Nieto's problem — how to fix Pemex

Task: Mexican President Enrique Pena Nieto

Newly sworn-in President Enrique Pena Nieto is stoking expectations that his administration will finally capture what has been the bridge too far for backers of energy reform in Mexico’s Congress.

Yet the Institutional Revolutionary Party’s (PRI) first president in more than a decade is facing some harsh realities — and towering challenges — in following through on his electoral pledge to secure far-reaching reform to breathe new life into the struggling Pemex-controlled oil sector.

“It is going to be a tough task for the PRI,” says Carlos Ramirez at the Eurasia Group.

“The party will have to build support for it in Congress.”

By all accounts, Pena Nieto is signalling that he will maintain oil reform as the keystone in the economic edifice his administration will build over the next six years — no matter how arduous the road ahead.

What Mexico should do, he and his top aides have suggested, is follow the lead of the the regional oil powers Brazil and Colombia in revitalising their sectors.

“Mexico cannot postpone any longer the experience that other countries have had,” Pena Nieto says. “By clinging to ideological paradigms we just deny benefits to all Mexicans.”

Yet some analysts say Pena Nieto and his team, despite their reforming zeal, are sending mixed messages on exactly what the reform will entail for Pemex in changing Mexico’s legal framework. “What is clear is that we have to take advantage of the energy potential Mexico has, but without privatisation of a company owned by all Mexicans,” Pena Nieto says.

While both Brazil’s Petrobras and Ecopetrol of Colombia have tapped investors’ appetite for dividends by floating minority shares in their state-run companies on equity markets, this is unlikely to happen with Pemex.

Splendid isolation The political and economic cost for giving investors a share of the Mexican cash cow may be too high for the PRI, a party which ruled Mexico for most of last century, but only came back to power after two failed previous attempts.

Pemex remains a potent symbol of oil sovereignty among Mexicans even today. “There will not be any initial public offering of Pemex,” Ramirez says.

“The parting line of every Mexican politician’s (speech) when it comes to Pemex is ‘no privatisation’.

“There is talk of something ambitious, but the (Pena Nieto team’s) reform may not go as far as some wish.”

While the details of the forthcoming administration’s reform remains to be seen, Pena Nieto’s proposal to overhaul the Mexican oil sector is made all the more complicated in that Pemex keeps the country financially afloat.

Whatever model Pemex takes it has to be “Mexicanised”, says Duncan Wood, Senior Advisor to the Mexico Institute and senior associate at the Center for Strategic & International Studies. Part of the problem is Pemex itself. It is probably the most misunderstood oil company in Latin America.

Created from the oilfields that Mexico nationalised in 1938, generations of Mexican political leaders have infused Pemex with the patriotic duty of keeping an iron grip on the country’s upstream.

Expropriation costs Nationalists still praise those Mexican grandmothers who hocked their jewels during the last century to pay the expropriation costs.

Even today the state-run citadel is so intertwined with the Mexican economy — and the public’s psyche — that the nation’s finances would collapse without it.

Four out of every 10 dollars the federal government spends comes from Pemex contributions. That is about a third of the national budget.

However, experts say the Pena Nieto administration should focus on cutting the rot out of Pemex and implement fiscal reform ­before undertaking a more ambitious reform package in Congress.

“There is one structural issue that the government would have to consider before it addresses constitutional and/or legislative initiatives that would allow foreign oil companies a role in Mexico’s development of its resources,” says Latin American expert Jorge Pinon, a research fellow at the Center for Inter­national Energy & Environmental Policy at The University of Texas.

“Pemex’s fiscal regime would have to be changed.”


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