Mexico: Energy reform by-laws in the spotlight as discussion in Senate begins
June 16, 2014
The Senate (the upper house of Congress) began discussing a first draft of the energy reform by-laws on 10 June. The by-laws include eight new laws and changes to thirteen existing laws. Lawmakers are expected to clarify the rules for private investment participation in the oil industry, the result of which will determine how successful the reform is in transforming the energy sector into a key driver of more sustained economic growth in the medium- and long-term.
When examining the content of the legislation that is under discussion, analysts and investors will focus on whether the tax burden imposed on businesses is kept close to the global average; whether national content rules discourage the flow of foreign direct investment into the energy sector or not; and whether the bidding process for securing exploration and hydrocarbon extraction contracts is fair and transparent. A law that is currently under discussion, which has attracted investors' attention, is the possibility to exclude international arbitration as a recourse for the resolution of disputes between energy firms and the Mexican government. According to the draft, the sector’s regulator, the National Hydrocarbons Commission (CNH), will not be subject to foreign jurisdiction with any of its contractors. The law rules out international courts—namely Houston, New York or The Hague—being used as a neutral jurisdiction. Instead, legal problems will be subject exclusively to Mexican federal courts. The approval of the bill could be a deal-breaker for some foreign businesses.
Most analysts and market participants, however, were more optimistic regarding the approval of the energy reform by-laws following Gustavo Madero’s re-election as leader of the PAN party (National Action Party). Madero was a supporter of the Pact for Mexico—the agreement the major political parties came to in order to push for the proposal and subsequent approval of the structural reform agenda. Madero has driven the PAN party to push for opening the energy sector to private investment more aggressively. Conversely, the opposition left-wing PRD party tried, although unsuccessfully, to delay the debate until after the World Cup in Brazil ends in mid-July, arguing that the international tournament would distract Mexicans from opposing the bills. Meanwhile, the ruling PRI party remains confident that the energy legislation will secure safe passage through both houses of Congress by the end of June.
The energy reform represents the lion’s share of the government’s attempt to overhaul the sector, attract foreign investment, create jobs and, ultimately, boost economic growth. However, against a background of weak economic growth at the beginning of the year and investors’ disappointment with the fiscal reform, most analysts see that President Pena Nieto is concerned with wrapping up the energy reform before the leading parties begin to focus on the July 2015 mid-term legislative elections. President Pena Nieto stated during a recent visit to Spain that the energy and telecommunications by-laws are expected to be passed by mid-July at the latest.
Author: Ricardo Aceves, Senior Economist