Reforming PEMEX: Awaking the Mexican Bronco

Both major political parties have or will publish their bills to reform the two institutions that control Mexico’s energy, Petróleos Mexicanos (PEMEX) and the Comisión Federal de Electricidad (CFE). In any other nation, these proposals might go unnoticed or be considered routine, but in Mexico the prospect of opening up both behemoths to private investment and reducing their regulatory role presents a radical change. The left has not presented a bill, but talks of alternative measures including protests and strikes. The former leftist presidential candidate, Andrés Manuel López Obrador, has vowed to bring out his supporters to protest any opening of the energy sector to private investment and the prospect of turbulence causes concern in Mexico. Is the reform of Mexico’s energy sector the bronco that could destabilize a delicate balance between the left, the center and the center-right parties? Why is energy reform such a volatile issue?

Energy reform is a flammable issue, replete with historical memories, national identity and global challenges. Therefore, over the last eight months, representatives from the three major political parties have discussed the shape of Mexico’s energy reform behind closed doors. Back in August 2012 and having badly lost the presidential election, the leftist Partido de la Revolución Democrática (PRD) initiated the process of discussion and consensus among the three major parties through a collaboration known as the Pacto por México. The Pacto members meet outside the halls of Congress, but its purpose is to present a consensus to the legislature so as to speed up Congressional discussion of relevant bills. Thus, passage of an education and communication law passed the lower house with little debate and remarkable speed. However, no consensus was reached on the issue of how to reform the energy sector beyond the statement that “hydrocarbons will remain as a State property.” Opinions were radically different.

In the last few days, the three political parties geared up to publish their respective bills and to muster their supporters. The proposals are characterized as energy reforms, but in reality they are reforms to the institutions created to manage the nation’s energy resources, namely PEMEX and CFE. The fundamental question is whether PEMEX and CFE should continue to be government agencies extracting hydrocarbons and producing electricity for the benefit of Mexican citizens, or whether they should become autonomous energy companies, capable of making profits, growing the energy resource, and competing on the world stage?

PEMEX is broke with losses of 49 billion pesos (US $4 billion) for the 2nd quarter of 2013, and energy subsidies to consumers exceeding 31.75 percent of the federal budget for the 1st quarter of 2013. PEMEX imports half of the gasoline sold in Mexico, half of the gas used in its industries and 80 percent of the petrochemicals processed in Mexico. Agreement exists among the major political parties on the need to reform PEMEX, but disagreement rears up in an emotional manner on how to reform both monopolies.

President Lázaro Cárdenas nationalized the energy resources of Mexico, taking the petroleum resource from Standard Oil of California (now Chevron), New Jersey Standard and Royal Dutch/Shell Company in March 1938. In November 1940, an addition to Article 27 prohibited the granting of concessions in “oil and liquid, solid, or gas hydrocarbons”. In January 1960, the Mexican congress added the phrase that:

Ownership of all natural resources of the continental shelf and submarine shelf of the islands…all minerals or substances…from the earth itself, such as…solid mineral fuels, petroleum and all solid, liquid and gaseous hydrocarbons; are vested in the Nation.

To manage those resources, Cárdenas created PEMEX by statutory law in 1938. The principle of national ownership of the petroleum, liquid and gaseous hydrocarbons has remained sacrosanct in Mexican political values and any change to this principle would require a lengthy, national debate. However, changes to the institution of PEMEX hold less privilege. It is therefore not surprising that a recent survey commissioned by the Chamber of Deputies found that 75 percent of those polled considered that the management of PEMEX was bad, or fair.[1] Only 17 percent considered management to be good. Furthermore, 88 percent of those polled thought that “very much” or “a certain amount” of corruption existed within PEMEX. Consequently, reform of PEMEX finds popular support. However, reform of the fundamental principles enshrined in Article 27 remains improbable.

Within the Pacto Por México, the representatives agreed that, “Hydrocarbons will remain a property of the National, [but] competition will be introduced in the refining, petrochemical and transportation fields.” [2] Within this broad parameter, the members of the Pacto began the most important national debate of the last century. Given the sensitivity of the issues, discussions were not carried out in public, nor among citizens and their representatives, but rather among an elite chosen by their respective political parties to represent their interests within the Pacto.

