Energy Reform in Mexico

Antonio O. Garza, Jr. (Ambassador to Mexico, 2002-2009)

Cross-posted from Ambassador Garza’s July 18, 2013 blog post.

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To Keep Energy Reforms on Track, Peña Nieto Must Engage Public

A reform push in Mexico that many have termed historic could get epic this fall. That’s when President Enrique Peña Nieto will introduce plans to reform the oil and gas sector and overhaul the country’s tax system.

There’s a broad consensus among economists that Mexico’s growth and long-term vitality rely on the passage of these plans, interlinked because oil revenues constitute a substantial part-around one-third-of the federal budget.

And there’s a general acknowledgment across much of the Mexican political spectrum that Pemex, the state-owned oil company, is in dire need of reform. Now in its 75th year, the company’s reputation is one of inefficiency and corruption while large and persistent financial losses-only one of its four subsidiaries is profitable-underscore its deficiencies. A host of problems, operational and structural, have limited the company’s ability to invest in the technology necessary to tap deep-water reserves and develop Mexico’s extensive shale-gas deposits.

Analysts argue that Mexico’s window to expand energy production is closing, and in order to fulfill this strategic imperative, Mexico must change the regulatory framework to permit deeper international partnerships. Despite the grim outlook, there is not significant public support for reform of the oil sector. A recent poll by a respected Mexican research institute found that 65 percent of Mexicans disapprove of foreign investment in the sector.

In an indication of his leadership mettle, Peña Nieto has not shied away from declaring his support for such change. As a presidential candidate he spoke often of Mexico’s being a “hostage to ideology” and the need to open oil to private investment for the good of the economy and the Mexican people. And in March at the national convention of Peña Nieto’s Institutional Revolutionary Party (PRI), the president advanced his cause by marshaling unity behind a statute to allow increased private participation in Mexico’s oil sector. It was a remarkable outcome given the country’s oil narrative and the symbiosis between the PRI and Pemex. And it was a shot across the bow signifying that internal party divisions will not stall the administration’s planned reforms.

Speaking at Pemex’s anniversary commemoration on June 7, the president emphasized his view that the company “must be transformed in order to remain an engine for the country’s development,” while also stressing that “Pemex will not be sold or privatized.” He reiterated these remarks a few days later in a speech and interviews while in Europe for the G-8, adding that the reform would include “the constitutional changes needed to give private investors certainty.” He also declared his confidence that the Pact for Mexico, the three-party alliance that has so far produced substantive reform for Mexico’s labor, education and telecom sectors, could deliver the reform. Though the staying power of the pact remains to be seen, the results of the July 7 local elections help solidify its spirit of cooperation and coordination-at least for two of the three parties. The PRI’s strong national showing and, paradoxically, its loss to the National Action Party (PAN) in the only gubernatorial election-in Baja California-strengthen Peña Nieto’s position as the next push for reforms begins.

Nevertheless, the president’s statements in Europe, along with an article in The Wall Street Journal on June 18 reporting that highly placed officials had revealed in an exclusive interview that the government would open the state-run oil-and-gas industry to private investment and competition, produced a shrill outcry in Mexico. The article also contained other previously unknown aspects of the plan, including that the reform would grant 25-year contracts in specific deep-water areas, develop a mechanism to allow foreign firms to book reserves and create a national petroleum agency to administer the new partnership model. The blowback came not only because of the specific revelations, but also because of where (abroad) and to whom (foreign journalists) they were first delivered.

The reaction, though not extreme, came as a clear reminder of how deep sensitivities relating to the national patrimony run. It also served to highlight the importance of strategic communications and the need for the administration to make a clear case for energy reform first, and foremost, to the Mexican people. Given the swirling discontent over corruption, the administration must also be wary of appearing to conduct business behind closed doors or trying to sidestep contentious issues.

These red flags are especially relevant given the influence and disruptive potential of many of today’s social movements. The eruption of mass street protests in Brazil is just one recent example of a government being forced to change direction on a policy initiative and find a way to rapidly and constructively respond to the desires, often inchoate, of a newly emboldened and empowered population. It’s a cautionary tale that begins with frustration and finds expression in mass action.

Such scenarios are not unknown in Mexico: Witness last year’s Yo Soy 132 movement, to name the most recent instance. The Peña Nieto administration surely knows it must be attentive to frustrations that are bubbling up around the country, whether over corruption, electoral meddling or any other from a long list of grievances. No matter the issue or its import to an international or national business and political elite, it’s the tools of democratic governance-transparency, communication, negotiation, inclusion, accountability-that are most essential for Mexico’s leaders to wield. That is especially true when it comes to the much-needed reforms in the country’s oil and gas sector.

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