Mexico: Will the proposed energy reform be enough?
Mexico’s oil monopoly has been in place for nearly eight decades. With the proposed reform, will it be enough?
The WSJ is optimistic:
Mexico’s Energy Breakthrough
The country bids adios to 75 years of oil nationalism., even when
Mr. Peña Nieto’s proposal doesn’t go as far as it might to solve Mexico’s oil woes, and it certainly doesn’t privatize Pemex. It doesn’t even give investors ownership of a drop of Mexican oil.
Instead, the bill allows foreign and domestic investors to become partners with Pemex in exploration and production. Those partners would take their profits not in oil but in the cash equivalent of what they pump. Whether that’s enough of an incentive to entice a Chevron or a Shell will then depend on secondary legislation, particularly on contract terms and taxes. It would be a shame if Mr. Peña Nieto and his allies in Congress fail to follow through here, but at least their political incentive is to make the reform a success.
Juan Carlos Hidalgo at CATO is not as sanguine: Mexico’s Timid Energy Reform
Peña Nieto’s energy reform contemplates changing three articles of the constitution to allow private companies to pump oil, not through concessions as in most other Latin American countries, but via profit-sharing agreements. That is, the Mexican government will pay private companies for the oil they produce, but the companies won’t have outright ownership of the oil.
Unfortunately, the reform doesn’t contemplate allowing the sale of Pemex shares, as proposed by Mexico’s conservative opposition party PAN. Not allowing the sale of Pemex shares will significantly limit the chances of improvement in corporate governance of that white elephant. As The Economist points out, Pemex is plagued by mismanagement and political meddling. Energy reforms in Brazil in 1997 and Colombia in 2003-2006—which the Mexican government is pointing to as successful examples—involved not only allowing concessions for private companies, but also limited private ownership in Petrobrás and Ecopetrol, respectively. These moves have been credited with improving the corporate governance of these oil companies.
Hidalgo concludes (emphasis added),
Peña Nieto’s efforts to bring more private investment to Mexico’s oil industry should be commended. However, even if his energy reform is approved, Mexico will still have the most tightly state-run energy sector in the Americas (even more than Cuba and Venezuela). That, in itself, should indicate how much room for further reform will be needed.
Additionally, the question remains on whether future Mexican government administrations wouldn’t nationalize whatever the foreign companies have.
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