Felipe Calderón
President of Mexico (2006-2012)
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Insight

Energy Politics During Felipe Calderón's Presidency

Wed, 01/25/2012 - 12:31

The year 2008 was momentous in the history of Mexico’s oil and gas industry. Until this point, no serious legislative reform of the oil and gas industry had taken place. It has been argued that until this point, presidents had lacked either the political leverage or the will to reform Mexican oil and gas legislation. Pemex was (and arguably still is) too important from a financial and ideological perspective for the Mexican government.

When Felipe Calderón stood for the 2006 presidential election, it was clear that reforms would be necessary to ensure the long-term development of the oil and gas industry. The field that had turned Mexico into one of the world’s largest oil and gas producers, Cantarell, had been in decline since 2004, and with no major discoveries to boost Pemex’s oil reserves, Mexico’s future energy security seemed to be seriously threatened. A former Secretary of Energy for the PAN under President Vicente Fox, one of Calderón’s most important election promises was energy reform. Shortly after becoming President with an extremely slim majority, Calderón submitted an energy reform bill to Congress. The main aims were to strengthen regulation of the energy sector, to create a new model for the corporate governance of Pemex, and establish a new contractual regime for the company. However, this was a controversial reform that Calderón would be unable to achieve without cross-party support. His administration therefore determined to undertake this challenge during the second year of the president’s six-year term. This gave the administration time to adjust to the challenges of oce and provided enough time between the attempted reform and 2009 mid-term elections.

The PAN hoped that when the reform was introduced in 2008, it would be fast-tracked through the two houses of the Mexican parliament, but leftist opposition party PRD had other ideas. Although the PAN had negotiated the terms of the deal with the PRI, another opposition party, the PRD, forced the Senate to debate the bill for a full 71 days, and used this time to launch a vocal attack on the proposals. The PRD’s nominee in the 2006 presidential elections, Andrés Manuel López Obrador, spoke out against the ‘privatization’ of Mexico’s oil and gas industry. Despite such eorts the Energy Reform was passed in 2008.

The Energy Reform did achieve some necessary changes in legislation at the government level, as well as within Pemex. The reform improved the corporate governance of Pemex, took investment decisions away from the political sphere and placed them more firmly into the hands of Pemex managers, and allowed for changes to be made in existing contracts, as well as allowing the creation of new incentive-based contracts for third parties. Calderón had seen that many of Pemex’s greatest weaknesses lay in the fact that they lacked the necessary experience and technological expertise in order to approach their most important challenges: improving production rates at declining fields and exploring new regions, including deepwater in the Mexican sector of the Gulf of Mexico. He believed that allowing international oil companies to provide their technological expertise and even operate these fields would be necessary in the short-term, which would in the longer term allow Pemex to learn the skills that are so crucial for Mexico’s energy security. However, the more wide-ranging of Calderón’s planned reforms, such as allowing the private sector access to strategically important areas such as refining and transport, in order to generate more interest in Mexico as an investment destination, were blocked by Congress. However, the reform did allow for the introduction of incentive-based contracts, which Calderón hopes will boost investment from the private sector in the Mexican oil and gas industry. In August 2011, the first of these incentive-based contracts were awarded for the development of three mature fields in Pemex’s southern region. Two of these contracts went to an international company, Petrofac, with one awarded to Dowell Schlumberger de México. However, these incentivebased contracts do have limitations, as stipulated by the 2008 reform. Any oil produced will unequivocally belong to Pemex and thus to the Mexican people, and all remunerations must be made to the investing companies in cash.

It is hoped that these incentive-based contracts and changes to the internal structure of Pemex will reverse Mexico’s declining oil production and support increases in the reserves replacement rate. More contracts will be tendered in the years to come, Pemex has promised, including Chicontepec and Mexico’s deepwater areas. These are areas in which many of the world’s largest international oil companies could have interest, depending on contractual terms and Pemex’s willingness to bear exploratory risk.

Calderón said in 2010, on the 73rd anniversary of Mexico’s oil expropriation, that he believed the 2008 reform to have been a net success: “Two years after the reform, we can now say with pride that Pemex is more ecient, more profitable, more competitive and has a better future.” However, he is keen to see more reform to address the issues that are still plaguing Pemex, namely increasing the interest and incentives of foreign parties, who can bring their technological expertise to bear in the Mexican arena. Calderón has been looking abroad for inspiration, suggesting that another legal reform would be needed to modernize Pemex along the same lines as Brazil carried out for Petrobras 10 years ago. By following the Petrobras model of partly privatizing the company, increasing its competitiveness, and expanding its technological expertise, Calderón seems to be hoping that Pemex will be able to overcome the trials it must face in the future. Of course, those who saw the 2008 reform as an attempt to privatize the Mexican oil and gas industry are distinctly suspicious of such talk.

However, the chances that the Calderón government will try to push for greater private participation before the 2012 elections are razor thin. It is far more likely that if energy reform happens at all, it will occur under the next administration. Already the PRI’s presidential candidate Enrique Peña Nieto, the early frontrunner in the presidential race, has begun voicing support for changes styled after those that Petrobras underwent. It remains to be seen whether such reform would suer from the same problems as the 2008 reform, which some considered to be composed of many half-steps, but without monumental change.