Possible Pemex Reform

Mexico's Calderon Attempts Oil Reform
Oxford Analytica 04.11.08, 6:00 AM ET

Mexico's President Felipe Calderón on April 8 sent an ambitious oil reform to the Senate. If approved, reform of state oil monopoly Pemex should attract private investment--domestic and foreign. However, approval probably will face legal challenges and political resistance--both in parliament and on the streets.

Government moves to liberalize Pemex had been awaited for weeks. The bill sent to the Senate on April 8 is ambitious enough to boost oil production and reserves through increased partnerships and contracts with other energy companies without seeking to amend the constitution. It would also allow Pemex to become more operationally and administratively autonomous.

Political savvy.
Calderón showed his political experience--particularly as a parliamentarian--when preparing and presenting reforms:

--As he lacks a working majority in Congress, the government negotiated beforehand with the center-left Institutional Revolutionary Party (PRI), a successful strategy when pursuing fiscal reform.

--Unless political developments force its leaders radically to change position, most PRI legislators probably will support the government. Publicly, PRI chiefs will criticize the proposal and seek amendments, while also arguing that it represents progress and deserves support.

--Calderón himself sent the legislation, staking his own political capital--he could have sent it through legislators from his center-right National Action Party (PAN).

No constitutional hurdle.
No constitutional change was proposed, but several laws were modified, the most important of which regulates Pemex's operations. Therefore, a simple majority in Congress can approve it (not the two-thirds required for constitutional changes). This makes acceptance easier for the PRI leadership, which had ruled out supporting changing the constitution (that gives the state exclusive oil ownership)

--The proposal was sent to the Senate, which has fewer members and is easier to negotiate with. The PAN has 52 of 128 senators, so needs only 13 additional votes. The PRI has 33 senators and the National Alliance Party (PANAL), which supports Calderón, one. Support from the Green Party (six senators) can also be negotiated. The other three parties, most important the center-left Party of the Democratic Revolution (PRD), follow defeated presidential candidate Andres Manuel Lopez Obrador. The government probably will not try to negotiate with them.

--Senate approval would create momentum in the Chamber of Deputies, where the PAN has 206 of 500 seats (the PRI has 104, PANAL nine, the Green Party 19, and a small party with four deputies may support Calderón). The PRD and its allies hold 158 seats.

Contract tweaking.
The most significant and controversial change the government seeks would allow Pemex to establish agreements to pay contractors according to performance. This is a proxy for risk-sharing deals, which formally remain forbidden:

--No Pemex partner could expect a share in oil discovered or extracted.

--New contracts are expected to allow Pemex to establish joint ventures that would facilitate exploitation of deep-sea oil deposits, which requires technology that Pemex largely lacks.

While the government would have preferred risk-sharing contracts, this is unacceptable to many PRI members.

Refinery construction.
Another crucial change would allow companies other than Pemex to build and manage oil refineries, with Pemex keeping full ownership of output:

--The government thus avoids the massive investment needed to build them, while slashing gasoline imports. Pemex currently imports 40% of gasoline products, selling them at a loss.

--The government estimates three new refineries being built over the next decade.

Greater autonomy.
Additionally, Pemex would be allowed a separate legal framework for contracts, procurement and operations from that regulating the rest of government, allowing greater managerial independence and more flexibility to reinvest profits. Additionally, the company will face a gradually reducing tax burden.

Citizen bonds.
Calderón also announced that Pemex would issue "citizen bonds"-- debt with yield tied to company performance. The main aim probably is to create a public perception of being a stakeholder in the company, rather than helping Pemex finance operations.

Lopez Obrador offensive.
Lopez Obrador is expected to attack the government, which he has sought to destabilize since it took office. Pemex represents his best chance to do this, as for many Mexicans it is a nationalist icon:

--Claiming repeatedly that the administration aims to "privatize" the company, he has staked political capital on derailing liberalization, however timid.

--He has organized "oil defense brigades" that probably will block infrastructure and, crucially, the Senate and the Chamber of Deputies, to protest against the proposal and obstruct legislators.