Mexico passes landmark oil reform: boon or bane?

An oil industry overhaul approved by Mexico's Congress portends massive changes for the country's iconic national oil industry – and potentially a boost for the economy.

The bill, approved overnight, would promote foreign investment and allow private companies to explore and exploit petroleum deposits – tasks previously reserved for Petróleos Mexicanos, or Pemex, as the state oil agency is known. It must be ratified by state assemblies, approval that is expected. 

Energy reform has been enthusiastically supported by international investors and Mexico’s business class, who are expected to sink billions into an industry lacking the capital and outside expertise to develop promising shale gas projects and drill in the deep waters of the Gulf of Mexico. President Enrique Peña Nieto argues the reform will lead to lower prices for ordinary Mexicans, create jobs, and reverse declines in Mexico’s dwindling reserves – all while keeping state control over the petroleum.

But  opponents, including former presidential candidate Andrés Manuel López Obrador, call the measure “treasonous,” as state ownership of oil has come to symbolize sovereignty and self-respect for many Mexicans, who consider oil nationalization in 1938 a seminal moment in making the modern Mexico. Stories of past privatizations as failing to provide promised improvements pose a further challenge to acceptance.

“There’s this experience that private players end up being as bad or corrupt as the public sector,” says Aldo Muñoz Armenta, political science professor at the Autonomous University of Mexico State.

Boosting coffers

President Peña Nieto says his reform – which his own party repeatedly torpedoed during a dozen years in opposition – isn’t privatization, and will boost oil output from 2.5 million barrels per day to 3.5 million barrels per day. Money from the sales will also improve public finances, he says, since oil income accounts for approximately one-third of the federal budget.

The plan removes restrictions on the ability of companies other than Pemex to participate in areas such as exploration, production, pipelines, and refining.

The new arrangement, says George Baker, a longtime Mexican oil industry analyst, offers the government flexibility to adapt to changing technology and market conditions. It also starts to change the “narrative” on how the industry in Mexico is operated.

“Mexicans for 70 years have thought that the way you manage an oil industry is that you have a bunch of commercial restrictions in the Constitution,” Mr. Baker says.

Skeptical public

But on the streets, the view is more skeptical. Shopkeeper Rodolfo Villanueva looks to the recent past – the 1990 privatization of the state telephone monopoly Teléfonos de México – and suspects history is repeating itself.

“Is the same thing going to happen there as in Telmex?” asks Mr. Villanueva, who points out that a privatized Telmex “produced the world’s richest man” – Carlos Slim Helú, who made monopoly rents from his telecommunications empire in a country where half the population lives in poverty.

Allegations of cronyism and corruption in the awarding of Pemex contracts only deepen the distrust. So do suspicions that the supposed benefits of energy reform are being oversold by the president and his Institutional Revolutionary Party (PRI) – just as many suspected under previous administrations, which advocated for privatization of more than 1,000 state-run businesses and the signing of NAFTA two decades earlier.

Professor Muñoz reels off a list of sectors with poor track records of performance and service. He says that banks, which privatized in the 1990s, lend little, charge high commissions, and send big profits to their struggling parent companies in other countries.

Telmex has improved its service and expanded its network since being privatized, Muñoz acknowledges, but, he argues, “What we get used to is going from a bad service to one that’s less bad,” while competitors seldom exceed expectations.

Even Pemex service stations – operated by private franchises – regularly water down their gasoline and shortchange motorists by operating crooked gas pumps, according to consumer protection watchdog Profeco.

Weak rankings in public opinion

A Consulta Mitofsky poll ranked “businessmen” 7th of 15 groups and institutions evaluated for “confidence” in a 2012 survey – placing them ahead of the police and politicians, but behind the Catholic Church, military, and universities.

Part of that perception stems from history and attempts by the PRI in past years to vilify private enterprise.

“The old PRI regime had to have an enemy in which to base its legitimacy,” says César Velázquez Guadarrama, professor of public policy at the Iberoamerican University in Mexico City.

Still, some businessmen benefited. “Through corruption and protection” – by keeping borders closed, for example – “the PRI regime created many millionaires,” Mr. Velázquez says.

Others say there’s less to worry about in terms of private participation and that times have changed to the point that the sale of Telmex to Mr. Slim – something deemed to have been done properly – would be carried out differently.

“The '80s and '90s were very different from today,” says Manuel Molano, director of the Mexican Institute for Competitiveness think tank. “There have been a lot of lessons learned by society and the market.”