Pemex Blues: The Downside to Mexican Energy Reform

Whlle foreign investment might seem like the silver bullet for Peña-Nieto and many of his allies, I wonder if this move might exacerbate some or all of Mexico's ailments.
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It's easy to tell that 2013 has been an impasse year for Mexico, capped off by Mexico's historic energy reform this month that will open the doors of the state-controlled energy industry to foreign investment , making North America one of the world's largest suppliers of oil and natural gas. Reading the news coverage of the reform, I couldn't help but think of Chimamanda Ngozi Adichie's talk on the danger of a single story. The American coverage has, of course, been a single story reminiscent of the same talking points surrounding NAFTA almost 20 years ago, focusing on the (hopeful) benefits of such a drastic change to Mexico's economy: a more robust private sector injected with fresh capital, a stable means toward growth and a short-term fix to hedge the fluctuating Mexican Peso against other world currencies. Many of these talking points echo those of President Enrique Peña-Nieto, who touts the plan as Mexico's silver bullet to its current economic woes. In its current form, Mexico's energy reform is based on Norway's model, which allows for profit-sharing, but not production-sharing with international companies in oil and natural gas production. One problem though: Mexico is not Norway and state-owned Pemex is hardly a shining example of efficiency.

Trickle-down economics and all of its bunk theories aside, corruption is the other problem everyone is thinking about but nobody is really talking about with concern to this plan. Currently, Pemex supplies Mexico with one third of all its revenue, paying nearly $70 billion in taxes on a 99.7% tax rate. To the casual observer, one third of all revenue from a single source should seem a little odd given the diversity of other economies with similar GDP's to Mexico. And indeed it should be a red flag to the average Mexican citizen given that Pemex Executives and Mexican politicians have reportedly embezzled billions of dollars from the nationalized corporation. Peña-Nieto's plan fails to address such corruption. And it can only be assumed that Pemex executives and the politicians benefiting from the decisions of those executives--many in the ranks of Peña-Nieto's own party--will remain safely intact after Mexico's energy reform is enacted. Though Peña-Nieto has been grilled on questions concerning the way corruption might manifest given a new injection of capital into Pemex, he's been reluctant to give answers so as to minimize wave-making within the ranks of his own party, the PRI.

And there's also the fact that Mexico is in crisis, at war with itself. Conservative estimates of the number of people killed in Mexico's ongoing drug war rests at just over 60,000 . One needs only to look as far as South Sudan to understand the ramifications of foreign energy investment in a country whose stability continues to crumble. While Mexico is not South Sudan, it is undeniable that Mexico could face many of the same problems as South Sudan given its energy resources and its ability to protect them. Mexico holds the fourth largest reserves of shale gas in the world and an entire gulf of oil untapped due to Pemex's inability to extract those resources.

Whlle foreign investment might seem like the silver bullet for Peña-Nieto and many of his allies, I wonder if this move might exacerbate some or all of Mexico's ailments. As a nationalized brand, Pemex touches most every life in Mexico. And one can only hope that the change in Mexico's constitution will bring about a change in Mexico's mode of business as well.

Update: The Mexican constitutional reform signed into place in December includes contracts and license agreements that include production sharing

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