The US Stake in Mexican Energy Reform

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Mexican president Enrique Peña Nieto recently announced a new proposal for reforming the nation’s outdated oil and gas industry. Image from QuidNovi.

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In 1938, Mexico’s government made one of the world’s most populist and radical moves of the 20th century—nationalizing the oil and gas industry. Foreign companies from the United States and elsewhere were paid as much as the Mexican government could afford, but the companies lost all permanent investments in the country. Lázaro Cárdenas, Mexico’s president at the time, was hailed as a hero by the Mexican people—Mexico, long a servant of foreign investors and governments, was establishing itself as an international force. Nearly eighty years later, Mexico’s current president, Enrique Peña Nieto, has proposed an energy reform plan that would allow foreign companies to take a significant part in the rich proceeds from Mexican oil and gas for the first time since 1938.

The move makes practical sense. Pemex—the public Mexican company that performs all the exploration, drilling, and refining of oil within Mexican borders—has long been notorious for its corruption and bureaucratic waste. It is frequently used as a cash source for politicians who sell high positions in the publicly owned company, invest with inside information, or provide consulting services. The company is twenty to thirty years behind industry leaders in management structure as well as technology and expertise concerning deep-sea and shale drilling, which are seen by many as the future of the industry. And many Mexicans agree that the company needs to be reformed, but less than 20% think it should be done by allowing private investment. With such broad, bi-partisan opposition to privatization of the oil and gas industry—along with bad memories from the privatization of the telecommunications industry in the 1990s, when Carlos Slim and a few other business moguls ended up with a de facto private monopoly—private investment in Pemex is an unlikely option for reform. To avoid this, Peña Nieto and his party have proposed that the Mexican legislature allow private companies to form joint ventures and partnerships with Pemex (taking fees but ceding all ownership rights of the oil to the national firm). More liberal politicians, including the left-leaning PRD, have suggested that Mexico continue its isolationist energy policy and attempt a complete overhaul of Pemex without any private involvement.

Peña Nieto’s proposition has several clear advantages for Mexico. The primary advantage for Mexico is that change will come more quickly and efficiently if outside companies are involved; private firms usually have more technical know-how and less time-wasting corruption. In addition, true to the intent of the 1938 nationalization of the country’s oil and gas, the proposition permits reform without allowing permanent private or foreign investment. Indeed, Pemex has already entered into some joint venture projects outside of its national boundaries in order to begin acquiring the experience it needs. Additionally, the ties created by work with foreign companies could well lead to increased foreign trade, which has been the lifeblood of Mexico’s economic growth for decades.

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One of Pemex’s many drilling platforms, most of which are deteriorating quickly. With an aging infrastructure and oil fields running dry, the firm produces 25% less oil than it did in 2005. Image from El Deforma.

But the US stands to gain much as well if the centrist PRI plan is adopted. One clear advantage is that large US oil companies—such as ExxonMobil and Chevron—will be afforded significant growth and revenue opportunities as they work with Pemex. Perhaps more important, however, the two nations would likely advance their working relationship a great deal by international cooperative ventures, even among private firms. The troubled history between the two countries, including a good deal of present tension caused by the ongoing war on drugs, could only be helped by friendly business relationships. On a related note, US foreign trade could be boosted by a better relationship with Mexican firms, and not just in Mexico—Central and South American views of the United States are greatly affected by its behavior towards Mexico, and a better US-Mexican relationship could increase trade from the Mexican border to the southern tip of Argentina. Finally, if Pemex recovers fully, the increased revenues would markedly strengthen Mexico—an important US ally—on the international stage and help further US interests in diplomacy and trade.

How, then, should the United States encourage Peña Nieto’s energy reform plan? Many Mexicans worry that private and foreign companies, unhindered by labor laws and unions, would generally exploit Mexican workers and care little about the country. Accordingly, the United States must first provide assurance that any foreign involvement will be strictly monitored, perhaps by forming a bilateral monitoring team with representatives from both nations to oversee the contracting, planning, and execution of any joint ventures. Once both nations are satisfied that Mexican security and autonomy are not at risk, US diplomats should collaborate with Pemex, representatives of the Mexican government, and private energy companies to outline a long-term plan for growth in Mexico’s energy sector. This should include details of how long domestic and foreign firms will be involved in the energy industry as well as an informational campaign to promote the program among the Mexican public.

US politicians and businesspeople can no longer afford to stand by and let Mexico suffer poverty and slow economic growth because it lacks information or options to make wise decisions. Limited intervention, particularly as Mexico’s energy sector is currently striving to reinvent itself, has become both a practical imperative and a humanitarian duty.

 

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