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Column 081814 Wall

Monday, August 18, 2014 

With Historic Legislation, Mexico's Energy Sector is Reformed 

By Allan Wall 

"Today marks a watershed. A change in the energy paradigm. It is a change in the way we relate our national identity to energy, to bring it up to date with realities of the 21st century.”   

Thus declared Mexican Energy Secretary Pedro Joaquin Coldwell, on August 11th, 2014, at the signing ceremony for Mexico’s historic energy sector reform.   

Wait a minute?  Didn’t that historic reform occur back in December of 2013?  

Well, yes, but in December 2013 the Mexican Constitution (Articles 25, 27 and 28) was amended to allow the energy reform.  That was the first step. (See my previous article Mexico's Historic Energy Reform is Approved and on Track, December 23rd, 2013.)  

What remained for this year was the secondary legislation, that is, the specific laws that will govern the new petroleum policies.  That’s what was signed August 11th.  And it had a lot of details to be worked out.   

The reform is really a set of reforms, governing many aspects of the new energy system.   

On April 30th, President Enrique Peña Nieto had submitted the proposed reforms to the Mexican Congress.  The package was eventually passed by both houses of Congress, and sent back to the President on August 6th.   

So on August 11th, 2014, President Peña Nieto signed the 21-part reform.  “This is the moment to put the energy reform into action,“ he announced when signing.   

The signing ceremony was held at the Palacio Nacional, Mexico’s ceremonial capitol building, where President Lazaro Cardenas had signed the decree establishing PEMEX back in 1938.   

This is a major reform, opening up Mexico’s energy sector to investment by private, even foreign companies, which can bid for the rights to drill in specific fields and share in the profits.  In the past companies could only be subcontracted.   

The reform also allows the private production of electricity.   

And it involves a lot of legal structure to make it function, including regulatory and oversight agencies.  The goal is to make Mexico’s oil industry more transparent, which is important to investors.   

Mexico’s state oil company PEMEX (Petróleos Mexicanos) still exists, but the reforms are intended to make it more autonomous and more competitive.   

One of PEMEX's problems is that the government has depended on it too much as a source of revenue, making it difficult for PEMEX to really function as an oil company.  The reform allows PEMEX to pay less of its revenue to the government, thus allowing it to spend more of its funds on producing petroleum.   

The reform also includes a plan for the government to take over a third of PEMEX’s enormous pension liability.   

The Mexican energy reform package includes all sorts of mind-numbing details about tax and finance, royalties, corporate income tax, extraction taxes, surface rental fees, cost deduction and national content (how much of the investment must be Mexican).  Lawyers should have a field day.  But logically, a big reform requires many details.   

The royalties are to be paid into a new trust fund, the Mexican Petroleum Fund, which is supposed to function as a sort of parallel bank to that of the Ministry of Finance.   

Another new institution formed by the legislation is the Comisión Nacional de Hidrocarburos (CNH, or National Hydrocarbons Commission), which is distinct from the Ministry of Energy.   

There are many details in the Mexican energy reform, and it should be interesting to see how it all develops during the next few years.  

For more detailed information, I invite the reader to consult a very informative article by Diana Villiers Negroponte of the Brookings Institution, entitled Mexico’s Energy Reforms Become Law (the main source of information for this article).  In her article, she summarized the importance of the Mexican energy legislation thusly:“Enactment of the energy reforms has two important implications: President Peña Nieto’s determination to balance the interests of potential investors versus the ongoing viability of PEMEX, and the success of the reforms measured by increased production and greater revenues for the government…. This is a defining moment for Mexico as it enters the global age of technological advantage and commits to raising the monies from foreign investors to pursue the development of infrastructure, quality education and social progress for its citizens.”   

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Allan Wall, an educator, resided in Mexico for many years.  His website is located at http://www.allanwall.info.

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