Mexican Energy Reform: Understanding the Context and the Flaws

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Few in Mexico doubt the need for reform. As Maria Vargas points out in her companion article, PEMEX is in desperate need of a new direction.

But two issues need to be understood fully before this reform proposal is adopted: the depth of patriotic popular opinion in Mexico against such drastic changes and the potential flaws within the reform package itself.

Popular opinion is certainly the more challenging issue for Peña Nieto. Bloomberg reported last month that while 77% of Mexicans were in favor of foreign investment in Mexico, 65% opposed such action in the fossil fuels sector.

The main reason for such hostility against foreign involvement in PEMEX dates to March 18, 1938, when then-President Lázaro Cárdenas’ expropriated the country’s fossil fuel resources and expelled foreign oil companies. March 18 is still celebrated as a national day of pride in Mexico and a symbol of resistance to exploitative foreigners.

The name of the state-owned company itself, PEMEX, also invokes this patriotism. PEMEX stands for Mexican petroleum, which means, as many Mexicans have been reported as saying, those resources belong to Mexicans.

Cuauhtémoc Cárdenas, the son of the former president and founder of the PRD (one of Mexico’s three main parties), has been vocal against the proposed reform and drew 8,000 demonstrators to the streets of Mexico city two weeks ago. Other PRD leaders have also led several of their own protests more recently.

In this context, Peña Nieto has had to emphasize several times to his Mexican constituents “Pemex will not be sold, nor privatized” and will still be Mexican.

Popular opinion aside, serious doubts remain as to whether these changes, significant as they may be, will have the desired effect of attracting new foreign capital, drawing foreign expertise for deepwater and shale gas drilling and altering the structure of PEMEX as a company so as to ensure the government does not exploit it to pay for budget deficits.

As Forbes reported last month, investors remain suspicious of the Peña Nieto package. Even though companies such as Exxon Mobil, Shell, BP, and Chevron want to pursue opportunities south of the border, they would prefer a reform package that allows for outright ownership of fossil fuel resources. Instead, the Peña Nieto package provides for profit-sharing of the cash equivalent of any oil in the drilling and refining procedures.

Just as importantly, Peña Nieto’s package does not address corruption at PEMEX and its continued role as a cash cow the Mexican government uses to plug its annual deficits.

Reform may be necessary in Mexico, but it remains a heavy lift politically, and it is unclear that this reform package will achieve the desired goals.  Peña Nieto appears to understand the context in which he is working, but these reforms will have an impact for years to come.  Peña Nieto should ensure he gets it right so that failed reform does not become worse than no reform at all.

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