Mexico Moves Toward a Major Energy Reform

President Enrique Peña Nieto presented a long-awaited energy reform on 12 August that may not be as controversial as feared. There is no doubt that the issue will generate significant political noise, but in the end Mexico appears ready to make changes that even ten years ago were unthinkable. The president’s proposal included rewriting portions of the constitution to allow private investment in the oil industry, changes to the national oil company Pemex, and revisions that would allow the company to retain more of its revenues. The government will also seek to open the electricity sector to private participants, though distribution and transmission would remain under state control.

Some pro-market analysts and sector participants were underwhelmed by the proposal. They feared that Peña Nieto’s insistence that only profit-sharing agreements would be allowed for upstream production would shut out the two most widely used contractual arrangements in the industry (production sharing agreements and concessions), which would have provided more clarity for oil companies. But those fears may be overblown. Changing the constitution to allow private investment is by itself a major step that should provide investors with legal certainty and the government appears ready to provide attractive enough guarantees to oil companies in the secondary and implementing legislation.

Most of the political attention will be focused on changes to articles 27 and 28 of the constitution, which respectively specify how the extraction and the refining and petrochemical sectors must be structured. The government will only be able to secure the reform’s approval if it has support from the center right National Action Party (PAN). The leftist Democratic Revolution Party (PRD) will not openly support any constitutional changes and will probably attempt to mobilize popular resistance to the changes. The PAN’s help is needed because constitutional amendments require two-third majorities in both houses of congress as well as approval in half of the state legislatures. But once those changes are secured the government will only need a simple majority to secure approval of secondary and implementing legislation.

The PAN’s price for their support, especially after having had their reform efforts stymied by the president’s Institutional Revolutionary Party (PRI) during two consecutive PAN administrations, will be more political changes and perhaps more pro-market elements to the oil reform. There is a small risk the PAN would push too hard for concessions, putting the overall process in danger. That is unlikely though given that even the pro-business PAN is aware of how difficult it will be to sell these changes to the general population.

The government is going to face significant opposition from the left, though in the end it may be less than anticipated. Even Cuauhtemoc Cardenas, one the PRD’s founders and the son of the president who nationalized Mexico’s oil industry in late 1930s included private investment in his alternate proposal to reform Pemex. Moreover, although polls show a majority of Mexicans oppose opening the energy sector, it seems unlikely that they will mobilize against this reform because of other concerns (e.g. violence, desire for better services). And while there are still some factions in the PRI that oppose it, the party seems to have maintained its usual discipline and has supported the president. In the end, the reform is likely to be approved in congress before the end of the year.

Daniel Kerner is director with Eurasia Group’s Latin America practice. Maria Jose Hernandez is an associate with the Latin America practice.