EPN’s Energy Reform Package

How to square the proposals with the historical record and investment outlook?

The debate that will follow the release of the government’s proposal for energy reform will invoke diverse claims and arguments. At the eye of the storm will be the linked topics of private capital investment, public oversight and Pemex governance. The PAN‐led, energy reform of 2008 was all about public oversight and Pemex governance; no new investment opportunities were created for Mexican or international capital.

With the clock moved forward five years, and with the development of shale gas deposits and deepwater blocks on standby, there are strong incentives for the government to think outside the box that, for two decades, has been defined by the question: How to make Pemex more efficient?

Today, no amount of “efficiency enhancements” will meet the challenges of a generation of underinvestment in oil and gas and power infrastructure and a decade of falling oil and gas production.

Constitutional changes, by themselves, create neither investment opportunities, instruments of public oversight nor improvements in Pemex governance; still, they are important in setting the table for what may be proposed in the future by legislation and executive order.

Said differently, the energy package of the Peña Nieto administration is unlikely to be about private investment at all. It is more likely that the government will propose high‐level measures that will not have market signals, such as the creation of a National Oil Fund (as the PAN proposes) or rewriting rules governing the career paths of oil professions in ways that would let talented specialists advance in rank and salary without having to seek jobs in management (as the PRD proposes). Another non‐market measure would be the elevation of the Hydrocarbons Commission (CNH) to constitutional status as a regulator, and not, as at present, as an advisory appendage of the Energy Ministry.

If the constitutional measures are approved and implementing legislation is enacted, the table will be set for a new era of public and private investment. For this, hard choices will have to be made:

1) Reintroduce the legal figure of a concession for exploration and production.
2) Reestablish the right of a private party to own oil infrastructure.
3) Reestablish a wholesale market in electric power.
4) Create new, state‐majority, commercial corporations with a minority of common shares
in a major stock exchange (thus allowing private investment by portfolio managers).

In the discussion to follow we offer a perspective on legal, historical and policy issues that will need to be addressed in evaluating the government’s energy proposal. We build on the several reports issued by Mexico Energy Intelligence in 2013 on the options for energy reform in distinct market segments.

Contents

How the government’s proposal will be seen ……………………………………………………. 2
The concept of a private oil mineral interest …………………………………………………….. 2
Why does the PAN want to change the Constitution for the sake of energy reform? ……… 3
An innovative way to encourage shale gas development ………………………………………  4
Pemex as a carried partner in concessions ………………………………………………………. 5

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Written by

George Baker

Baker & Associates offers niche-market business and policy intelligence related to Mexico's oil and gas, power and chemical industries. Over 1,000 reports have been issued in the last 20 years. Subject matter expert and publisher George Baker, who directs the firm, has carried out consulting assignments starting in the late 1970s at the height of the Oil Boom in Mexico. He brings bilingual and bicultural skill-sets to understanding and responding to challenges of business and public policy, coupled with a deep familiarity with the history and idiosyncrasies of the Mexican operating environment.

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