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Research Report

Mexico’s Energy Reform:: Ready to Launch

David L. Goldwyn
Neil R. Brown
Megan Reilly Cayten
Copyright Date: Aug. 1, 2014
Published by: Atlantic Council
Pages: 48
OPEN ACCESS
https://www.jstor.org/stable/resrep03603
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Table of Contents

  1. (pp. 1-1)
    Peter Schechter and Jason Marczak

    Just over eight months ago—and one day after congressional passage—the Adrienne Arsht Latin America Center released a landmark report on Mexico’s energy reforms. The constitutional changes served as the precursors to legislation that would implement sweeping energy reform in Mexico.

    The December report, Mexico Rising: Comprehensive Energy Reform at Last?, had a poignant question mark at the end of its title. This second report on Mexico’s energy reform no longer has any need for a question mark. The government of Enrique Peña Nieto has provided the country with a legislative energy infrastructure designed to encourage business, increase transparency,...

  2. (pp. 6-8)

    A structural change of Mexico’s energy sector first required the once unthinkably high political hurdle of amending the Mexican constitution. Mexican President Lázaro Cárdenas nationalized the hydrocarbons sector in 1938, and the notion of inviting foreign investment into the sector was political heresy for decades. Although the more tentative 2008 reforms allowed private investors to work with PEMEX as subcontractors under a new form of incentivized service contract, the constitutional ban against their direct participation in the hydrocarbons sector through acquiring direct stakes in projects remained in place.

    These dramatically more expansive initial, constitutional-level reforms required approval of two-thirds of...

  3. (pp. 9-22)

    The Hydrocarbons Law, the Hydrocarbons Revenue Law, and the PEMEX Law12 set forth the framework for oil and gas development in Mexico. These laws are the cornerstone of the energy reform. Indeed, increased production of oil and natural gas is key to the political legs of reform: increasing economic growth and job creation, improving Mexico’s overall fiscal outlook, and decreasing electricity prices by substituting high-cost diesel and fuel oil with new supplies of natural gas.

    The basic components of the hydrocarbon reform laws include:

    Conversion of PEMEX from a monopoly to a “state-owned productive enterprise” with special legal status, increased...

  4. (pp. 23-26)

    Increased access to natural gas is the hidden political lynchpin of the energy reform. Mexico, a nation with likely the sixth-largest technically recoverable shale gas resources in the world,70 also has high electricity prices and recently had gas shortages in some parts of the country. Its pipeline infrastructure is woefully insufficient to build an internal market and meet demand.

    The reform aims to accelerate the growth of the entire economy, not just grow oil and gas production. Broad-based growth relies on attracting new investment, which depends on large consumers enjoying reliable low cost power. These low costs depend on increased...

  5. (pp. 27-34)

    The Ley de la Industria Eléctrica, or the Electricity Industry Law,87 reaffirms the strategic nature of the key aspects of the electricity system—planning, transmission, and distribution—and the continuation of public sector control of these functions. It also sets the principles by which Mexico intends to create a competitive electricity market, which include broader private sector participation. The accompanying Ley de la Comisión Federal de Electricidad (Federal Electricity Commission Law) provides a map for the transformation of CFE from a state monopoly to a state-owned productive enterprise (SPE).

    Mexico introduced private competition in power generation in 1992, with the...

  6. (pp. 35-37)

    Mexico has made tremendous strides in addressing the questions that emerged following the constitutional amendments.

    In our earlier paper, we identified seven principal questions. The secondary laws answer three of those questions—would the laws truly liberate PEMEX to act independently, would the fiscal framework trust the market, and would local content requirements be manageable?—in the affirmative. Two others —can Mexico offer competitive fiscal terms, and can it build effective regulators?—now have solid legal foundations and committed political leadership. So, we are optimistic. The final two questions—can the Peña Nieto administration manage public expectations and can it...