5 Facets of Mexico’s Energy Revolution

Oil Refineries

Earlier this week, President Enrique Peña Nieto made a bold proposal. The recently elected president of Mexico suggested that his country overhaul and revitalize its national energy industry and make sweeping changes to its oil, gas, and electric infrastructure. The initiative is largely contained within the Energy Reform bill, a piece of legislation that, if passed, could increase economic activity by 2 percentage points by 2025 and provide hundreds of thousands of jobs.

“The Constitutional Reform Bill I submitted to the Senate yesterday would make it possible to increase current gas production from 5.7 billion cubic feet a day to 8 billion cubic feet in 2018 and 10.4 billion cubic feet by 2025,” Peña Nieto wrote. “By having enough gas, we will also be able to reduce the cost of generating electricity and thereby lower electricity bills for Mexican families. … More gas will also support the countryside and make it possible to produce more food, since this input is the basis for having more fertilizers.”

However, the political problem facing Mexico’s president — and what makes his ambition so bold — is that Mexico’s energy economy is dominated by Petroleos Mexicanos, or Pemex, a massive state-owned company established in 1938, when the country nationalized its petroleum and natural gas reserves.

As much as one-third of Mexico’s government revenues come from Pemex, making the company a source not just of national income but also of national pride. The nationalization of hydrocarbons in the 1930s represented a firm step toward Mexico’s independence from foreign governments and multinational energy companies seeking to capitalize on the country’s massive oil and gas reserves, often at the expense of locals.

But while Pemex has experienced a huge amount of success, overall oil production in Mexico is declining. According to the U.S. Energy Information Administration, Mexico’s production of heavy crude oil fell by 46 percent between 2004 and 2012, while production of light crude oil increased slightly. Thanks to the shale gas boom in the U.S., exports have also fallen. All the while, Mexico has lagged in the refining game, and imports nearly 50 percent of its gasoline from the U.S.

mexcrude

Source: U.S. Energy Information Administration based on Mexico’s Secretariat for Energy’s Energy Information System

So what is Peña Nieto proposing? Here are five facets of the plan, as outlined by the president’s editorial staff:

1. The government will engage in a profit-sharing mechanism with the private sector, incentivizing major international oil companies like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), Royal Dutch Shell (NYSE:RDSA), and BP (NYSE:BP) to bring advanced technology and expertise to the country.

2. There would be a new tax system for Pemex, allowing the state to act as owner of the oil wealth with a long-term vision, rather than as a collection agent with a short-term vision.

3. In order to address its infrastructure and refinery problems and develop the capacity to access shale gas and deep oil formations, Pemex will undergo restructuring.

4. The initiative would increase accountability and transparency at Pemex, sharing information related to operations, acquisitions, and profit contracts. Mexicans will have “proper access to the information related to the administration and the state of the Nation’s energy patrimony.”

5. Pemex will use its purchasing power to help fuel investment in Mexico’s infrastructure.

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