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Can Mexico's New President Achieve Energy Reform?

Most probably, on December 1st, Mr. Enrique Peña Nieto (EPN), the presidential candidate of PRI party, will become the new Mexican president for a six year term. The PRI was the dominant political party in Mexico from 1929 to 2000 although with different names. The resurgence of the PRI comes after a 12 year interregnum of the PAN, a center-right party whose merit was to evict the “hegemonic” PRI from Los Pinos, Mexico’s presidential house. The question on everyone’s minds is: Will the return of the PRI spell a reversal of energy policies pursued by PAN during the past 12 years? Though a presidential turn over in Mexico might seem to point to a possible change in policy goals and priorities, this time it seems that EPN will be committed to negotiate and implement the “energy reform” that Mr. Fox (2000-2006) and Mr. Calderón (2006-2012), his antecessors, failed to pass by a divided Congress.

Peña Nieto’s plans are in sharp contrast to the positions advocated by Mr. Andrés Manuel López Obrador (AMLO). During his presidential campaign, EPN openly advocated for major fiscal reforms to reduce Mexico’s dependence on oil income. Such policies, in turn, would limit the financial squeeze on PEMEX whose coffers have been raided by all previous administrations, regardless their political affiliation. Pena Nieto also advocated a larger share of private participation within the hydrocarbon industry, calling for a sort of “association” between PEMEX and private firms, mainly for exploring and developing deep water fields in the Gulf of Mexico. The development of shale gas plays located in northern Mexico, a geological continuum of those located in Eagle Ford, Texas, is also part of the energy agenda of the upcoming president. Finally, the enhancement of infrastructure in transmission and distribution networks, a traditional bottleneck for expanding Mexico’s gas industry, was also announced during the campaign.

Peña Nieto’s election defeated contenders seeking an energy goal of “self-sufficiency” which in Mexico’s case implies continued declines in crude oil exports and obstruction of PEMEX’s contracts with private firms. Ironically then, the shift back to the PRI virtually ensures the same policy approach followed by previous PAN administrations. But can EPN be successful to implement this policy change that his predecessors failed to accomplish?

It is clear that at least for the next three years, when legislative elections will take place to renew Mexico’s lower house, no major constitutional amendment modifying the status of the oil industry will take place. This has been the major feature of past energy reforms attempted or implemented by PAN administrations. In a similar way, EPN’s administration will take place with a fragmented Congress in which to build up a qualified majority (two thirds of the votes) will be next to impossible. Worse still, this time the PRI lost a majority even in the Senate. Thus, the so-called “energy reform” announced by EPN in his campaign, will follow the same pattern of policy change witnessed by the country since the Carlos Salinas years (1988-1994); any transformation of Mexico’s oil and energy industry will be managed only by redrafting secondary and regulatory legislation, while keeping unaltered constitutional mandates prohibiting private participation in upstream activities.

Chances are the only avenues open to EPN for enhancing the development of shale plays and oil production in deep waters will be the same kind of “incentives-based” contracts already initiated by the Calderón administration. So far, this formula has not proved attractive enough to raise the 27 billion dollars annually to get Mexico’s crude oil production back to 3.3 million barrels daily in the second part of the next decade and to start production of shale gas in 2016 –two major targets envisioned by President Calderón at the end of his term.

Perhaps the best opening for EPN to make a breakthrough in Mexico’s energy sector will have to be limited to the fiscal side of the equation. Oil transfers amount to around 35-40% of government income, meaning that 60% or more of overall PEMEX’s income is squeezed by the federal government. Mexico has become in fact a “rentist-state”, where the expropriation and management of the financial “rents” from oil is being siphoned off by the country’s political elites –through the Congress, public administration (mainly in the Ministry of the Treasury), governorships, and PEMEX’s boards and union’s bureaucracy. PEMEX is the cash cow and the process of investment and expenditure lacks sufficient transparency and accountability to the Mexican electorate. Thus, if EPN is serious about initiating a deep and sound energy reform, he must start by cutting the government dependence on oil transfers and by allowing PEMEX to be managed as an efficient and independent firm with transparent financial reporting and rationalized budgets.

Will EPN have the political capital in order to accomplish this kind of major fiscal reform which, by the way, does not require a major constitutional amendment? The answer seems to be blowing in the wind. A major fiscal reform would compel the upcoming administration to challenge vested interests of some of its major supporters:  big corporations which benefit from generous tax waivers, key governorships which depend on oil transfers, middle class gasoline and electricity consumers, who benefit from generous subsidies and a strong oil union whose fringe benefits depend on Mexico’s oil wealth. At present, there is no evidence yet that EPN or the PRI are prepared for the job.

This post was written by Isidro Morales, Professor at the Santa Fe campus of the Monterrey Institute of Technology and Higher Education (ITESM) in Mexico City.

Image: 3D Map of Mexico via Shutterstock

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