Energy Reform in Spotlight as Future Leftist Party Leader Emerges in Mexico

Political Uncertainty

President CalderÌn’s partial reform progress has been leading up to the most difficult political test to date. The time to tackle controversial changes to energy legislation has arrived with this legislative session representing the most plausible opportunity that the government is likely to see. Circumstances—and opponents—are conspiring against the PAN at this moment. An inconclusive leadership contest in the PRD appears to be going the way of old guard leftist Encinas. The former interim mayor to Mexico City would endorse demonstrations against energy reform and throw his party’s lot in with LÌpez Obrador. This decision may cause harm to the PRD in the medium term, but, in the short-term, it causes difficulties for the government’s energy reforms. Encinas has urged moderate rival Jesus Ortega to “know how to lose” after the latter demanded a full recount of ballots in the PRD leadership contest. Ironically, Encinas and close ally AMLO still refuse to recognise the Felipe CalderÌn government and reject the conservative’s narrow victory over AMLO in July 2006. Arturo Núñez, the PRD’s top technical electoral official, has given constituencies until Saturday (22 March) to conclude their recount so that the verdict can be confirmed the following day.

The PRD’s habitual schisms are deepening with the indecisive internal vote and fraud allegations, which could weaken its hand in the 2009 mid-term elections. However, that is equally unlikely to help the PAN for now. President CalderÌn’s difficult task of convincing voters of the potential economic benefits of partially opening the energy sector to private investment is made more difficult after a serious corruption scandal hit his cabinet. Government Secretary Juan Camilo Mouriño is under investigation by Congress and the public prosecutor’s office for his role in granting PEMEX contracts to his family’s energy company while he held influential positions in the Chamber of Deputies and later the Energy Secretariat. Mouriño was promoted from the position of presidential aide to a senior cabinet post in January and touted as CalderÌn’s man to win congressional backing for some form of energy opening. The incident has been a gift to AMLO, who is using it an example of the government’s desire to sell out the state firm to private and foreign interests. (Mouriño was born in Spain.)

PEMEX Celebrates Anniversary Amid Uncertainty

In speeches to mark the 70^th anniversary of the nationalisation of the oil sector, Mexico's President Felipe Calderón and the country's Energy Secretary Georgina Kessel Martínez on Tuesday both paid tribute to the central role that the state oil company PEMEX has played in Mexico's economic development over the previous decades, but called for changes in order to address the challenges the company now faces. The challenges they referred to included: declining production and reserves; the need for new technology; the need to access reserves in deepwaters of the Gulf of Mexico; and the need to reduce oil product imports. This emphasis on the challenges that PEMEX faces will be seen as an attempt by the government to win public support for energy reform. Although neither of the speakers made any direct references to the current discussions under way in Mexico's Congress and the national media over the possible reform of the oil sector the message was clear: a broad discussion is needed in order to strengthen PEMEX and ensure that future generations of Mexicans continue to enjoy energy security. In keeping with the occasion, President Calderón also reaffirmed his government's pledge not to privatise PEMEX and equated national sovereignty with a stronger oil industry.

However, the president and the Minister's speeches were fairly vague with regard to precisely what changes they considered necessary to bring about a stronger and more efficient state oil company. A notable exception was Calderón's comment that he had instructed the Energy Secretary and the head of PEMEX to conduct a study into the feasibility of building a new refinery in Mexico. In contrast, PEMEX chief Jesús Reyes Heroles was more direct in his call for change presenting operational data on PEMEX’s performance in 2007 in order to highlight the critical condition of the company:

• Reserves Fall: As of 1 January 2008, Mexico's proven hydrocarbon reserves were 14.7 billion barrels of oil equivalent, 5.1% lower than in the same month of 2006. Mexico's proved crude reserves-production ratio fell to 9.2 years in 2007 from 9.3 years in 2006 and its proved gas reserves-production ratio from 9.7 years to 8.2 years. Meanwhile, PEMEX's hydrocarbons reserve-replacement rate for proven reserves was 50.3%, higher than the 41% achieved the previous year, but well below the 100% target set by the government.
• Production Falls: Crude production for 2007 as a whole averaged 3.082 million barrels per day, 5.3% less than in 2006 and 8.8% less than in 2004. Production from the largest field Cantarell was 17% lower in 2007 than 2006.
• Imports Grow: Gas production rose by 13% in 2007, but imports still accounted for 22.9% of final consumption. Meanwhile the volume of gasoline (petrol) imported in 2007 was equivalent to around 40.3% of final consumption.

Reyes Heroles also set out six challenges that need to be addressed in order to modernise the company:

• promoting a regulatory framework for PEMEX that allows greater flexibility over technical decisions such as contracting services without undermining the state's role in the sector;
• improving the corporate governance of the company, strengthening its administrative board, and improving transparency;
• promoting a new model of control and regulation that strengthens its effectiveness in the fight against corruption;
• allowing PEMEX to seek the support of other companies in the development of activities, but without affecting the state control over resources;
• promoting a tax and budgeting system in line with international practices including amending the tax system in order to reflect the higher costs of developing projects such as deepwater exploration and Chicontepec; and
• seeking greater oversight of PEMEX’s performance from the stock exchange, but without listing shares.

Outlook and Implications

National ownership of Mexican oil dates back to 1938 when then-president Lázaro Cárdenas expropriated the petroleum industry. The act is celebrated on the anniversary every 18 March in an event that stirs strong nationalist sentiment. This year it took place against the backdrop of a debate over energy reform that is currently dividing Mexican society. Although neither the government speakers nor the head of PEMEX made any direct reference to the issue of energy reform, they all stressed the challenges currently facing the state oil company and their calls for a “shared vision” and an “open” dialogue reflect a deep-seated desire to build a political consensus on the issue.

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