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The Politics of Energy Reform

March 31, 2008

Energy reform bill submitted to Congress

President Felipe Calderón presented an energy reform proposal to Congress on April 9 that seeks to give more autonomy to Pemex—the state oil company—and allow for some private sector investment in the energy sector. The reform, steering clear of the Mexican Constitution’s prohibition on private ownership of Mexican oil, focuses primarily on strengthening Pemex’s corporate governance and granting it greater operational autonomy. Pemex would have more control over its budget and debt-contracting procedures—allowing it to bypass the Secretaría de Hacienda y Crédito Público—with the goal of boosting operational and investment decision efficiency.

The reform does not tackle the ban on foreign companies participating in risk sharing agreements, a move still considered to be Mexico’s most viable option to tap its vast deepwater reserves, according to the Energy Intelligence Group. However, it would permit private investment in downstream and midstream operations by allowing private ownership of oil refineries currently owned and operated by Pemex. Non-state entities could also participate in areas such as transportation, gas supply and distribution, refined petroleum, and petrochemicals.

Another proposal in the reform is for Pemex to be able to issue citizen bonds. Ordinary Mexicans and pension funds could buy Pemex debt in exchange for monetary benefits; this could provide needed cash infusion for the oil company. The reform makes clear, though, that these bonds would not give any right over Pemex assets and operations.

Mexico’s declining oil production

Mexico is one of the largest producers of oil in the world and is consistently among the top three oil exporters to the United States. But without new oil field discoveries, Mexican reserves have been declining since the mid-1980s. This is of particular concern for the federal government, which relies on Pemex for 40 percent of its budget. In presenting the oil reform to the nation, Calderón said, “We have to act now because time and oil are running out.”

From 2002 to 2007, reserves fell 27 percent to 14.7 billion barrels, which Pemex estimates is just about nine years of oil, if extraction continues at the current rate. Production has fluctuated between 3.5 and 3.8 million barrels a day since 2002, and the U.S. Energy Information Administration forecasts a further decline to 3 million barrels a day by 2012. As new projects come online, production should reach 3.5 million barrels a day by 2030.

PRD leadership

Three weeks after the March 16 internal election, the two main factions of the Party of the Democratic Revolution (PRD) continue to debate the results. The contest for the party’s presidency, largely a fight between Alejandro Encinas and Jesús Ortega, is still being disputed. Encinas received a thin majority of the votes but allegations of vote manipulation continue to dominate the political scene.  

Alejandro Encinas is a close ally of Andrés Manuel López Obrador, the 2006 presidential candidate, and leader of the Izquierda Unida, a party faction that refuses to negotiate with the federal government. The challenger, Jesús Ortega is the leader of the Nueva Izquierda, a PRD wing that calls for dialogue with both the National Action Party (PAN) and the Institutional Revolutionary Party (PRI).  

Congressional passage of energy reform

The recent PRD leadership battle will have an effect on the energy reform proposal that Calderón is pushing forward in Congress. The party president has access to key financial resources and control over candidate nominations, according to the Eurasia Group.

The PRD opposes what they are calling the “privatization” of Pemex, and López Obrador has said he will mobilize PRD supporters in acts of civil disobedience at strategic installations, if necessary. The PRI initially indicated it might support the PAN’s proposal, but PRI lawmakers are divided and some have questioned the figures released by Pemex on the decline in reserves. Furthermore, the PRI is concerned that voting for the energy bill may jeopardize electoral chances in the May 2009 congressional elections. The PAN will be severely challenged in passing energy legislation without PRI support.