Fluvio Ruiz Alarcón
Senate of the Republic
Expert Contributor

Ideas Toward a Reform of the Hydrocarbon Sector

By Fluvio Ruiz Alarcón | Thu, 07/22/2021 - 12:58

During the “Stabilizing Development,” Mexico was self-sufficient in oil and was marginally importing between 1971 and 1973. This was followed by the oil boom from 1977 to 1981. After the 1982 crisis, the Mexican state changed the status of Petróleos Mexicanos in the economic development model. PEMEX became the state's main source of fiscal revenue, which led to the privileging of short-term criteria aimed at maximizing crude oil production. Over the years, this has resulted in the subordinate energy integration of our country to the North American area, as well as a growing dependence on natural gas, LPG, petrochemicals, gasoline and diesel. 

PEMEX faces complex challenges, such as a lack of a comprehensive long-term strategy, suffocating fiscal regime, high total debt, high labor liabilities, budgetary, economic and regulatory constraints and a need for new financing, as well as difficulties to expand its extraction activities, production costs well above their tax deduction limits, deteriorating production infrastructure, deficient national refining system and insufficient storage capacity. It also has underutilized petrochemical complexes, faces the risk of generalized credit downgrading, long delays in payments to suppliers, opacity in contract allocations, growing distance from other oil companies already operating in Mexico, a weak scientific and technological base, loss of qualified human resources and operational dysfunctionality.

Institutional Adjustment Proposals

First, at the constitutional level, the phrase, "With the purpose of obtaining revenues for the State that contribute to the long-term development of the Nation..." should be eliminated from the seventh paragraph of Article 27. This text is clearly of a rentier nature and its introduction into the constitutional text had no other purpose than to prevent the Energy Reform from being submitted to public consultation. Secondly, to repeal the first paragraph of the eighth transitory article, which states that "the activities of exploration and extraction of oil and other hydrocarbons (...) are considered to be of social interest and public order, and will therefore take precedence over any other activity that involves the use of the surface and subsoil of the land affected by them." This elevates extraction to constitutional status and ignores the historical forms of nonmaterial links between communities and the land. 

Regarding the secondary legislation of the reform, the proposal is to push for the necessary amendments to the Hydrocarbons Law, the Law of the Coordinated Regulatory Bodies in Energy Matters and the Law of Petróleos Mexicanos, to make the following possible:

  • Geopolitical and national security considerations are incorporated into sectoral architecture and dynamics.
  • A precise definition of the notion of a State Productive Enterprise, from a legal, political and technical perspective.
  • End the ambiguity with which the state treats Petróleos Mexicanos and remove all legal and regulatory asymmetry that puts our oil company at a disadvantage.
  • Review, clarify and better delimit the spheres of action and powers of the regulatory bodies, to consolidate the stewardship of the State and the public interest over private interests.
  • Evaluate the suitability of keeping COFECE's powers in the energy sector, considering that this is a sector of natural monopolies and therefore needs a specific regulation, which could be based on CRE and CNH.
  • Granting of Assignments to PEMEX does not require the authorization of the National Hydrocarbons Commission.
  • PEMEX's alliances are approved exclusively by its Board of Directors, in accordance with the criteria of the suitability of the potential partner, transparency in the process and accountability, which the board itself issues.
  • Alliances between PEMEX and other oil companies should be made in places where they are necessary to share geological risks, have access to new technologies, train technical staff, improve management capacity or learn to operate in geological conditions different from those of our country.
  • The crude oil that corresponds to the Mexican state in production-sharing contracts should be marketed exclusively by PEMEX through its subsidiary PMI. In the case of possible cross-border fields, PEMEX should also participate directly in the operation, regardless of its percentage of participation in the respective project.
  • Domestic oil production, whether public or private, is primarily intended to meet the needs of domestic demand.
  • Expansion of the fuel market should be subject to criteria of urban planning, environmental preservation, public health and industrial safety.
  • PEMEX is given genuine budgetary and management autonomy while improving its transparency, accountability and fight against corruption; separating its accounting from the public accounts; and assigning it a mandate for energy security, social responsibility and value creation within the framework of a contract-plan with the state.
  • PEMEX's corporate governance is reorganized and can fully exercise its autonomy while reintegrating into the board of directors a representation of the workers elected by universal, secret and direct vote of the workers. Likewise, candidates for independent directors must testify before the Senate's Energy Commission.

Fiscal Proposals

The Hydrocarbon Revenue Law, the Federal Fiscal Responsibility Law, the Mexican Petroleum Fund for Stabilization and Development Law and the Petroleos Mexicanos Law need to be amended for the following: 

            I) Reduce the Shared Utility Tax (DUC) from 54 percent to 35 percent over a period of two years to bring PEMEX's tax burden closer to the average of that of national oil companies.

            II) Update the deduction limit for each geological zone, according to their respective production costs. 

            III) Adjust the taxable base for determining the profit-sharing right, giving PEMEX the same tax benefits that contractors enjoy.

            IV) Define new areas of geological complexity in the law, with their respective deduction limits: mature fields, ultra-deepwaters, unconventional fields, among others. 

            V) Introduce a percentage of cost recovery as consideration in favor of PEMEX, similar to that granted in production and profit-sharing contracts tendered by CNH. 

            VI) Eliminate the state dividend. 

            VII) Create a special regime for non-associated natural gas, whose taxation does not differ from that of oil, in the collection of the Shared Utility Right (DUC). 

            VIII). Modify the distribution of surplus revenues to allocate 25 percent of these surpluses to PEMEX investment projects.

            IX). Completely restructure the rules for the integration of the Mexican Petroleum Fund and its reserve.

These are, of course, just a few ideas that could be part of a collective, serious and inclusive debate in pursuit of building a hydrocarbon sector that effectively serves national development.

Photo by:   Fluvio Ruiz