Marco Oviedo
Director of Research
Barclays
/
Insight

Can Energy Reform Unleash Private Investment

Tue, 01/22/2013 - 13:30

Mexico’s new government has, until now, kept very quiet about any details regarding the energy reform that it has been planning. As a result, predicting how it will a†ect the Mexican economy or foreign investment in the country with any certainty has been near to impossible for analysts. “Before the election, people were expecting that we would see energy reform come extremely quickly, given the importance that the three main political parties gave to it in their campaigns,” says Marco Oviedo, Director of Research at Barclays Mexico. “Indeed, both the PRI and the PAN were talking about the possibility of Pemex launching an IPO during the election campaign, which led many to believe that this would happen. However, I believe now that this would be too large a step for the government to take straight away: while it might be in their long-term goals to list Pemex on the stock exchange, a number of measures will have to be taken first in order to ensure that the industry is ready for such a step.”

In a recent paper, Oviedo outlined three possible ways in which the Mexican energy reform could happen, on a sliding scale from light changes to a dramatic reshaping of the industry. Oviedo notes that these possible reforms are not necessarily dissociated from one another. “I believe that the first stage of a new energy reform should be aimed at improving Pemex’s e·ciency and autonomy, in order to make Pemex work more like a private company. In order to do this, it should be detached from the public sector financial framework. One key aspect of this will be to reduce the amount of tax that Pemex currently pays: any company that is taxed 70% of its total annual revenues will eventually fail. The second aspect involves changing the legal framework in order to separate Pemex from the laws that govern its expenditure and investment decisions. There is also the question of Pemex’s pension liabilities, which at the end of 2011 represented 43.9% of Pemex’s total liabilities. This problem will probably be solved by a combination of Pemex and government funding, but an ideal energy reform should aim to restructure Pemex’s pension scheme,” says Oviedo. “If the energy reform contains at least one of these components, there will be some optimism in the market, with an accompanying increase in investment, not only in terms of FDI but also portfolio investment. Once we know what the final reform looks like, there should also be a corresponding appreciation of the Mexican peso.”

Among the smaller-scale changes that could be made at Pemex, Oviedo believes that one that would change the industry for the private sector would be the opening of less controversial areas of the industry to the private sector. Pointing to the recent announcement of a joint venture between Pemex and Mexichem as an example of a new partnership between the NOC and a private sector company that has not been regarded as controversial, Oviedo believes that this model could feasibly be applied to shale gas in the future, which would spur private investment in an area where Pemex should not currently be spending its budget. The next level of reform would be along the lines of the current structure of Saudi Aramco, which would allow for joint ventures to be created for Pemex’s priority upstream activities, but this would require a constitutional change in Mexico. “If constitutional change is included in the energy reform, optimism in the future of the Mexican oil and gas sector would be at an all-time high. If this reform is carried out this year, then perhaps by as soon as 2017, we could see Pemex participating in its first upstream joint ventures,” says Oviedo.

The final potential reform of the energy sector is the public listing of Pemex. “I believe that a public listing that follows the Colombian model of only domestic shareholders would be the hardest reform to pass,” says Oviedo, “and it probably will not happen in the next fifty years, because a change of mindset, encouraged by increased private sector participation, will be necessary first.” Oviedo concludes by saying that even before the reform has been announced, let alone passed, the intentions of the government regarding the reform have helped to encourage positive opinions on the future of private companies in Mexico: “The intention of having private sector involvement is clearer now than it was in 2008, when the government made clear that this window would be very limited. I remember there was a little bit of disappointment at the end, let’s see if this will be the case this time.”