Press commentary: The constraints of Mexico’s economic agenda

In an editorial on the print edition of The NY Times this morning there is an article on “Mexico’s Ambitious Economic Agenda,” and, in passing, notes that Carlos Slim owns about 8% of the Class A shares of The New York Times Company.

The editorial states that Mexico’s president “wants to allow the country’s state-owned oil monopoly to form joint ventures with foreign energy companies to improve its ability to produce oil from deepwater wells.” Regarding energy, the essay adds that “policy makers will have to guarantee that concessions involving foreign oil companies are awarded fairly and transparently . . . .”

The article observes that “the big questions are whether and how these proposals will be implemented.” Indeed.

Pemex so far has not demonstrated any ability to produce oil from deepwater wells, as the first barrel has yet to be produced. But there are deeper, technical, legal and institutional concerns that are not raised in the article:

1) The willingness of IOCs to discover and develop deepwater reservoirs in Mexico—in a commercial relationship with Pemex or not—is contingent on the Mexican government rediscovering the economic power of the legal concept of a private mineral right to oil and gas in situ. When this concept was codified into law, Mexico became the 2nd largest world oil exporter by 1921 (second to the US). When this concept was deleted from the law, global E&P investments stopped; and in recent memory there have been no such investments by oil companies beyond those of the existing farm-out contracts.

We have seen no signs that anyone in Mexico is thinking about recreating the legal figure of a private oil mineral right, which is, we submit, the sine qua non of future oil company investments. Without this legal figure, an oil company has no upside corporate valuation that is attributable to its ability to find oil (production comes next, sometimes with a lag time of 5-10 years).

2) A second technical matter concerns the fairness of awards. The comment would seem to be directed to the Hydrocarbon Commission (CNH), which, according to many observers, believe that the Commission, not Pemex, should be in charge of the awarding of the current round of farm-out contracts.

The article uses the word “concessions” as if it were purely a descriptive, neutral term; but in Mexico the term is a political swear word. Constitutional Article 27 states that in relation to petroleum the State will not grant concessions; further, any concessions that may have been granted are (hereby) rescinded. Even though the farm-out contracts issued by Pemex since 2003 may be thought of as a concession (e.g., the block is granted on an exclusive basis), the term “concession” is never used.

3) A third technical matter is open access on Pemex’s natural gas transportation pipelines, with unregulated pricing for secondary capacity.

4) A fourth matter is on the power side: For two decades the government has maintained the legal fiction that all electric power generation for “public service” is to be performed by the State; yet exceptions abound. But, as with the monopoly on pipeline capacity, the State lacks the information that a secondary market in power would provide.

President Peña Nieto’s government has said that nothing will be revealed of the energy reform until the second session of the legislature, which begins on September 1st. There are only a few months left in which public opinion in Mexico can be turned 90 degrees in order for such reforms to become viable policy options.

Click here to read the NY Times article.

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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