Is this enough progress? That is the question now that Mexico’s President Enrique Peña Nieto has announced his proposal to open his country’s energy industry. Freeing up even a sliver of energy exploration in Mexico is a big step. The day of nationalisation back in 1938 is an observed holiday. And any step towards liberalisation risks immense popular backlash. So President Nieto has tried to split the baby. He has boldly called for amending Mexico’s constitution, which would give the reforms permanence. Although the terms have yet to be worked out, his proposal allows foreign companies only to enter into profit-sharing agreements with Pemex rather than production arrangements where they would have control over the barrels.
There is understandable interest in Mexico’s energy assets. Its nearly 3m barrels a day of oil production ranks ninth in the world, says the US Energy Information Administration. Mexico also has relative political stability compared with other areas of the globe where petroleum is sought. Unfortunately, the inefficiency of state-run enterprises has cost Pemex as oil production has fallen from its peak in 2004. Because profits are siphoned towards government spending, not enough money has been ploughed back into exploration. With expertise and capital from foreign partners, production could begin to expand again.
But oil companies, such as ExxonMobil, Royal Dutch Shell and Repsol that have expressed interest, prefer production control. That enables them to extract cash flow earlier in the project life cycles and thus boost their returns. To win popular support for more aggressive reform, Mexican consumers will have to be convinced that greater energy production leads to lower utility bills. For now, give Mexico’s president credit for taking the first step towards breaking away from 75 years of protectionism.