Mexico: A Light Energy Reform?

Monday, April 14, 2008

Although too light for many foreign oil companies, the proposed reform of Pemex is a smart effort by President Felipe Calderon at this point.

BY JEREMY MARTIN
AN ROGER TISSOT

The speculation is over. With a thirteen minute address to the nation last Tuesday, April 8th Mexico's President Felipe Calderon announced, and in turn submitted to Congress, a detailed five point energy reform plan. It is now, to borrow from Churchill, officially the "end of the beginning." And, as to be expected, the dissection is well under way with the punditry weighing in quite vociferously from Mexico City to Houston to New York to London and many arguing that the package lacks vision and is too "light" to affect the changes that PEMEX (and Mexico) truly need. Yet, is it accurate and useful to continue using the qualifier "light" as the debate unfolds? Moreover, is the proposal really a vision-less effort that will have no impact on the current energy woes facing Mexico?

SOMETHING FOR EVERYBODY

Not surprising given the several hundred page package itself, there is no short answer to these or the myriad questions surrounding the debate. Indeed, President Calderon's proposal seems to be a classic piece of legislation in that it offers a little something to everybody. For the fervent nationalists, Calderon repeated many times PEMEX will not be privatized. For the business community and private investors he suggested the possibility of building and operating refineries on behalf of PEMEX and investing in downstream transportation infrastructure. For PEMEX management, the proposal appears to respond to the cries for an opening toward greater financial and strategic autonomy. Lastly, and perhaps most importantly from a public affairs vantage, through a creative concept called "Citizens Bonds," the proposal offers all Mexicans the ability to truly own a piece of PEMEX and gain economically from a successful PEMEX.

Mexico's oil woes are a well documented tale: production is in decline and, equally alarming, reserve replacement is well off, particularly in comparison with international oil companies. Meanwhile, these oil business issues occur against the larger backdrop of the government's reliance on PEMEX for almost 40 percent of the Federal budget. Thus the increasing emphasis at PEMEX to reverse the drastic decline of the massive Cantarell oil field is more than just a business issue, it is fiscal balance matter. And it is within these confines that President Calderon has introduced the reform proposal.

MODERNIZING PEMEX

The most pertinent portion of President Calderon's reform package focused on the need to create a more modern, agile PEMEX. The aim is enhanced and increased autonomy through a major re-write of the Organic Law governing the company, including a revamped Board of Directors that would count four highly experienced independent members. This is a particularly welcome idea as to date the PEMEX board has seemed unable to comprehend PEMEX's needs and requirements as one of the world's largest oil companies - and what it takes to maintain that status. Instead, to be blunt, their focus was to ensure PEMEX remained the golden goose: provider of cash to the government and jobs to the PEMEX union.

Meanwhile the proposed modifications and "opening" of the downstream sector seems to have important upsides, not the least of which is addressing PEMEX's - and Mexico's - fuel imbalance. Unclear, however, is how enthusiastic the private sector would be in investing in Mexican refineries.

POCKETBOOK NATIONALISM

One of the more surprising and interesting elements of the measures before Congress is the intention to create a mechanism for Mexicans to invest in PEMEX. The so-called "Citizens Bonds" is a clever form to encourage popular capitalism and allow the Mexican populace to have an increasing sense of ownership over their cherished national oil company. The cry since 1938 has been that "oil belongs to the people." It is one thing to say that as President Calderon repeatedly has, yet it is another case altogether when the people directly own a piece of the national oil company and stand to benefit financially if the company does well. Call it a new paradigm, Pocketbook Nationalism.

