David Penchyna
Senate’s Energy Commission

Road to Restructuring Mexico’s Energy Sector

Mon, 09/01/2014 - 14:50

The Energy Reform was a key proposal in President Enrique Peña Nieto’s electoral campaign, and has become one of his signature issues since he took office, as well as being one of the structural reforms agreed upon in the Pact for Mexico. David Penchyna, President of the Senate’s Energy Commission, claims the Pact for Mexico was fundamental, as it reopened public discussion on the Energy Reform – a sensitive subject that he says had been largely untouchable, even inside the PRI which had to change its internal bylaws. “The initial step was given from an institutional, formal, and legal viewpoint. For this reason, PRD, PRI, and PAN – in this chronological order – all presented initiatives to restructure the energy sector. PRD suggested changes to ordinary laws while PRI and PAN proposed constitutional reforms.” However, PRD retired from the Pact for Mexico claiming political irregularities in the agreements being made surrounding the Energy Reform.

Minister of Energy, Pedro Joaquín Coldwell, acknowledged that the debate surrounding the Energy Reform proposal would entail an unavoidable ideological focus. For this reason, he asked for the inclusion of productive and economic factors in the debate in order to push forward with pressing changes. Joaquín Coldwell said structural changes had to be made, otherwise Mexico would lag behind other countries that have seen great advancements after passing energy reforms, such as Colombia, Brazil, and Norway. Political consensus, nonetheless, was an important factor in drafting and passing the Energy Reform, as former presidents Vicente Fox and Felipe Calderón had seen their plans to change energy legislation frustrated due to a lack of support from Congress.

On August 12, 2013, President Peña Nieto announced his plans to send Congress a reform initiative modifying Articles 27 and 28 of the Constitution in order to modernize the energy sector. The proposal turned out to be controversial, as said articles define the nation’s ownership over the country’s hydrocarbon reserves. The proposal made by the President suggested the participation of the public sector in profit sharing contracts – different from the widely known risk sharing contracts – in oil and gas exploration and production activities, as well as in refining, transportation, and storage. Regarding the electricity  sector, the initiative opened the possibility of letting private parties generate and sell electricity using the national grid. The president emphasized the objective of making the oil and gas industry a driver of economic growth once again by reducing electricity and gas tariffs.

The proposal spawned a great debate among the country’s main political forces, each of which countered with its own ideas of how to modernize the energy sector. PRD overtly opposed any changes to the Constitution. The left-wing faction headed by this party presented a reform proposal that considered budgetary and managerial autonomy for PEMEX, while allowing it to maintain control over the strategic direction of Mexico’s oil and gas industry in order to guarantee energy security. The autonomy proposed by PRD was what PEMEX executives had been looking for in order to operate more efficiently and effectively. The oil company would be removed from the annual federal budget and its fiscal regime would be changed in order to gradually reduce its tributary burden. The PRD proposal involved modifying 12 secondary laws pertaining to Constitutional Article 25 and changing the regulation for Article 27. PRD recommended integrating PEMEX’s four subsidiaries into a single company to create economies of scale and foster operational efficiency, as well as excluding members of the STPRM labor union from PEMEX’s Board of Directors. The initiative did not include any strategies to increase investment in the energy sector.

PAN went further by proposing a higher degree of liberalization including a concession contracting model, which would see concessions being granted by CNH. In this party’s initiative, resources would still belong to the nation, therefore operators and concessionaries would have to pay for the right to exploit the country’s resources. PEMEX would be given budgetary and managerial autonomy, an element that was also included in PRD’s document. The PAN proposal also contemplated the option of having the oil company’s four subsidiaries competing with the private sector and forming alliances according to their needs. PAN finally proposed the creation of a Mexican Oil Fund to administrate oil revenues in order to maximize economic benefits.

PRI maintained its stance regarding the nation’s ownership of the hydrocarbon resources. In its proposal, PEMEX and CFE would be given more autonomy to invest in the areas they deem necessary. The oil company’s subsidiaries would be restructured in two divisions: Exploration and Production, which would be the same as current PEMEX E&P, and Industrial Transformation, which would merge the three downstream subsidiaries. After the dissolution of the Pact for Mexico, PRI was struggling to get enough votes to pass its initiative within Congress. President Peña Nieto and his party were then compelled to broker important negotiations with PAN representatives in order to obtain the support needed to modify the Constitution. To reach a bi-partisan agreement, PRI acceded to include some of PAN’s petitions in the Energy Reform Decree, including the creation of a fund to administer the profits from oil revenues, allowing private companies to participate in electricity generation and distribution, and removing STPRM from the Board of Directors of PEMEX. Although PAN has traditionally favored private participation and its original proposal included a major liberalization for the energy sector, not all of its members were on board with the end result.

The Senate approved the Energy Reform Decree on December 11, 2013. After a 20-hour long heated debate session, Congress approved the Reform the following day, accepting changes to Articles 25, 27, and 28 of the Constitution in order to allow private investment in the energy sector. The proposal received 353 votes in favor and 134 against. Those who voted in favor argued that the Energy Reform would result in the creation of 100,000 jobs annually. They also pointed out that, currently, Mexico has still to produce its first drop of oil from deepwater, a situation that could change with the participation of the private sector in upstream activities. Members of Congress who voted against the initiative voiced their concerns about handing national resources over to private companies. The week after the Reform was endorsed by both chambers in Mexico’s legislative body was approved by the local Congress of each state. Peña Nieto then congratulated Mexico’s political forces for demonstrating that the country could achieve deep structural transformations through institutional vehicles in spite of ongoing controversies surrounding the legislative change.

The approved version of the Energy Reform states in Article 27 that hydrocarbons in the country’s subsoil are the inalienable and imprescriptible property of the nation. “All the resources in the country’s subsurface will continue being property of the nation. Through the government, the nation owns an oil and gas company: PEMEX. Therefore, PEMEX is the property of all Mexican citizens,” explains Penchyna. Although concessions will not be granted, exploration and extraction activities will be carried out by PEMEX or by private parties through contracts according to the corresponding regulation. These measures establish the foundations to increase Mexico’s oil production from 1.5 million b/d to 3 million b/d by 2018 and 3.5 million b/d by 2025. As a consequence of the constitutional changes, PEMEX will no longer be the only party involved in hydrocarbon extraction. CNH, under its new mandate, will provide SENER with technical assistance in evaluating the oil company’s operational faculties. In the words of Penchyna, “the monopoly is over. Transparency will be the signature of the Energy Reform as pertaining to hydrocarbon and electricity regulation.”

In his speech during the promulgation of the Energy Reform, President Peña Nieto said it was possible to bring together an advanced juridical framework that would turn the national energy sector into a source of economic growth through meticulous legislative efforts and a sense of political responsibility. He added that the Reform strengthens and modernizes PEMEX and CFE, giving these productive companies of the state enough capacity and flexibility to fulfill their mission of benefiting Mexican society at large.

In 1938, it was established that the state would be responsible for all energy related activities in Mexico. The 2013 Energy Reform represents nothing less than a paradigm shift, drastically moving away from the previous model in order to safeguard the country’s energy security by permitting private investment and fostering competitiveness. “Constitutional reforms were carried through with a majority of votes because the country’s political, economic, commercial, and technological circumstances have changed over the past 75 years. This led to the proposal of an integrated reform, not just for PEMEX, but for the entire energy sector,” states Penchyna. According to President Peña Nieto, the Energy Reform is one of the most important changes Mexico has faced in the past 50 years and will help the country successfully navigate the challenges of the 21st century.