Mexico's energy reform: ending the inertia.


A key aspect in understanding the troubles of Mexico's oil and gas sector is the federal government's high budget dependence on the revenues of the National Oil Company (NOC) Petroleos Mexicanos (Pemex).

Through heavy taxation the company has been recently funding 32-35% of the federal government's expenses and as a result has been left with a limited budget for any significant reinvestment strategy. As a consequence, in the last 10 years Pemex has faced increasing difficulty in both managing a decline of its total production and successfully exploring and developing additional hydrocarbon reserves.

In addition to these constraints the subject of oil in Mexico is highly ideological and political. Any topic related to hydrocarbons is connected to a nationalistic interpretation based on the 1938 expropriation. The Mexican constitution incorporates these principles by securing state exclusivity in managing the hydrocarbon resources.

Allowing private participation in the sector in schemes that differ from service contracts would require a constitutional change. Due to strong public sentiment, any attempt to reform the sector has entailed significant political challenge.

Other administrations have made efforts to reform specific parts of the hydrocarbon sector but successes have been limited. Whenever private companies have been allowed to enter the sector it has usually been either through a special agreement or a single subcomponent of the value chain. Some of the most liberal cases of these changes have amounted to the creation of service contracts with performance indicators or private participation in the midstream sector for natural gas.

The most groundbreaking aspect of the energy reform is the change in the constitution that will allow private companies to participate in exploration and production activities under specific contracting schemes. Nonetheless, it is explicitly stated that the resources will always be under the ownership of the nation.

Another recent attempt at reforming the sector occurred in 2008 during the administration of President Felipe Calderon. After a series of congressional debates and intense negotiations an approved bill contained mainly institutional changes and modifications to secondary laws. These sought to relieve Pemex of some fiscal burden and provide more flexibility in designing service contracts that could account for the contractor's performance. Judging by the number of operators that showed interest...

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