Bloomberg News

Pena Nieto Ponders Easier Way to Open Mexican Oil Industry

October 04, 2012

President-elect Enrique Pena Nieto’s team is looking at ways to open up Mexico’s energy industry that wouldn’t require changes to the constitution, a top economic adviser said.

Pena Nieto wants to break state-owned Petroleos Mexicanos’s monopoly on refining and exploration and is considering legislation that wouldn’t involve the two-thirds congressional majority needed for constitutional changes, Ildefonso Guajardo said. Pemex, as the company is known, is struggling to reverse seven years of production declines that have cut output 25 percent from a peak of 3.4 million barrels a day in 2004.

The decision on how to pursue an energy overhaul will depend on “a technical analysis of how far we can get without a constitutional change,” Guajardo, 55, said yesterday in an interview in Mexico City. “If a constitutional change is required, we’ll need to define where. I’d be lying if I told you that has been defined.”

Achieving an energy overhaul without changing the constitution would be a departure from the strategy outlined by Pena Nieto’s team before the election. Campaign manager Luis Videgaray said in a May interview that the Institutional Revolutionary Party candidate would ask Congress to approve changes to the nation’s charter that would allow joint ventures and shared risk contracts.

Priority

Pena Nieto, who takes office Dec. 1, said in November he’ll stake his administration’s success on attracting private investment to the oil industry and eventually paving the way for selling shares to the public.

The incoming leader in his first year in office wants to open up the oil industry and achieve a fiscal overhaul that boosts taxes as a percentage of gross domestic product by at least four percentage points, Guajardo said. Congress convenes in regular sessions from February to April and from September to December each year.

One possibility is for fiscal and energy bills to be introduced at the same time in different chambers and have lawmakers work on them simultaneously, as they have been with a labor overhaul and a bill to increase state-level government transparency, Guajardo said. The legislation to ease the process for hiring and firing workers passed the chamber of deputies last week. There’s a “need to push energy and tax together,” he said.

Tax Revenue

Mexico’s total tax revenue, which amounted to 18.1 percent of GDP in 2010, is the lowest relative to output among the 34 members of the Organization for Economic Cooperation and Development, according to data compiled by the group.

Asked if Pena Nieto would extend a 16 percent value-added tax to food and medicine, which are currently exempt, Guajardo said it would depend on what the parties negotiate. Some lawmakers in both President Felipe Calderon’s National Action Party and Pena Nieto’s Institutional Revolutionary Party have said in the past they would support adding duties to those goods.

“The general point is that you have to redesign the tax basket,” Guajardo said. “I can’t say what the final conclusion is, because it will depend in part on our dialogues.”

The PRI alliance with the Green Party has 241 seats in the 500-member lower house and a one-seat majority when it works with the New Alliance party, a partner in the last Congress. While that’s enough to pass laws and regulations, it doesn’t ensure the party sufficient support for constitutional changes, which must also be ratified by a majority of legislatures in the 31 Mexican states and the federal district.

Pragmatism

The potential change in tactics may be an acknowledgement of a more difficult political environment after Pena Nieto’s PRI party won fewer seats in Congress than projected by many polling agencies, including Consulta Mitofsky, said Jeremy Martin, an oil specialist at the Institute of the Americas in La Jolla, California.

“Politically, it’s damn hard to do constitutional amendments,” Martin said in a telephone interview. “If you want to really make this happen in the sense of seizing the opportunity Mexico has, then you need to amend the constitution so real deals can be done, as they have been in other parts of the world, as with Petrobras (PETR4) in Brazil,” he said, referring to Petroleo Brasileiro SA.

Guajardo, an economist who got his doctorate from the University of Pennsylvania, previously served as a deputy in Mexico’s lower house.

He also worked in the Foreign Ministry, as a negotiator on the North American Free Trade Agreement with the U.S. and Canada that took effect in 1994, and as an economist at the International Monetary Fund.

When asked whether he would serve in Pena Nieto’s cabinet as economy or energy minister, the Dallas Cowboys fan, originally from Monterrey, said the incoming president hasn’t yet made any decisions on those posts. Pena Nieto named him to the transition team last month.

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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