Mexican President Enrique Peña Nieto’s Energy Reform Does Not Convince Investors

 @PReyMallen on August 14 2013 1:37 PM

Mexico’s energy reform, presented on Monday after months of anticipation, has so far been a huge letdown for everybody involved. President Enrique Peña Nieto outlined a plan for opening up the state-owned Petróleos Mexicanos (Pemex), which holds the monopoly of the oil industry in the country, through contracts and partnerships, but without giving away ownership of the company. The reform also mapped out changes to Articles 27 and 28 of the Mexican Constitution, in order to make Pemex accessible to private investment.

Mexico is the 10th-biggest oil producer in the world, just behind Iraq, according to the Statistical Review of World Energy 2013 published by BP plc (LON:BP).

Mexican politicians and workers’ unions alike had a lukewarm reception for the reform. The right-wing opposition Partido de Acción Nacional (National Action Party) argued that the reform was too timid to bring real change for the deeply indebted Pemex. And the leftist opposition Partido de la Revolución Democrática (Party of the Democratic Revolution) said that the reform was a privatization in disguise and that it would turn Pemex, a symbol of national independence and identity since the oil nationalization in 1938, over to foreign hands.

However, these opinions might count less than those of the private investors who are supposed to enter into partnerships with the "new" Pemex. But even they are less than thrilled. The ambiguity of the proposed contracts, by which private companies would be compensated by the Mexican government for their oil extraction while the government monopoly keeps full ownership of the sites, was disappointing for prospective investors.

“What companies want is to register as theirs what they extract,” Gerardo Esquivel, a Mexican economist, told Spanish newspaper El País. Investors were hoping the reform would allow for concessions or shared production agreements, which would mean that they obtain direct revenue from the extractions.

The scheme presented by Peña Nieto is not the norm, explained Esquivel.

Analyst Joel Martínez said foreign investors are disappointed that the reform was so moderate, as they were expecting a bolder move. “Investors do not know what is going to happen with the law, the fiscal security; they hoped for more than just shared fields, they hoped for something similar to Brazil,” he explained. In Brazil, the government opened up the oil sector to private operators in 1997, ending the monopoly of state oil producer Petrobras (but not privatizing it.) 

Nevertheless, nothing is set in stone on the Pemex reform. The PRD still has to present its own proposal later this week, and leaders have anticipated that it will be vastly different from the president's. The decision will, then, lie in the hands of the Senate.

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