Emerging from eight months of discussion within the Pacto are proposals for energy reform from each of the major parties, the governing PRI, the center-right PAN and the left PRD. All agree that PEMEX and CFE should be reformed to clean out corruption and to lower costs. However, there is no agreement on how PEMEX should be structured to lower its outstanding debt and to operate as a profit making enterprise.

On July 31, the PAN sent its energy reform bill to Congress. It seeks to break up the CFE’s “monopolio paraestatal” on electricity generation and distribution. It would also reduce PEMEX outstanding debt through the issuance of new debt, as well as hybrid securities, known as ‘Citizen Bonds’ and the sale of shares to private investors. Production sharing contracts would be legal, in return for which participating companies would pay royalties, taxes and licenses. PEMEX would become autonomous from the government and be subject to regulation by a newly formed, Comisión Nacional de Hidrocarburos (CNH). A more radical aspect of the PAN bill seeks to eliminate the five union seats on PEMEX Board of Directors.

The PRI’s focus is on expanding current energy sources, generating new energy and reducing the current high costs through the participation of the private sector, which could be Mexican or international.[3] Javier Treviño, a prominent member of the PRI and secretary of the congressional energy committee said in an interview on August 1 that the government’s bill would allow either production or profit sharing contracts between private companies and PEMEX, or both. In order to assure private investors of their rights in both institutions, Constitutional Article 27, as well as Articles 28 and 25 need to be amended. Whether private participation is large enough to break up of the state’s monopoly in both PEMEX and CFE remains unclear and depends upon the size of the equity and bond issuance to private investors and creditors. For the time being, this issue has not been discussed publicly.

The PRD objects strongly. It does not have a single position, but is divided among three factions, or tribus, each with a distinct response. Cuauhtémoc Cárdenas, the son of the president who nationalized the oil resources, stands against private investment in PEMEX. Instead, he would modify the tax system so as to increase PEMEX resources and capacity to refine. He recognizes the need to introduce transparency into the operations of PEMEX and root out corruption, both of which have affected the capability of the “paraestatal” to compete, but he rejects changes to the Mexican constitution. Cuauhtémoc’s personal and moral leadership on energy issues makes him a strong ally for the former mayor of Mexico City and contender for the PRD leadership in 2018, Marcel Ebrard.

The national leader of the PRD, Jesús Zambrano, also defends national ownership of the energy resources. In support of this position, he has called for popular consultations on the proposed energy reform to take place on August 25 and September 1. The PRD would set up 3,400 tables throughout the country and expect to gather the opinions of 1.5 million Mexicans.

The most fiery of the broad PRD tribus is Andrés Manuel Lopez Obrador who left the PRD to form his own Movimiento de Regeneración Nacional (Morena). He is ready to call his followers into the streets in protest against any privatization of Mexico’s energy resources. It is the prospect of strikes and public demonstrations that concerns the government most, as well as the PRD which is incapable of restraining Lopez Obrador and preventing these disturbances.

With the support of the rightist PAN and the ecology party, the PVEM, President Peña Nieto and the PRI have sufficient votes to pass the constitutional amendments. However, the president would prefer to enact these changes without strikes and protest. Therefore he is making every effort to avoid widespread disturbances and a convulsive political situation which might frighten off the very investors that the PRI seeks to attract.

We should anticipate that the Lopez Obrador bronco will buck, but not for long. Peña Nieto will use the bully pulpit to persuade citizens that reform to both institutions is essential for economic growth and jobs. With the support of the PAN and the PVEM, he will achieve the constitutional changes. Afterwards and slowly Mexicans will become accustomed to more than one energy company delivering services, although the arrival of the XYZ gas station across the street from the PEMEX station may cause a stir as it seeks to compete. The time is ripe to introduce the reforms and Peña Nieto should hold firm while citizens express their opinions and gradually accept the new reality.

[1] Dr. Farael Arestegui, Centro de Estudios Sociales y de Opinión Pública (CESOP).

[2] Pacto por México, Commitment 54.

[3] President Peña Nieto speech at Chatham House, London, June 19, 2013,