July 16th, 2012
03:38 PM ET

Is time ripe for energy reform in Mexico?

Editor’s note: Shannon K. O'Neil is Douglas Dillon Fellow for Latin America Studies at the Council on Foreign Relations. The original post can be read at her Latin America’s Moment blog here. The views expressed are solely those of the writer.

Though legal battles are sure to continue, Mexico has chosen its next president. Enrique Peña Nieto will take office on December 1, and his party, the Institutional Revolutionary Party, or PRI, will dominate both houses of Congress.

Domestic and international audiences are now looking to the next government to pass the structural reforms needed for Mexico to become more productive, more competitive, and grow faster. This starts with the state-owned energy sector. Enshrined in Mexico’s Constitution, oil reserves are property of the state, and managed by Petróleos Mexicanos, or PEMEX, which retains full, control over exploration, processing, and sales. A modest 2008 energy reform pushed on the margins of this arrangement, allowing Pemex to offer incentive-based service contracts to private firms. These new rules so far have disappointed, with few foreign oil companies substantially upping their foreign direct investment or bringing in the technological know-how needed to unlock potential reserves and boost long term production.

Though notoriously a political third rail in Mexico, during the campaign Peña Nieto promised to open up the sector to private investment, à la Brazil’s Petrobras. In a 2011 interview with the Financial Times he claimed that Pemex “can achieve more, grow more and do more through alliances with the private sector.” He reaffirmed this position just [last] week when talking with the press, saying he was convinced that the PRI could reach an agreement on energy through “much negotiation ” between his party and the opposition.

Can Peña Nieto open up the energy sector? Possibly. One consideration is the PRI’s legislative heft. The party gained a plurality, but not majority, in both houses of Congress. Many commentators see this as worrisome for an ambitious reform agenda, predicting a weaker president, and continued gridlock . But energy reform was always going to require a coalition to create the necessary two-thirds constitutional majority. The lack of a majority may make the PRI more willing to come to the bargaining table (and more willing to negotiate in other areas, such as political reform). If they come, they may find a willing partner in the outgoing National Action Party, the PAN.

More at CFR: The New, Old World of U.S. Oil Policy

The PRI also has the advantage of counting on the PEMEX union as a political ally rather than an opponent. In fact, the union’s leader, Carlos Romero Deschamps, was just elected to the Senate on the PRI’s proportional representation list, as was the union’s treasurer, Ricardo Aldana. Their presence, rather than stymieing negotiations, may help smooth the process, enabling a Nixon in China moment for Mexico.

Another pressure for reform is the reality of Mexican oil exploration and production. Mexico has huge potential, but increasingly recognized limits on PEMEX’s ability to realize these riches. Since 2004, oil output has dropped by roughly a quarter (stabilizing in 2010). Under the status quo, many expect further declines, which are troubling not just for the economy; oil revenues account for a third of the government’s budget. Even if production remains stable, Mexico will likely become a net oil importer during Peña Nieto’s tenure. For a party that aspires to remain in power, unleashing additional revenues is vital.

In 2008, Mexico passed a more moderate energy reform (many say that behind the scenes Peña Nieto himself blocked a more comprehensive bill). Though disappointing in terms of its reach, it did put energy reform on the table – bringing politicians from across the spectrum, interest groups, and society at large together to debate, discuss, and successfully revise a once sacred cow of Mexican politics. This precedent created the space for contemplating a comprehensive reform today.

The path to true change will require serious negotiations both within the PRI and with other parties – most likely with the PAN but perhaps also with members of the Party of the Democratic Revolution, or PRD (some of whom voted for the 2008 reform). In these few days since the election, both the president and his chief of staff, Luis Videgaray Caso, have repeatedly placed energy reform at the top of the agenda. Both know the challenges ahead. But, as the president elect says, “I’m optimistic.”

More at CFR: Targeted Killings and Signature Strikes

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Topics: Latin America • Mexico

soundoff (4 Responses)
  1. j. von hettlingen

    Despite its huge oil reserves, this sector doesn't bring in much revenues. Mexico is still highly dependent on remittances from its nationals abroad, which represent the country's third-largest source of income after oil and tourism. While the US economy began to stall and Mexico's economy started to boom many Mexicans decided to return, but their homeland is still not yet ready to take them all back, due to the lack of resources and capacity in public services to cope with an increased population. These Mexicans bring back American know-how, culture and money, which the authorities hope they will invest in Mexico. But it might takes years for reforms to bear fruits.

    July 18, 2012 at 5:13 am | Reply
  2. Patrick

    Mexico's outgoing President Felipe Calderon stated on July 15th in Madrid that he “will push through reforms until the end of his term and will support the reform plans of his successor and rival Enrique Pena Nieto.” Nieto won the presidency by avowing to follow on changes to tax, labour and energy reforms. However his team blocked attempts by Calderon to do just that when the tables were turned. Will Calderon rise above his own ego and follow through for his people?

    July 18, 2012 at 10:05 am | Reply
  3. Aaron Chaney

    Romney vs. Frankenstein (Obama)

    Put simply, better the devil you don't know. Vote Romney.

    July 19, 2012 at 10:56 am | Reply
  4. Oliver

    Mr.Zakaria, you also said "elections in Mexico were exemplary" and nothing could be further from the truth...

    July 29, 2012 at 7:45 pm | Reply

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