Iván Alemán
Chief of the Legal Unit
Mexico's Energy Ministry
View from the Top

Debunking the Myths Behind the Constitution

Tue, 01/22/2013 - 13:24

Q: What are the realities and the myths behind the 27th and 28th Articles of the Constitution in terms of national and international participation within the Mexican oil and gas industry?

A: The reality is that all hydrocarbons located within national territory are property of the nation. This will not change: it is the same everywhere in the world. There is a myth that, by opening up certain activities within the industry to the private sector, the resources will no longer be owned by the nation. The important point here is to design a scheme under which Pemex is allowed to arrange di†erent types of agreements with private companies, even when the NOC maintains control of the resources. These are the kind of amendments to the Constitution that should be discussed.

Another important subject to be debated is whether Pemex should become a decentralized organism. If it is decided that Pemex should act more business-like, it should then be established as a business from the legal standpoint. This is also a constitutional reality: only decentralized organisms can perform strategic activities. Therefore, to drive a state-owned company such as Pemex towards the execution of crucial activities, the Mexican Constitution would have to be modified.

On the other hand, the strictness of our regulation is also a myth. In the US, for example, legal security of individuals is profoundly advocated, restricting the modification of the terms of concessions earned. If we were as strict as we vow to be in Mexico, the same thing would happen: openness in the shale gas market would mean that the government could not modify terms in a concession and would necessarily have to keep certain standards and legal requirements to validate its strictness. Our legislation is not strictly closed; it actually allows many variables and options, but only if we know how to exercise that freedom. If we do not take advantage, the results will still be the same, and reforms will continue to be the central talking point.

Q: One of the perceptions in Mexico is that if privatization is allowed, Mexico will lose its sovereignty. What is your perspective on this?

A: This is definitely a myth. It would be exactly the same deal if Pemex would extract the hydrocarbon and ended up selling it locally or through exports. The only variation from these two scenarios is that, if hydrocarbons are sold within the country and the subsequent activities of refining, transport, storage, and distribution take place within Mexico, it would bring more national wealth in the form of job creation than if it is exported in its crude form. If oil were always exported, the main business in the industry would only consist in extracting and trading hydrocarbons, which by themselves, would maintain the sovereignty of the country.

Q: With the inclusion of ISCs, international companies are allowed to work more autonomously in production projects. What is the dierence between this and allowing private operatorship?

A: What this new contracting model adds to the previous one is supplementary components in the economic structure of the contract. At the end of the day, these agreements are still service contracts: the only thing that Pemex is doing through them is form agreements with private sector companies to support its activities, which has always happened. The di†erence lies in the fact that the law now recognizes certain indicators as the basis for rewarding good performance from service companies, plus additional remuneration when that performance involves technological progress and production advancement.

In a strict sense, this is not privatization, but a serviceproviding contract. Privatization means that the only ones allowed to extract and exploit hydrocarbons would be private companies, and not state-owned companies. It is important to di†erentiate between this and the fact that Pemex leans on third parties to improve e·ciency in its operations. The only debate within these contracts is the remuneration schemes and the incentives implied. Obviously, due to constraints in the regulatory framework, companies cannot be paid in hydrocarbons. However, that does not mean that their e†ort should not be recognized or that a payment scheme that rewards or penalizes performance cannot be established.