Mexico took a giant leap toward a new economic future last week with Congressional passage of a remarkably bold energy reform bill. Both euphoria and hand wringing ensued as Mexico observers and the Mexican people began contemplating the significance to the country of opening its long-protected oil and gas industry.
These emotional reactions, though deeply felt, will soon subside; giving way to the realization that there’s much hard work ahead and that the road to reform is long and potentially strewn with obstacles.
But there’s every reason to believe that President Enrique Peña Nieto’s administration is attuned to the challenges. After all, there’s been quite a lot of discussion-albeit largely of the academic sort-about how to revamp the sector. And Mexico surely stands to benefit from the examples of previous reform efforts in the hemisphere and beyond, namely in Brazil, Colombia, Peru and Norway.
The measure that emerged from Congress last week barely resembled the initial, cautious, proposal presented in August by the governing Party of the Institutional Revolution (PRI). That middle-of-the-road effort, which would have introduced profit-sharing agreements, was judged unappealing by the foreign firms whose investment and expertise Mexico’s energy sector desperately needs to overcome its woes.
And so a new, more transformative piece of legislation was produced by what is known as “the art of political compromise.” It’s a craft that has been evident throughout Peña Nieto’s first year in office, facilitated by the three-party accord known as the Pact for Mexico. But with the leftist Party of the Democratic Revolution (PRD) unwilling to negotiate meaningful change for the energy sector, the Pact inevitably dissolved. The PRI and the conservative National Action Party (PAN) remained at the bargaining table and together produced a reform more far-reaching than many analysts had thought possible.
The approved legislation reforms Mexico’s constitution by ending the oil and electricity monopolies (PEMEX and CFE, the Federal Electricity Commission); allowing private oil companies to explore for and produce oil and gas under a variety of contracts, including services, production or profit-sharing, and licenses; creating a sovereign fund to manage oil revenues; and, revising the nature and governance of the PEMEX board.
It took less than a week for the constitutional changes to be ratified by a majority of state legislatures: 17 of Mexico’s 31 states approved the reform within five days of its Congressional passage. Senate recognition of the state actions and the President’s signature will soon follow.
The proximate step will be far more challenging: translating constitutional reforms into workable policies. This secondary legislation, also called implementing laws, will stipulate the policy framework and legal processes required to carry out the reform.
These measures are highly anticipated and potentially will set the stage for as much as $20 billion a year in new investment in the sector. They must clarify roles (for all actors in the sector, from private companies and regulators to PEMEX, CFE and other government entities) and establish the mechanisms and procedures by which the country’s energy resources will be developed and distributed. Among the details to be addressed are which oil and gas blocs will be developed, when, and under which terms and how costs will be established and recuperated.
Adding to this daunting task is an aggressive time frame stipulated in the reform for developing the follow-on laws and regulations, and pressure from continued political opposition from the left can’t be dismissed as a potential complication.
Still, Mexico has taken the crucial first step toward reforming its energy sector. The arduous work of building a framework and policies that can bring Mexico’s energy sector into the modern era and enable the country to realize its great economic promise is underway. The excitement of this moment is real, for Mexico and anyone concerned about this hemisphere’s future.
Antonio Garza is a former U.S. Ambassador to Mexico. Ambassador Garza is Counsel in the Mexico City office of White & Case and serves as chairman of Vianovo Ventures. Online at www.tonygarza.com.
My colleagues at White & Case point out in our recent client alert that energy reform goes far beyond expectations. The 75-year monopoly by state-owned PEMEX ends, and a competitive wholesale power market is created. You can download and read the full client alert online.
Lastly, JP Morgan pointed out in their Dec. 16 report on Mexico, “The approval of a better-than-expected energy reform bill improves the prospects of lifting Mexico’s potential growth and attracting FDI inflows in the medium term.” Their report is available here.