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Raul Gallegos : 75 years later,
is Mexico ready for energy reform?

The genius of the energy-reform proposal unveiled Monday by Mexican President Enrique Pena Nieto is that it taps the country’s pride in the oil sector’s nationalization to justify reopening the energy industry to private investment. The trouble with it is that -- depending on the fine print -- it could alienate the very investors it seeks to attract.

The much-anticipated plan by the ruling Institutional Revolutionary Party, or PRI, aims to revamp key portions of Mexico’s constitution so that the country can rescue the oil business from 75 years of isolation. In doing so, the plan invokes the memory of General Lazaro Cardenas -- the president who nationalized Mexico's oil companies in 1938 -- and claims the dead president still believed that private initiative could help develop the country’s oil wealth.

Indeed, Cardenas's reforms left the door open to other types of contracts, as Pena Nieto's plan would do. (That door closed in 1958.) The current president's proposal makes it clear: “The spirit of Cardenas’s reforms was no doubt nationalist, but also modernizing, visionary and pragmatic. A fundamental element of these reforms was that they guaranteed ownership and regulation of hydrocarbons by the state, while allowing private-sector participation.”

Mexicans who regard big business with suspicion revere Cardenas. Cities, schools and streets are named after him. Every year on March 18, the country proudly celebrates his oil-nationalization decree. But such pride has given Mexicans an excuse to ignore the evolution of the oil business over the last 75 years. In that time, oil-rich countries have gained the upper hand in dealing with major oil companies. A host of contractual options now exist to more fairly divvy up the oil proceeds, and new technology has made it easier to pump offshore oil similar to the kind Mexico needs to extract.

Die-hard nationalists disavow the damning facts and figures produced by Mexico’s troubled energy business. Despite higher investment, Mexico’s oil output has dropped 25 percent since 2004. Its oil reserves have depleted to only nine years' worth of production. State-owned oil company Petroleos Mexicanos is now forced to explore for oil in deep waters, a costly endeavor for which it lacks expertise.

Pena Nieto’s initiative seeks to reassure the extreme left that despite the changes, the country’s natural riches are safe, and Pemex will remain state-controlled. The president no doubt had his detractors in mind on Monday when he tweeted: “Pemex and CFE won’t be sold nor privatized, they will continue to be 100% Mexican companies and 100% state-owned. Strengthened, competitive and efficient.” The government's website on the reform proposal employs apt phrasing: “No to privatization. Yes to energy reform.”

Pena Nieto’s use of the former president to sell his plan angered politicians who consider Cardenas sacred and prompted his opponents to try to reclaim their icon. Carlos Fernandez-Vega, a columnist for the leftist newspaper La Jornada, accused the president on Tuesday of misusing Cardenas’s name: “Congratulations, credulous Mexicans! 'Not a screw' owned by Pemex will be sold, but the oil market and rents will be privatized.…That’s the gist of the energy initiative of President Pena Nieto, which begins by privatizing General Lazaro Cardenas himself.”

Despite such indignation, the radical left’s ignorance of oil affairs became clear on Monday when Andres Manuel Lopez Obrador (known as AMLO), a leftist leader and twice-defeated presidential candidate, posted a video address on his website that denounced the idea that new technology is needed to pump crude buried deep under the ocean floor: “Since when is so much science necessary to extract oil? Mexican technicians and workers have always done this. It involves drilling a well like one does for extracting water -- the only difference being that it's not 30 meters deep but 3,000 or 5,000 meters. It requires no science, not much technology.”

John M. Ackerman, a popular legal scholar at Mexico’s Universidad Nacional Autonoma de Mexico and a rabid critic of energy reform, went further in his criticism -- all but calling for rebellion in Mexican political magazine Proceso. If “a citizen mobilization can stop the oil privatization," he wrote, "some optimism would be warranted with respect to the possibility of a democratic advance in the country.”

Despite such fierce rhetoric, Mexico’s leftists are torn on how to proceed. AMLO has asked his followers to take to the streets on Sept. 8 to protest the PRI’s energy-reform plans. A less extreme segment of the leftist Democratic Revolution Party led by Jesus Zambrano may present its own reform plan instead.

An Tuesday editorial in the El Universal newspaper warned politicians against destabilizing protests: “These are times of dialogue and negotiation; of frank debates and open minds. The nation is plural and heterogeneous, and in a democracy the majority wins, but government is for all. Mexico must emerge from this process strengthened.”

With the opposition National Action Party, or PAN, also pushing to open the oil business, the reform’s approval, in some form, is almost assured. But details of how the private sector will participate in the business are still not clear. Pena Nieto has talked about using profit-sharing agreements that pay companies that pump crude with cash instead of oil, typically a far less enticing prospect for companies.

Hopefully the PRI and its allies are serious enough about reform to offer oil companies attractive-enough returns to justify the constitutional overhaul. Before the PRI returned to power with Pena Nieto's election last year, the party blocked a similar energy-reform plan advanced by its rival PAN. And for 12 years in the opposition, the PRI failed to advance any meaningful energy overhaul. With Pena Nieto now in power, the party has a responsibility to get it right.

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Raul Gallegos is the Latin American correspondent for Bloomberg's World View blog and a contributor to the Ticker. Follow him on Twitter. Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was published by Bloomberg World View Blog, on July 15, 2013. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld News 08/16/2013


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