Energy Debate Continues, Mexico Poised for Symbolic Plebiscites

Debate Continues

The period of 71 days officially set aside for a more inclusive national debate on energy reform came to an end this week with the government no closer to reaching a political consensus on this issue. Instead, the debate is set to continue following the presentation of a counterproposal by the PRI and the expectation that the PRD will also unveil a separate legislative proposal following the party's staging of a referendum on energy reform in Mexico City this Sunday (27 July). All this means that there is likely to be a lot of behind the scenes inter-party wrangling over the coming weeks if legislators are to reach some kind of accord on the issue when Congress returns to work in September.

The PRI Proposal

The co-ordinator of the PRI in the Senate on 23 July presented the party's proposal for energy reform, which differs from the initial reform package submitted by President CalderÌn is some respects, but which appears to be remarkably similar in others. One key difference is that the PAN package contained a proposal to allow private participation in the refining sector, but the PRI proposal does not—it supports the hiring of foreign companies to build refineries, but not private ownership. However, neither of the parties support the privatisation of PEMEX or have proposed a reform of the Constitution to end PEMEX's monopoly over the sector and allow foreign companies to hold oil and gas exploration concessions. Instead, both parties favour the service contract model as a way to enable PEMEX to acquire technology from foreign companies for deepwater exploration, although the two parties appear to differ on the payment mechanism. CalderÌn's proposal called for a performance bonus, which would in theory allow companies to obtain a share of profits if output increases. However, the PRI proposal appears to require a fixed payment for service companies that may be adjusted if costs increase. The two parties are also agreed on the need for greater operational autonomy and efficiency for PEMEX, but the PRI's proposals go further. Indeed, one interpretation in the local press of the PRI's call for PEMEX's corporate structure to be altered through the creation of new state companies owned by PEMEX and state governments saw it as a means not only to increase transparency but to reduce the influence of PEMEX's union.

Earlier this week, the union welcomed the announcement that PEMEX was adjusting wages in a bid to avert a planned strike. Meanwhile, the threat to PEMEX's oil installations in the Gulf of Mexico posed by the first hurricane of the season Dolly has passed as Dolly was downgraded to a tropical storm and moved up into the United States. PEMEX had evacuated platforms ahead of Dolly's arrival.

The Referendum

Mexico City kicks off on Sunday with its unofficial referendum to determine the capital’s opinion on possible changes to energy legislation. The questions posed are as follows:

1.- The exploitation, transportation, distribution, storage, and refining of hydrocarbons are exclusive activities of the government. Do you agree that private companies can now participate in those activities?

2.- In general, do you agree that proposed energy reforms under discussion by Congress should be approved?

Representatives of the PRD have been campaigning hard in the DF against suggested amendments that would allow enhanced private enterprise involvement in the oil industry. Nine other states are holding their own parallel votes that will act as a partial sample of public opinion. State-level public consultation is not binding, but it will be difficult for the ruling PAN to ignore a resounding “No” vote accompanied by a high turnout or vice versa for the opposition. Additional polling days are scheduled for 10 and 24 August.

Outlook and Implications

The CalderÌn administration is expected to be open to compromise in order to save face in advance of the 2009 mid-terms. However, any further progress through ad hoc affiliation with the PRI would also weaken the hand of the governing PAN. Polls are already showing the PRI as the electorate’s favourite for next year’s legislative vote. The party that governed Mexico uninterrupted for 71 years until 2000 is once again depicting itself as the party fit for government. Meanwhile, the PRD is banking on its opposition to any further private involvement in the oil industry as a means of rebuilding support after its radical response to the close 2006 vote put off moderate supporters. The left-leaning party is divided, without a clear leadership, but its obdurate position against Calderón's energy reform proposal is a unifying issue.

The similarities between the PRI and the PAN reforms mean that it should in theory not be too difficult for the PRI to garner support for its proposal from PAN legislators, while at the same time allowing the PRI to get the credit in next year's mid-term elections for rescuing President Calderón's stalled reform package.

However, if legislators approve the PRI proposal or even a hybrid mixture of the two, potential investors are bound to be disappointed. This is because the reform proposals as they currently stand stop well short of the changes needed to ensure the large influx of foreign investment that the sector needs if it is to achieve its full potential. The development of oil reserves in deep waters of the United States portion of the Gulf of Mexico has required billions-of-dollars-worth of investment and the Mexican side is unlikely to be substantially different, while PEMEX's own figures show that the development of the Chicontepec reservoir alone requires the drilling of around 1,000 wells per year. It is hard to see how PEMEX would be able quickly to develop these new areas on its own even with some additional support from foreign oil companies holding service contracts. Nonetheless, some reform, albeit limited, would be better than none.

Find out more about Same-day Analysis