Mexican Congress Approves New Rules for Oil Industry

Mexico’s Congress approved on Tuesday a sweeping overhaul of the energy industry that cleared the way for international giants to tap Mexico’s rich reserves of oil and gas…read full article here.

Key Points:

  • The new legislation is the centerpiece of President Enrique Peña Nieto’s plan to jump-start economic growth by allowing competition in one of Mexico’s most stagnant sectors.
  • Legislators approved most of the rules governing changes made last year to the Constitution that ended 75 years of state control over the energy industry.
  • Hope - entry of international energy giants will:
    • lift sagging oil output,

      • Pemex’s production has dropped to about two and a half million barrels a day, down about a million a day from its peak production a decade ago.
    • exploit untapped reserves of natural gas,
    • lead to new refineries being built and
    • result in cheaper power for Mexico’s factories.
    • remake Mexico’s two sclerotic state energy companies, the oil monopoly Pemex and the Federal Electricity Commission.
  • Agreement that government would absorb part of the oil worker union’s unfunded pension liabilities, estimated at about 10 percent of the country’s national output. In return, Pemex will have to renegotiate the pension provision of its contract with the union and submit to an audit of its pension payments.
  • Mexico’s senate passed the bulk of the legislation Tuesday and is expected to finish approval Wednesday. The lower house approved the legislation over the weekend.
  • Background:
    • Presidnet Peña Nieto took office at the end of 2012 promising to unclog the bottlenecks that experts agree have held back Mexico’s growth over the past two decades.
    • Congress quickly approved an overhaul of the education system and a raft of measures intended to improve business competition, particularly in telecommunications, where Mexicans pay high prices for shoddy service.
  • Selling points to energy changes:
    • promising that it will create as many as two million new jobs and
    • attract billions of dollars in investment.
  • Jorge R. Piñon, an oil expert at the University of Texas at Austin, said all the pieces were in place for the reform to deliver on its promises over the long term, although it would take time.
    • “The political commitment from Mexico is there,” Mr. Piñon said. “The economic and business interest from international oil companies is there. On top of that, there is a need for Mexico to increase production. There is a need for Pemex to grow as a truly independent oil company. So how can it not move forward?”
  • Criticism:
    • Critics on the left argue that Mexico is handing over part of its oil wealth to private companies.
    • Past privatizations in Mexico have failed to deliver benefits to consumers, instead generating suspicions of cronyism and corruption.
  • Steps Forward:
    • The government will announce in September which fields Pemex will continue to work
    • Then next year hold the first auction of blocs for private oil exploration and production.
  • Hopes
    • Expect to increase output to about three million barrels a day by 2018.
    • Over the longer term, hopes that private investment in developing oil reserves deep under the Gulf of Mexico and shale oil in northern Mexico will raise output even further.
    • Natural gas – Mexico also has rich reserves of natural gas that have not been exploited.
      • cheap gas to local companies and power plants,
      • bring down fuel costs for industry.
    • New laws to create a competitive electricity market and lift restrictions on private power generation are expected to bring down electricity prices.