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Mexico’s energy reform: how is it going to affect local economy and communities?

Mexico City, Mexico – Mexican government opened its energy sector to private investors in in late August to improve the country’s economy.

Pemex is Mexico’s state-owned energy provider and up to now the only company allowed to develop their oil and gas. President of Mexico, Enrique Peña Nieto, put it on his agenda when elected in 2012 to improve and develop country’s economy. Previous governments have tried to take similar actions, but were unable to complete the projects before the end of their term in office.

The energy reform was proposed and eventually passed by the government in December with intend to encourage private sector investment and introduce a competitive market alongside Pemex. Equally importantly, permit foreign companies to participate in bidding oil reserves in the Gulf of Mexico. This puts stop the 76 years long monopoly in the Mexican oil industry and liberalising the economy.

The company has proposed a number of packages offering opportunities to prospective non-Mexican energy companies. Pemex wishes to find companies willing to boost production by offering using their technology and money. The energy giant is looking to sign partnerships worth over $32 billion in the next 14 months in already exploited oil areas. They are also looking to launch partnerships to explore new oil and gas areas in the Gulf of Mexico.

The reform keeps Pemex as 100% state owned company. The purpose of this new legislation is to ensure that the Mexican state is going to invest less in the energy sector, but they will receive more tax revenue when new investors starting coming in and pumping oil.

Foreign investors have instantly shown their interest in investing in Mexico’s energy sector, including Government of Singapore Investment Corporation and Russia’s Gazprom, after the announcement of the new reform.

Recent estimate shows that Mexico has over 87 billion barrels of prospective energy resources, including gas and oil, exposing the potential opportunities available. Mexico’s energy reform is going to, if carefully structured; increase financial and operational involvement of private companies. The newly opened private sector will be able to explore, produce and refine oil.

“Mexico is in the middle of a transformational movement in the energy sector,” said Alfredo Alvarez, Oil & Gas Leader at EY in Mexico. “After almost a century of monopolistic activity in oil & gas (PEMEX) and power generation (CFE), the Mexico energy reform opened both sectors to private investment.”

“This will generate a cascade of investments in Mexico, estimated by several sources to potentially be between US$350 to US$700 billion over the next 10 years,” he added.

Increase of oil production remains one of the main purposes of the energy legislation, in order to increase midstream and downstream infrastructure in Mexico and manage the expected increase in electricity demand of more than 5% per year.

“Mexico is a diverse and rich country and when we talk about natural resources, the opportunity should be attractive to a wide range of foreign investors.,” Alvarez explained.

Often countries that decide to pursue microeconomic reform agendas plan to reduce electricity prices for households and businesses, but also encourage new capital for energy infrastructure.

This is the case in Mexico, according to Matt Rennie, Global Transactions Leader for Power and Utilities. “Subsidised electricity prices in the country of tequila are, on average, 25% higher than in the US, and if subsidies were removed, would be 73% higher than in the US.”

Experts have shown a real support towards the changes to the current system operating in federal republic of North America. James Fredrick, freelance journalist from Mexico City specialising in energy and ex-BNamericas writer, thinks, “This is a great move from the government.”

“We have such a [bad] history of monopolies and corruption routed in those monopolies. We have seen a general backwardness and isolation in the international oil industry,” Fredrick added. “Pemex provides 1/3 of federal budget and they have to make decisions based on what’s going to bring in revenue for the state as quickly as possible.”

“In theory this is all very good, in practice I personally have these concerns, and I have heard a lot of other people expressing these concerns, that Mexico has done very poor job in the past of privatising industries,” he stated. They [Mexican government] are not calling this a privatisation but essentially that’s what it is.”

He raised his concern about previous examples of Mexican government attempting to privatise other sectors, such as the telecom sector or railroads. “There is plenty of rhetoric in the energy reform about eliminating corruption and introducing new transparency measures.”

Critical infrastructure is also required - President Peña Nieto himself noted that 47% of national transmission lines in Mexico are more than 20 years old and only 8% have been built in the last five years. Private sector capital will be essential to build this critical infrastructure.

President of Mexico explained in an interview for Financial Time that the energy legislation “will create more jobs” and subsequently “strengthen the domestic market and enhance economic growth.”

The energy industry sees this a positive moves, able to provide benefits to the Mexican economy and its growth. Not only will local labour be needed to help build new infrastructure and provide new services, but commentators also estimate that Mexico’s long term GDP could rise by between 1.5% and 2.3% as a result of the energy market reform, providing a general uplift in economic sentiment that will benefit all Mexicans.

“We expect that the investment made in oil & gas and power generation will improve the attractiveness of Mexico as a manufacturing hub, offering even better conditions if we are able to decrease the electricity cost and make petrochemicals, such as ethylene, available for the industry, as well as access to North American’s natural gas. If this happens, the positive effect on job generation, even beyond those generated by the energy sector, will be exponential.”

James Fredrick, however, raised issues about the general misunderstanding of the situation and the how it benefits local communities. “There is no the benefits to the working man the everyday Mexican,” he said. “There are concerns over poor messaging, but I think this is because these benefits don’t exist. I don’t anything tangible that the Mexican citizen is going to gain from these reforms in the short term.”

As well as this, access to private sector capital to build new electricity infrastructure will provide the Mexican Government with the ability to divert funds, which would have been, spent on the electricity system, to other areas of focus.

“One of the more positive measures in the energy reform is the fund this will be the government’s decentralised investment fund”, said Frederick, “of which all oil royalties will go to the Mexican budget over 5-10. The fund will will have excess in it every year. It will reinvest that excess into education, hospitals and other social programmes.”

Bidding for the already exploited areas as well as new potential oil explorations is expected to take place sometime in the first half of 2015. Enrique Peña Nieto’s government stated they want to organise and hold at least one public auction every year until the current administration ends in 2018.

The current situation is intensely watched and analysed by energy experts, after the Mexican government’s promise to consumers that electricity tariffs will be lowered within the next two years as a result of competition.

Photo: © Alejandro Linares Garcia / CC BY-SA 3.0

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