Monday, November 4, 2013

Oil and Energy Reform in Mexico: An Interview with George Baker

MexiData.info

George Baker is the long-time publisher of Mexico Energy Intelligence, a Houston-based newsletter that addresses current matters of commerce, institutional development law and regulation. In parallel, he directs its online portal: ENERGIA.COM, where a visitor may read interviews with stakeholders and analysts, and download reports on topics of public interest.

MEXIDATA: A number of our readers were intrigued by the arguments you put forward, about energy reform in Mexico, in your editorial that was published in Reforma on October 24, 2013. As the language was clearly intended for the political elite, we doubt that there is an English translation.

So, for the benefit of our readers, we would like you to briefly restate your ideas -- but in plain English.

MEXIDATA: Most people, or so we imagine, would say just the opposite: that the future is confusing but the nature of the present gridlock is clear. What is it that you see so clearly about the future?

GB: Simply this: It is inevitable that, sooner or later, there will be a PEMEX 2.0.

MEXIDATA: Do you have in mind the privatization of PEMEX?

GB: I am seeing a new company of mixed capital, as a state-majority owned enterprise with a minority of shares on the New York Stock Exchange. This company would have an arms-length relationship with the Mexican government; unlike the present situation, where Pemex can "wear two hats," that of a federal agency with sovereign immunity and that of a commercial agency that can be active in the global oil market as buyer and seller. Pemex 2.0 would wear only one hat, that of a commercial operator.

The first benefit of a Pemex 2.0 would be that it could enter into commercial alliances with other oil companies. At present, it is unlikely that any IOC would accept Pemex as a partner in a consortium if there were the remotest chance that it could turn its back on accepting responsibilities for environmental liabilities, as it did in Texas in the litigation that followed the Ixtoc-1 blowout in 1979.

Such alliances could be either in Mexican waters or outside of Mexico. The going abroad of National Oil Companies (NOCs) has been the pattern of the past 20 years. In the U.S. Gulf of Mexico, NOCs like Statoil, Petrobras and Ecopetrol, among others, have won drilling rights to blocks. Pemex is marginalized, and as the agency of a foreign government, it is legally prohibited by U.S. law from obtaining a lease.

As I say, all of these issues can be resolved with a Pemex 2.0 of the kind I'm describing.

MEXIDATA: And what is it that you find confusing about the present moment?

GB: The Mexican government seems to be working against itself, and is pulling in two directions in relation to oil policy.

On the one hand, the government is correctly proposing to take what we might call the "oil regime" outside the Constitution. This is an important and long overdue step.

MEXIDATA: What do you mean, "outside" the Constitution?

GB: Consider the five centuries of Spanish legal tradition: At least since the time of Isabella ("the Intolerant," as I now nickname her), minerals have belonged to the Crown. And the way the exploitation, including permits, royalties, taxes and the like is laid out constitutes the commercial regime for their exploration, extraction and marketing.

Thus, there are two issues: ownership and commercial regime. In Mexico, since the Expropriation of 1938, but especially since the Oil Law of 1958 and the Constitutional Amendment to Article 27 in 1960, this critical distinction has been blurred.

The government's intent-without stating it in these terms-is to reestablish the restricted scope of Article 27, limiting it to the ownership of minerals. The second step is to establish an Oil Regime that gives the state the flexibility to respond quickly-without a constitutional debate-to changing technologies, business models and market conditions.

MEXIDATA: An interesting perspective. Where's the rub?

GB: The rub is found in the idea that is circulating that any oil produced in a new oil regime would all be delivered to the State, which would sell the oil via a new marketing company, and that, from the proceeds of the sale, would pay the IOCS.

You could only justify such a counterintuitive scheme if you passionately believed that the doctrine of First-Hand Sales (VPM in Spanish) was imperative as a matter of public policy. My view is that there is no constitutional foundation for VPM, and that its introduction to the Oil Law of 1958 should have been challenged as unconstitutional.

My guess is that there will be a new oil law proposed after constitutional changes to articles 27 and 28, and that the new law will abrogate the current law, which dates from 1958. If you did that, there would be no need to adhere to any notion of VPM, yet the government has leaked to the public its intention to propose terms and conditions that would suppose the continuing validity of that concept which has inflicted such value destruction in Mexico's energy sector.

MEXIDATA: So, on the one hand, the government wants to be free of the distortions (as you regard them) in both the Oil Law and constitutional Article 27; yet, on the other hand, it says that it will devise an oil regime that will preserve at least one of the restrictions of the current oil law.

GB: Yes, exactly.

MEXIDATA: One final question: Your idea that a Pemex 2.0 is inevitable sounds right. So when do you-as a "Pemex futurologist"-anticipate that Pemex or the government will propose such a measure?

GB: The idea itself has been in circulation for some time. In the public mind, the idea is confused with the suspicion that it's the same as privatizing Pemex; but the idea is to create a new company, not even touch the existing company.

In the present cycle of debate, I'm the only one so far who proposes this idea. I don't see any support for it in the current administration.

MEXIDATA: Thank you George, for sharing your time and insights with us.

[1] http://www.energia.com/; and

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George Baker is the director of Energia.com, a publishing and consulting firm based in Houston.  He can be reached via e-mail at g.baker@energia.com. Mexico Energy Intelligence, Energia.com.