Mexico Moves to Reform Its Energy Sector

A bill to reform Mexico’s energy sector passed both houses of Mexico’s Congress this week, bringing President Enrique Pena Nieto’s promised overhaul of the state-owned oil and gas industry a big step closer to becoming reality.


The bill would usher in a dramatic opening of Mexico’s oil and gas industry, which was nationalized 75 years ago, and is hoped to revamp the country’s flagging oil production and attract billions of dollars in foreign investment.

Mexico is currently the world’s ninth-largest oil producer and depends on the energy sector for one-third of its revenue, but inefficiency and corruption have plagued Pemex, the state-owned oil monopoly, and Mexico’s oil production has dropped by about a fourth over the past decade. At a time of high oil prices, this has meant foregone revenue and expensive imports, which have helped drag down GDP growth to a rate of 1.3 percent in 2013.

Given the rate of decline in oil production, Sean Goforth wrote in WPR last spring, without energy sector reform “Mexico, which sits atop as much oil as Kuwait, could be a net energy importer before Pena Nieto leaves office in 2018.”

The bill must now pass a majority of state legislatures, since it requires changing the constitution, which guarantees Pemex a monopoly on Mexican oil and gas. The bill is expected to pass, despite some vocal opposition. In the meantime, as Goforth wrote, Mexico has gradually laid the groundwork to expand foreign partnerships in exploration for both offshore oil and shale gas. He explained:

Last year, the United States and Mexico agreed to cooperate when drilling for oil and gas along their maritime border in the Gulf of Mexico. Under the agreement, U.S. energy companies will be allowed to work with Pemex in the Western Gap, which had previously been under a moratorium on drilling. As Pemex lacks the technology to drill in the region itself, cooperation with U.S. companies, or perhaps Petrobras, is almost inevitable if Pemex seeks to tap new oil reserves.

The same goes for shale gas. Whereas shale exploration north of the border began in earnest a decade ago, Pemex only started drilling its first exploratory well in the northern state of Coahuila in March 2011. Pemex has announced plans to drill for shale at 20-25 sites in 2013, compared to the more than 2,800 licenses the state of Texas granted in 2011 to operate in its Eagle Ford shale reserve alone. But so far only companies in Texas and Canada have offered up plans to address the shortage of water that will otherwise hamper efforts to frack for gas in the arid north of Mexico, where Mexico’s richest shale reserves are located.

The energy bill passed this week would remove barriers to expanded cooperation in these areas, allowing Mexico access to the expertise it needs to exploit its own resources. But as Antonio Garza, a former U.S. ambassador to Mexico, explained in WPR in July, Pena Nieto must tread lightly given “sensitivities relating to the national patrimony” among voters. As the energy reform bill is taken up by the state legislatures, Pena Nieto has another chance to clearly explain why reform is necessary.

Photo: Pemex gas station in Puerto Vallarta, Mexico (photo by Wikimedia user Coolcaesar, licensed under the GNU Free Documentation License).

http://www.worldpoliticsreview.com/trend-lines/13441/in-context-mexico-moves-to-reform-its-energy-sector