By Felicia Graham
LA JOLLA, Calif., June 2 – The countdown to Mexico’s July 1 presidential elections has begun, and energy reform is one of the hottest issues on the table, with all of the candidates more or less agreeing that change is needed.
The question is: how to achieve it.
Overall, Mexican policy-makers and the population alike continue to share the sentiment that Mexico’s oil belongs to Mexico, and that is unlikely to change. So, while everyone agrees energy reform is needed, no one wants complete privatization of state-owned Petróleos Mexicanos (Pemex).
CHRONIC PRODUCTION DECLINE
Pemex, has held a monopoly over Mexico’s oil industry since 1938 and is the world’s seventh largest producer. But it has failed to attract the foreign investment needed to properly develop the country’s oil industry.
Mexico’s oil production was on the upswing during 1980-2004, when its output doubled to 4 million barrels per day (b/d) from 2 million b/d, according to the U.S. Energy Information Administration.
But after 2004, Mexico’s oil production took a turn for the worse, producing only 3 million b/d in 2009, and just 2.5 million b/d in 2011.
Part of the problem is that Pemex is required to pay a 60% tax on its revenues, leaving the firm little money to invest in the new technology and equipment required to develop the country’s 10 billion barrels (bbl) of proven oil reserves.
Mexico’s inadequate refining capabilities also force the country to import more than 40% of its gasoline and other petroleum products to meet growing domestic demand – estimated at 2 million b/d in 2010.
But Pemex’s deteriorating oil production capability doesn’t mean bad news only for the oil industry — it affects all aspects of life in the Latin American country.
Nearly 35% of the government’s budget comes from oil revenues, meaning that the decline in oil production has had a direct effect on the government’s ability to deliver goods and services to the population.
Compounded by the global economic downturn in 2008, the government is hurting financially, and the population is looking for some fresh policies.
THE CANDIDATES
The presidential race has come down to three main candidates: Enrique Peña Nieto of the left-leaning Institutional Revolutionary Party (PRI), Josefina Vázquez Mota of the right-leaning National Action Party (PAN), and Andrés Manuel López Obrador of the Party of the Democratic Revolution (PRD), also a leftist group.
The candidates squared off during a live debate on May 6, where they discussed their views on energy reform.
NIETO: ‘PRAGMATIC REFORM’
Front-runner Enrique Peña Nieto – who holds a hefty 15-20 point lead so far – called for “pragmatic energy reform, which will allow Pemex to benefit from greater associations with the private sector, without giving up public ownership over hydrocarbons.”
“I will modernize Pemex, not privatize it,” Nieto explained during a televised debate. “I believe greater wealth can be created with the participation of the private sector.”
OBRADOR: ENVIRONMENTAL SUSTAINABILITY
Andrés Obrador calls for energy reform – but not in the form of privatization, declaring that he would not make any changes to state control over Pemex.
The rationalization behind this position is that small and medium-sized companies would be unable to compete with large-scale private companies.
Instead, Obrador hopes to focus on environmental sustainability, the exploration of new fuel resources, and investment in new technology.
To do this, Obrador outlined a plan to build five new large-scale refineries in the south of Mexico. The goal is to achieve energy self-sufficiency, in which Pemex would refine its own gasoline and discontinue exports of crude oil.
MOTA: COMPETITIVE PEMEX
Vazquez Mota’s proposed policies are more in line with Nieto when it comes to energy reform. During the debate Mota explained her preference for a modern, competitive Pemex, that integrates private capital through the use of citizen bonds.
Mota’s policies would focus on working with private business to invest in new technologies and research to develop alternative energies like solar power, shale gas and petrol chemistry.
EXAMPLES: BRAZIL, COLOMBIA
Still, some major shifts could likely to take place within Mexico’s oil sector, and candidates are looking at Brazil and Colombia as examples of steep increases in foreign investment and production.
Brazil’s oil production has more than quadrupled since 1980 – producing over 2.5 million b/d in 2009, while Colombia received a record $10 billion in foreign direct investment in 2010.
Both Nieto and Mota noted that Mexico should learn from the “successful experience” of Brazil’s state-controlled oil company Petrobras – Nieto emphasizing the potential of raising equity through stock exchanges.
Current President Felipe Calderon initiated some small policy changes in 2011, allowing private oil companies to participate through non-equity upstream performance. But these have yielded little interest. Pemex needs more reforms to successfully develop Mexico’s substantial oil reserves.
For this election, energy reform is the name of the game. Whoever comes out on top this time will set the course of Mexico’s energy policy for the long-term. But one thing does seem certain: Mexico’s energy policy is changing – slowly but surely.
Felicia Graham is Managing Editor at Oil Diplomacy
© Glamma Productions Inc. 2012
For further information, and to follow the Mexican elections visit the Institute of the Americas at UCSD.