PEMEX: Open to Foreign Investment, but Not Privatization (Yet)

Following his election last summer, Mexican President Enrique Peña made waves by agreeing to open certain operations of the national oil company (NOC), Petróleos Mexicanos (PEMEX), to competition [1]. Given that oil production has dropped a full 25 percent since 2004 and debt levels have likewise continued to rise over the past decade, Mr. Peña Nieto’s proclamation thus represented one of the most significant economic reforms in recent Mexican history. [2] Nevertheless, constitutional obstacles still prevent a fully deregulated market from emerging and, indeed, Mr. Peña Nieto has since tempered expectations regarding privatization.

Article 27: Oil as a Public Good

Article 27 of the Mexican Constitution defines energy resources as publicly-guaranteed assets. The government has consequently asserted control over all aspects of industrial operations. The guarantee of federally-subsidized energy has likewise fostered substantial public opposition to structural reforms. Even as late as 2009, attempts to privatize PEMEX were summarily rejected in a highly polarized Congress. With public opinion shifting over the past few years, however, the issue had begun to develop bipartisan momentum among many presidential candidates – including Mr. Peña Nieto. [3]

The designation of energy resources as public goods has typically resulted in two policy outcomes: (1) highly subsidized residential electricity and (2) the diversion of oil revenues to fund federal program budgets. Indeed, 30 percent of the entire federal budget is derived from revenues generated by PEMEX and the national electricity conglomerate, CFE. As a result, PEMEX has accumulated considerable public debt over the past two decades, and is technically bankrupt. [4, 5] With such significant annual federal obligations, PEMEX has done little to expand existing infrastructure. Older technologies have thus become more inefficient over time, with outputs declining from a 2004 peak of 3.4 million bpd to 2.5 million bpd in 2012. The national monopoly model for Mexican energy has thus placed considerable strain on public finances as demand has converged on supply.

NAFTA and International Competition

Beyond the domestic competition-enhancing effects that would be expected to occur, liberalization of PEMEX operations would also have an impact on international competition. Currently, the public monopolies exercised by PEMEX and CFE comprise the primary impediment to regulatory and commercial harmonization between Mexico and the United States. The North American Free Trade Agreement (NAFTA) was intended to stimulate cross-border competition and economic development. Article 301, the so-called “National Treatment” clause, requires that the member countries treat the investment interests of other partners “no less favorably” than those of resident investors. [6] The clause governing energy policy, however, stipulates that any trade arrangements between member countries uphold the basic principles outlined in the parties’ individual constitutions. Taken in tandem, these two provisions ostensibly clash with Mexico’s constitutional designation of oil as a publicly-guaranteed asset. Thus, the continued practice of nationalized oil exploration and refinement has both explicitly violated the National Treatment clause and undermined the general spirit of free trade espoused by NAFTA.

The opportunity to introduce competition into PEMEX proposed by President Peña Nieto therefore transcends public finance implications alone. Indeed, the agreement would allow Mexico to finally comply with Article 301 of NAFTA and more fully harmonize its regulatory and commercial operations with NAFTA and the United States economy. Still, Mr. Peña Nieto recently reiterated that PEMEX would neither be “sold nor will it be privatized.” [7] Rather, the federal government will merely open PEMEX to foreign and private investment. This distinction stems from the lack of progressive investment in technology and expertise that PEMEX has been able to sustain in light of its heavy debts. By allowing foreign investment and collaboration with exploratory oil drilling companies, PEMEX looks to follow in the footsteps of such NOCs as Venezuela’s PDVSA. While certainly not a comprehensive market reform, Mr. Peña Nieto’s policy change thus represents an opportunity for PEMEX to deleverage, modernize, and reassert itself as a top-10 oil producer. In order to sustain this momentum, however, Mexico will need to continue to liberalize its energy market over next few decades.

[1] http://fuelfix.com/blog/2012/12/03/mexican-parties-agree-to-break-pemex-refining-monopoly/

[2] http://www.forbes.com/sites/doliaestevez/2013/02/01/mexican-tv-billionaire-salinas-pliego-wants-pemex-to-be-privatized/

[3] http://www.brookings.edu/research/papers/2011/11/07-mexico-oil-negroponte

[4] http://oilprice.com/Energy/Energy-General/PEMEX-And-The-Long-Road-To-Privatization.html

[5] http://www.americasquarterly.org/node/3781

[6] http://www.sice.oas.org/trade/nafta/chap-031.asp#A301

[7] http://www.chinadaily.com.cn/world/2013-03/18/content_16316551.htm

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