Fluvio Ruiz Alarcón
Professional Board Member
View from the Top

Surprises in the 2013 Energy Reform

Mon, 09/01/2014 - 14:24

Q: Which were the main surprises for you and PEMEX in the Energy Reform?

A: The main and most evident surprise was the degree of openness achieved by the Energy Reform. It went much farther than the original proposal in terms of openness. When the proposal was first made public, the government was extremely cautious about openness. While the original proposal talked about profit-sharing agreements as the only contracting model available, the approved Energy Reform allows for all types of contracts, as it mentions several contracting models followed by the phrase “among others.” The text is careful to not mention concessions due to the word’s political significance. The fact that the Energy Reform has been an extremely politicized subject is what makes this commitment to openness a big surprise. Once we move past the political sphere, the biggest surprise was on the electricity side rather than the oil side. The liberalization of the electricity sector is total, under a model that has not been particularly effective elsewhere. The UK tried to use it unsuccessfully but France stayed away from it, resulting in the best power company of the world: Électricité de France (EDF). The Reform included other surprises, such as the National Center for Natural Gas Control, which not even those who drafted the proposal expected. They are trying to ground that center as a hybrid, which will curiously result in a regulated regulator. We know PEMEX will surrender the entire gas side to this center but we do not know whether it will administer the capacity, development, or the growth of the sector. Another positive surprise lies in the formal introduction of PEMEX as a productive enterprise of the state. We are yet to see if the content behind this legal entity complies with the definition of public enterprises. At the very least, we will see certain elements of budgetary and management autonomy. Until the secondary laws are approved, we cannot be sure it will really happen, as was the case with the 2008 Reform.

Q: Which elements of the Energy Reform still worry you?

A: The surprise of a wider liberalization contains two elements that concern me. The first is the possibility of tendering different geologic formations at different depths within the same block. This could generate conflicts on the surface, which could vary from a lack of coordination to stacking of the different companies involved with the operations of the block. The second element that concerns me is that E&P operations are now defined under the law as social order and public interest activities. This gives E&P preference over any other activity, which could generate social conflict. Both of these elements are integrated in the line of accelerating oil works and expediting production, constituting risks that have not yet been visualized.

Q: What are the main issues you expect the secondary laws to solve?

A: The first and most important issue is finally turning PEMEX into a public company. For PEMEX to transform from being the sole operator in Mexico to being the sector’s dominant player, it needs to really become a public enterprise and not simply be lumped under that denomination. PEMEX needs to be granted all the characteristics of public enterprises. This implies complex adjustments to Mexico’s legal framework. While this could be easier in other countries, the complex legal fabric that governs this country makes it extremely complicated. Implementation will require changes to take place outside PEMEX. SHCP needs to view budgetary autonomy in the same way that PEMEX does, and the regulators’ faculties and resources will need to be clearly defined for this to happen. If we do not have consolidated regulatory bodies when we start the international tenders, the situation is going to get complicated. There is also the fundamental subject of SENER’s full discretion in all energy decisions. PEMEX is completely defenseless, legally speaking, once SENER makes a decision. We have already delivered our proposal and SENER, with CNH’s technical backing, will have six months to define which areas and fields it surrenders to PEMEX. So far, nothing has been said about PEMEX having the right to appeal. We expect the secondary laws will define legal instances or mechanisms to resolve disputes that may arise over SENER’s decision. SENER will naturally privilege the objective of production increase over the need to consolidate PEMEX’s material foundation. PEMEX, however, will fight to consolidate its foundation. Given these conflicting interests, a compromise has to be reached, which supports the creation of a series of mechanisms for PEMEX to defend its proposals.