Energy Reform

On August 12th President Enrique Peña Nieto pushed one of the most sweeping economic overhauls here in the past two decades. This was when he proposed opening his country's historically closed energy industry to foreign investment.

The President's goal is to recharge Mexico's economy by tackling areas that analysts agree hinder its expansion, which has averaged just 2.2 percent a year since 2001 according to the Organization for Economic Cooperation and Development.

The parliamentary coordinators in the Senate stated that there isn't any deadline for passing energy reform. The regular session will begin on September 1st and ends on December 15th. Energy reform is part of the Mexico Pact with a deadline to be dealt with sometime during the second half of 2014.

Emilio Gamboa Patron, coordinator of the PRI said: "It is a reform in which we encourage the participation and opinions of all senators regarding the reforms presented by President Peña Nieto. It has to be compared to the one presented by the PAN and the one that will be promoted by the PRD."

Jorge Luis Preciado, coordinator of the PAN bloc in the Senate, insisted that energy reform will not be considered until the political and electoral reforms are put on the table for discussion. "I think we could move forward," he said, "in parallel with discussions among reform proposed by the National Action Party and the 'mini-reform' that is being suggested by the Executive."

The coordinator of the PRD, Luis Miguel Barbosa, warned senators of the possibility that the PRI and the PAN want reform in September, so he has called for consideration of the referendum on the basis of "Vox Pupuli": "We urge the Federal Government and the political parties to behave as statesmen and they can be the ones first to recognize that people need to be consulted," he advised.

Mexican President Enrique Peña Nieto unveiled the highly-anticipated energy reform initiative allowing for limited participation by oil giants such as Exxon Mobil, Chevron and BP in Mexico's restricted oil industry. This will be for the first time this has happened in 75 years.

The New York Times recently announced that Mexico already has to import almost half of its gasoline, mostly from the U.S. Mexican companies pay 25 percent more for electricity than competitors in other countries, according to the government. Although Mexico has some of the world's largest reserves of shale gas, it imports up to one-third of its natural gas.

The proposal would allow private companies to negotiate profit-sharing contracts with the government to drill for oil and gas. Under this plan the reserves would continue to belong to the Mexican state, but investors would get a share of the profits. Private investment would be allowed in refining, oil pipelines and petrochemical production.

Forbes made this announcement on the proposal: "Investors are unimpressed with Mexican President Peña Nieto's energy reform." Duncan Wood, an energy expert who heads the Woodrow Wilson Center's Mexico Institute, said: "The reform proposal is solid and will revolutionize the sector. I think that some investors will be disappointed that the contracts are profit-sharing and not productionsharing."

Chevron's Kent Robertson said the company would welcome any decision by Mexico that provides new investment possibilities. Shell said Mexico would benefit from working with energy companies, but declined further comment. The Wall Street Journal reported that Exxon also declined any comment.

The Wall Street Journal wrote: "If approved, the energy reform proposal by the Mexico Federal Executive would be a milestone in the modernization of the country, as has not occurred since the Free Trade Agreement (NAFTA) was initiated."

The General Director of Legal Expenses for the Undersecretary of the Ministry of Finance, Mister Juliet Y. Fernández Ugalde, directed this comment to the Standing Committee of Congress. He said: "The Energy Reform sent by President Enrique Pena Nieto to Congress has no impact at all on the federal budget."

The Council of Industrial Chambers of Jalisco (CCIJ) fully supports the Energy Reform. But according to Juan Alonso Niño Cota, Coordinator of the organization, it must first be approved. He said: "It is a reform that industry, through the Council of Industrial Chambers of Jalisco, supports. We strongly believe that this announcement will make our country better, make us more competitive and it will strengthen the industries with cheaper energy," he predicted.

Gerardo Gutierrez Candiani is President of the National Business Coordinating Council (CCE) and the Confederation of Industrial Chambers (CONCAMIN). He considers that the reform proposal presented by the President is ambitious enough to achieve the goals of the industrial sector. It will make inputs cheaper, create more jobs and businesses will become more competitive. "It is a historical scheme," he explained, "that will allow us to finally really achieve what we want. That is exactly where there should be investment, where the risks should be shared along with the higher levels of investment. And all this will mean better jobs and this will surely translate into better prices for inputs, as well as many more competitive companies in a country that will be far more productive. Obviously In the final count this is going to be reflected in the pockets of all Mexicans; that is the really big challenge," he said.

He notes that the reform will allow Mexico to move from inertia and deterioration to renewed capitalization and revived competitiveness in the energy sector. In addition to this he says, "... oil revenues should be used as a genuine lever for development."

For Schneider Electric Mexico, the country's energy sector represents 35% of total sales per year. Their participation could be increased up to 10% per year based on investment detonations from the Energy Reform, according to Enrique Gonzalez Haas, President of Schneider Electric Mexico. "We would be participating in energy efficiency projects and generation," he pointed out. This would mean exploitation of oil through teams working in the company; especially the ones who help run the motors and drive the force needed to extract oil."

Eaton expects to invest more if the energy sector grows. For multinational interests, says Andrea who is Director of Marketing and Communications of the Division of Energy quality for Latin America and the Caribbean at Eaton.

Perez says the reform opens a range of business opportunities in Mexico. "We could insert ourselves as suppliers for PEMEX and CFE" he observes, "as new investors, and we have a broad portfolio of solutions for the energy sector. In the electric field, for another example, we have everything from generators to UPS that improve the quality of electricity."

For the Center for Development Research (CIDAC) the energy reform initiative lacks ambition. For specialists in the field of hydrocarbons and electricity, what was needed is to strengthen the regulatory bodies.

In hydrocarbons they are required to propose a sovereign oil fund, as Norway does. This ensures that people receive the benefits of oil revenues and know how to spend wisely. This is a strengthening move according to the National Hydrocarbons Commission (CNH).

Miguel Toro, junior researcher in the CIDAC said: "The creation of a fund not only allows future generations to enjoy that income, but also spend it in a more transparent way and they become better prepared for what already is," he said. "Currently," he continued, "what Pemex takes the government will not necessarily include in current spending on infrastructure which has already been spoken for by the government.".

To Rodrigo Vallejo Alpizar, President of the National Chamber of Industry (Canacintra), it is urgent to address energy efficiency all across the country. "In the new industrial policy," he emphasized, "we have to find a dynamic where the energy costs are more attractive to businesses of transformation. High energy costs are hitting them too hard in much to the country."

The president of the National Action Party (PAN), Gustavo Madero, criticized the initiative and pointed out that it is not ambitious enough. "I have the impression that they are running in the--at least try to do no more than necessary--in the water and the energy sectors, but not enough so that it becomes a real engine of sustained economic growth," he said.

The challenge of the energy reform proposal by the Federal Executive will provide certainty to investors, for one thing, observed Juan Pardinas Carpizo the CEO of the Mexican Institute for Competitiveness (IMCO). "We can maximize the potential of generating economic growth that has the hydrocarbon sector in Mexico," he predicted.

If passed, this initiative could attract investment of between 50,000 and 70,000 million dollars annually, according to estimates done by the Center for Economic Studies of the Private Sector (CEESP). Although the figure could reach as much as US$100,000 million a year, especially if during the discussion of the proposal approval is given to grant concessions to the private sector. This is especially important, said Francisco Lelo de Larrea, Deputy Director of the Economic Research Agency.