Weak regulations could limit nation’s energy market reforms
For the last seven decades, Mexico’s oil and gas sector has been a state-run monopoly, largely closed off to international investment. Thanks to new reforms championed by President Ernesto Peña Nieto, that’s about to change, and energy companies in Houston and around the world are salivating at the prospect. They may need to hold their horses. Though the reforms have the potential to be good for business, and for Mexico itself, the true fate of the energy reforms hangs in the balance of the Mexican congressional term that started earlier this month. The outcome is far from certain.
If Peña Nieto has his way, the energy sector will see increased competition and a huge influx of both foreign and domestic investment starting in three to four years. Energy costs will drop, boosting the country’s economy, creating jobs and, of course, profits for those investors.
It’s not likely to turn out so rosy. Although the constitutional reforms were approved in principle last December, the details of how to implement those reforms must be ironed out. Mexico’s Congress still needs to determine what regulations and oversight bodies will govern the newly opened energy sector. It is the sort of task that requires careful, deliberate lawmaking.
That’s unlikely to happen. Congress set a deadline of April 20 to complete secondary reform legislation. Missing that target could trigger an extraordinary session of Congress in which rational rule-making will be even less likely. It would almost certainly delay implementation of the energy reforms, which works against the government’s electoral prospects.
On top of the time crunch, opponents of reform are determined to stall this process. Leftist opposition parties see the legislative process as a chance to position themselves for greater success in local elections this coming summer and midterm elections in 2015. Gridlock seems almost inevitable.
Regardless of how quickly the legislative process moves, any proposed regulations will likely be watered down by lobbying. The long-term costs of not strengthening the rule of law could be significant. While some of Mexico’s industrial conglomerates recognize this, others see themselves better served by weak regulation and have “invested” in congressional representation to protect their interests. This could dampen the expectations of any potential new entrants into the Mexican energy sector. Congress could send a better signal by expediting the setup of the specialized economic competition courts that have been proposed. This would go a long way toward improving the economy’s competitiveness, particularly if the new regulations leave too much leeway for interpretation.
Despite the reforms, Mexico’s state-run energy company, Pemex, will still be a major player. Just what role it plays will be hotly debated in the legislative session. Lawmakers are fretful after watching Brazil’s Petrobras slide from role-model to cautionary tale following a few failed investments and an initially disappointing auction of offshore leases.
In order to compete with international industry standards, Pemex would need to slash its labor force and compete with private investors for its most talented engineers and workers. A sharp uptick in job losses at Pemex could counterbalance any political benefits of increased international investment, and parties that are seen as failing to protect the company’s jobs will likely suffer at the ballot box.
Given the time crunch and the political climate, the results of the current legisla- tive session may not be pretty. In the best scenario, Mexico’s Congress would pass regulatory legislation that includes strong anti-corruption measures, clearly defined national contents rules and independent regulatory agencies. A far likelier scenario is a legislation that lacks teeth to pursue criminal sanctions for corruption, attempts to leverage inefficient national providers of parts and services and creates politicallymotivated regulators.
Companies looking to cash in on a Mexican oil boom would do well to look before they leap.