Perhaps the most intensely scrutinized element of the current proposal is with regards to PEMEX service contracts, with revisions to allow PEMEX to offer incentives for efficiencies (lower costs). The dissection of this part of the proposal is not without reason as the previous efforts by PEMEX at multiple service contracts for natural gas were underwhelming. Indeed, it is this part of the reform proposal that apparently comes up shortest in the eyes of the industry - see "reform light." Many industry observers were disappointed that there was not a stronger signal from Mexico to entice interest in what has been described as one of the greatest prizes in the oil industry. PEMEX chief Jesus Reyes Heroles seemed to be hedging his bet on this part of the reform package when, in response to who would be interested in these contracts he said "Maybe not Exxon Mobil, but other companies."

On the other hand, local industrial groups seem content with what has been proposed, perhaps aware of the historic role of PEMEX as a tool for domestic industrial development. Not surprisingly, the left is fervently opposed to these reforms and continue to twist this very aspect into their prior and ongoing campaign to fight any effort toward the "privatization of PEMEX."

A GOOD START

Mexico's energy reform does not have to please everyone but it also cannot ignore the risks of the status quo. By focusing first on improving PEMEX's fiscal state and operating efficiency, revitalizing the Mexican Petroleum Institute and defining a long term energy strategy, the reform could achieve more than many critics expect and move past the status quo. As PEMEX grows more confident in its own capabilities, it may also become less difficult for the Mexican population to accept their national oil company partnering with foreign companies which would be eager to share their expertise in order to access Mexican oil. There is simply no reason why PEMEX cannot be as successful as other national oil companies such as Petrobras, Statoil or Petronas. Central to this change is the need to develop a long term vision for Mexico's energy sector, one which would not emphasize the rentier nature of oil, but instead focus on Mexico's long term development goals. The modernization of PEMEX and Mexico's oil industry vis a vis Mexican development has always demanded an incremental approach.

Reaching consensus on energy reform is a Sisyphean task, but most agree that the key to any reform is to provide a more certain future for PEMEX. The disagreement has always been on the "How." This reform package will not completely settle the argument but all in all it should rate a smart effort by Calderon at this point. The old axiom is you need to crawl before you can walk and while PEMEX will not be running marathons anytime soon, they should be able to knock off a few 10K's - at a nimble pace - if the proposed changes are adopted.

Jeremy Martin is director of the energy program at the Institute of the America. Roger Tissot is an independent energy consultant. They wrote this column for the Latin Business Chronicle.

_______My comment on the above,...

Martin and Tissot make a good point in labelling Calderon's reform as 'light'. However it wrongly suggests that this piece of legislation attempts to give something to everybody, as it only provides private firms with presence in the sector and further allows some sort of potential accumulation of 'citizen bonds' that being openly tradable have no obstacle for ending up in the hands of Slim, for example, one of the richest guys around.

As to the tale of decline in production, is it bad? It all depends where you look at it. If you happen to be a US oil company, then it is bad news. If, on the other hand, you are Mexican that could not be so bad, as Mexicans don’t see the rush in getting that oil burn. Instead, as a valuable resource, it well could be the case of its value being higher with time.

In addition to that, such legislation is a clear attempt to cancel the spirit of Mexican constitution, which clearly states that natural resources are NOT tradable. Hence national or foreign private investment is banned. Neither directly nor indirectly private investment is allowed by the constitution and the secondary laws as it has been a rather long process Mexican government has embarked on in order to get rid of firms such as Shell, Exxon, and others.

Those firms came to Mexico in the late XIX century by invitation of Porfirio Diaz. They stayed in the country and exploited or rather exhausted existed petroleum at that time. After Mexican revolution, congressmen passed a newly designed constitution which generally declared Mexican resources to be own by the state.

It, however, didn’t mean the end of foreign firms’ presence in Mexico, as the secondary laws allowed them to, in the name of Mexico, continue to exploit petroleum. It is until 1938, with General Cardenas that those secondary legislations were put in line with the spirit of the constitution by both nationalising and confiscating oil industry at once.

Perhaps, this point in time is the starting point of Mexican modern development as having oil and its derivatives the Mexican miracle was possible. It is a period of economic growth and rapid urban industrialisation that was accompanied by a trend to more equitable income distribution. It all saw an end by the mid 70s when an oil prices crisis happened.

