Mexico: Congress approves hydrocarbons reform bylaws ending Pemex's 75-year monopoly
August 7, 2014
Overhauling the energy sector was the most important of all the structural reforms that President Enrique Pena Nieto submitted to Congress during his first year in office in 2013. However, the energy reform was also subject to the most pressure from different interest groups, including the oil workers union, private investors and the state and federal bureaucracy. Now, following a long period of debate—the longest legislative session on record in Mexico—the approval of the energy reform bylaws has moved to its final stage.
On 5 August, the Mexican Congress (both the lower and upper house) passed the bulk of the legislation and, notably, approved changes to the hydrocarbons law, which is the backbone of the energy reform. The reform to the hydrocarbons law effectively brings an end to the monopolistic position that Petroleos Mexicanos (Pemex) enjoyed in the oil sector for over 70 years. It also establishes the legal framework for activities in exploration, extraction, refining, commercialization, transportation and storage of oil and gas, in which both Pemex and private investors will take part.
An important aspect of the approved bylaws is the provision that allows private companies to open and run petrol stations at the beginning of 2016 in order to compete with Pemex in the retailing of fuels. Moreover, through the regulator—the National Hydrocarbons Commission (CNH)—the federal government can draw up contracts with private firms to allow them to explore and extract hydrocarbons. Pemex, which now is defined as a productive state enterprise, also will benefit from these contracts and the allocations that it will provide. The new legislation also features a clause that obliges firms participating in the exploration and extraction of hydrocarbons to include a minimum percentage of local inputs in their industrial processes, together with a series of measures that are expected to guarantee Mexico's energy security. The reform of the hydrocarbons law also includes a new obligation for the Ministry of Energy. The Ministry must now publish monthly reports for the general public about the allotments and licenses granted to private companies and it must detail areas subject to the bidding process in which exploration and extraction contracts are involved.
Meanwhile, one controversial element of the vote is related to the transfer of Pemex’s (and CFE’s) pension liabilities to the government. The transfer was intended to leave the state companies with a lower pension burden in order to prop up their balance sheets in the context of the forthcoming competition in the energy sector. However, the transfer was conditional on the powerful oil workers’ union accepting a change toward an individual pension scheme and an increase of the retirement age for new members. Together, these liabilities account for nearly 12% of GDP and the proposition has received heavy criticism among left-wing groups, who had compared the measure with the bailout of the banking sector in the 1990s.
Most analysts agree that energy reform is likely to provide a significant boost to private investment in the energy sector in the medium- and long-term, which will ramp up GDP growth rates. Thus far the energy reform looks like it will likely be the most significant legacy of Enrique Pena Nieto’s administration.
Author: Ricardo Aceves, Senior Economist