The Future of Energy Reform in Mexico
On January 16, the Latin America Initiative and the Energy Security Initiative at Brookings hosted Fluvio Ruiz Alarcón, Diana Negroponte and Ambassador Arturo Sarukhan for a review of the key challenges that lie ahead for Mexico’s energy reforms, now that preliminary constitutional reforms have passed. Questions remain regarding the regulation of the energy industry, the balance between the public and private sector, and implications for Mexican – and more broadly North American – energy security.
Seventy five years after the nationalization of the oil company, Petróleos Mexicanos (PEMEX), the December constitutional reforms opened the energy sector to private investment and will transform PEMEX from a government agency to a productive state enterprise. Though oil and gas in the subsoil will remain in the hands of the Mexican people, licenses and production sharing can be employed from the wellhead onwards. The ability of PEMEX to enter into joint ventures has the potential to speed up the exploration and exploitation of hydrocarbons in the Mexican territory, though such profit sharing or service contracts also pose regulatory and political challenges.
As the Mexican state will no longer be the single operator of energy in Mexico, the state must develop its regulatory capacity and competence to continue to ensure Mexican energy security. PEMEX currently provides over 30 percent of Mexican government revenue, but the state must ensure PEMEX’s budget autonomy going forward and avoid overregulation. This will support PEMEX’s ability to re-invest in its own wells and become competitive with private oil companies, as the law requires it to do.
Moreover, political consensus with regard to the secondary legislation will be critical in supporting the engagement of the private sector. The government must “win the street” and convince public opinion that the new model will not transfer a public monopoly to a new monopoly in the hands of the private sector. An additional challenge will be the ability to institutionalize and enshrine the independence and autonomy of the four new regulatory agencies recently approved to manage the auction of the bids, industrial safety, environmental issues and transportation of gas.
Nevertheless, the energy reforms hold great potential not only within Mexico but also for its ability attract investment and leverage its economic power to build global geopolitical clout. Putting energy at the center of discussions on deepening NAFTA can help ensure that that the reforms are not only a turning point for Mexico but also for the security of North America.