo, on corruption charges, taking on a leader long considered to be untouchable. Her lawyers say she is innocent. In mid-June, Peña Nieto signed a law aimed at spurring more competition in telecommunications by threatening to break up companies that control a majority of the market. That’s a potential headache for billionaire Carlos Slim’s América Móvil (AMX), which has 70 percent of Mexico’s mobile phone subscribers, and Grupo Televisa (TV), which gets 70 percent of the nation’s broadcast television audience.

“Overall he’s done an excellent job,” says James Jones, the U.S. ambassador to Mexico when the North American Free Trade Agreement took effect in 1994. “He has the best political sensitivity and touch I’ve seen since President Salinas was able to marshal various factions of Mexico to pass Nafta.”

The bottom line: Mexico, facing a steady decline in oil output, needs foreign money to develop shale gas and deep-water reserves.

Martin is a reporter for Bloomberg News in Mexico City.
Rodriguez is a reporter for Bloomberg News in Mexico City.
Marinho is an editor for Bloomberg News in São Paulo.

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