In the early 80s, with the discovery of new production sites among the biggest in the world, Mexico started to believe that future was on their side. Unfortunately, clumsy politicians and foreign pressures put the country in a situation of debt crisis: the biggest in Mexican history, up to that moment of course.

The mid 80s and more evidently the 90s saw the arrival of politicians more keen on fulfilling the Washington consensus than on looking after their country’s own interests. One of them is Carlos Salinas de Gortari, whose personal background is rather obscure coming from a confusing childhood, to say the least. Early in his life he killed his family’s housekeeper. And later, along with his brother Raul, burn a school boy who used to come to their place to play together.

Only the usage of their father political power saved them not only from being put into psychological treatment but from the public eye. And hence those situations were not openly reported. Those incidents, I believe, could just be unfortunate for a boy; however, I also believe that shaped his personality as once in the presidency he used all the political power to silence any kind of opposition, even the systematic assassination.

It does not come as a surprise then that during this period about 2000 oppositors were disappeared, tortured, and killed. Examples of this are by hundreds; however the most notorious and rather shocking is the assassination of the presidential candidate Luis Donaldo Colosio Murrieta.

All this background information is just to make clear that the privatisation of more than 3000 firms during Salinas’ period was not something Mexican society debated. Instead it was an imposition that continued beyond his government, with later presidents like Ernesto Zedillo, Fox and now Calderon.

Then why Salinas didn’t privatise PEMEX, if he had already done so with most state owned firms? Firstly, it has been of the US government interest to have mexican oil in private hands, and ‘recover’ what Porfirio Diaz gave them, (or at least that’s the line of reasoning). On the other hand, it has been a Mexican interest at least from the late 80s onwards, to have a free zone, not only in commerce but in peoples’ mobility. It is believed that during NAFTA negotiations in 1992-1993, US government attempted to push the PEMEX privatisation agenda, and Salinas replied with the open borders agenda, which was unacceptable for US negotiators.

Zedillo did little in moving that agenda forwards as he faced the biggest Mexican crises with the ‘tequila’ effect that lasted two years, 1995-1996, and then struggle to gain some popularity. He also had the EZLN in front to deal with. So his agenda was pretty much occupied in internal affairs.

Fox, the next president did everything he could to privatise whatever he came across. His government is perhaps the most corrupt of all (and that’s to say a lot in Mexican standards) and his agenda moved around two major issues: one to benefit private firms (foreign preferably) and to promote his wife for the candidature for president.

Examples of Fox’s corruption and bias towards favouring the rich are many. On the corruption side, it has been noted that during his government Mexico received the resources from oil that historically high. Once taxes are taken there is something that is called ‘petroleum exceeding’ and it is the difference between budget estimation of oil barrel price and the actual market price. For example if in the national budget oil is said to be sold at 30 dollars, and the actual price is 50, then the exceeding is 20. Well that money is lost. Along with some special founds Mexican government has to deal with disasters and many others smaller special founds.

On the bias side, on example perhaps speaks for itself. The motorways used to be state owned, then they were privatised, and due to mishandling they had to be rescued by the federal government, put them into healthy state and privatised again. But this time not even at cost of the recovery. And it was the case with many other firms. The sugar cane mills are other good example, they were nationalised, restructured, and then given back to the privates who were broken before the government intervention.

Finally, Calderon came to scene in a middle of a huge electoral fraud in 2006. He was supported by private firms. And his position as president is only due to the intervention of those firms in running a smear campaign against Lopez Obrador, who many believe won that election. So, his position is rather weak and he has to do anything he is told to do. Well, it just so happens that the private sector has told him to give them PEMEX! And that is exactly what he is doing, paying back. And of course, main benefitiaries would want more and qualify this as 'light'.


Comment by wet_ahuizote

next video shows how little all the privatisations and free trade did and do for the poor,...