January 2014 Article – Mexico’s New Petroleum Act

Posted on Posted in Monthly Article

By Jerry Pacheco

Mexico’s sacred cow just became a lot less sacred. In 1938, as a reaction against what it considered foreign interference in its economy, the government nationalized the petroleum industry by changing the nation’s constitution, and formed PEMEX, which today has evolved into an inefficient, bloated bureaucracy. Since then, no foreign companies have been allowed to drill or explore for oil in Mexico, and PEMEX has been the nation’s undisputed petroleum monopoly. This prohibition denied PEMEX the access to venture capital and state-of-the-art technologies that it badly needs to keep oil production ahead of local demand, and to keep exporting production to generate money for the government’s coffers.

Experts predict that Mexico needs to be investing more than $60 billion per year in research and development for the exploration and successful establishment of new oil wells – this is more than double what PEMEX is currently investing. For years, however bleak the situation looked for PEMEX, Mexico’s executive branch and congress refused to seriously act on opening the nation to foreign investment in its petroleum industry – until now.

In late December, Mexican President Enrique Peña Nieto and Mexico’s congress passed a sweeping energy reform that will allow foreign companies to explore for oil and natural gas, and the government will collect royalty and taxes on the new finds. This essentially breaks PEMEX’s monopolistic hold on the nation’s petroleum industry and allows the Mexican government to access more oil reserves and to generate income. As part of the necessary constitutional process, a majority of Mexico’s state legislatures were required to approve the package, which they did. The next step is for Mexico’s congress to draft the specific legislation on how contracts will be awarded and where the new monies will be allocated.

The passage of the current energy reform has to be some of the most ambitious legislation created by Mexico’s executive branch and congress since the Mexican Revolution more than 100 years ago. It has proven to be a controversial move, and many people who see PEMEX as a symbol of Mexico’s nationalism are still protesting. However, the implications for that nation and the entire world are enormous, and a big opportunity will be created for U.S. businesses.

U.S. companies which have developed advanced research and development technologies in the petroleum industry will now have a new market in Mexico, our next-door neighbor which is much closer than other petroleum bastions halfway across the world. This comes at a time when the U.S. petroleum industry is booming and U.S. energy production is reaching record levels.

These opportunities will most likely not present themselves overnight, as details need to be worked out, bids issued, and new administrative processes developed that don’t currently exist in Mexico. U.S. companies will have to become familiar with the new energy reform and understand where best to dedicate their resources. The North American Free Trade Agreement, signed by Mexico, Canada and the U.S., opened Mexico’s financial and telecommunications sectors to foreign participation, and the new energy reform promises to do the same.

The other benefit that might accrue to companies located in North America is decreased energy costs, which can result in increased revenues and an improved bottom line. Lower energy costs also will allow North America to retain and attract new industries which review their total cost of business in making a location decision, of which energy costs are a major factor. In the future, competition will increase among different regions of the world to attract new investments such as manufacturing plants, logistics/distribution operations, research/development operations, and testing facilities – energy costs are a major concern for all of these.

An even bigger effect of the new reform is its ability to turn the three already strong petroleum producing North American countries into a global energy powerhouse bloc. Technology, know-how, and large markets can be integrated, not only to satisfy local demand, but to create one of the world’s premier energy exporting regions. This will further aid North America in taking large steps in becoming energy independent. For Mexico, which already is being looked at as the darling economy of emerging markets, this could make it an even stronger economic power in the future and a more important partner to the U.S. For the three North American nations, greater economic integration could be on the horizon.