ENERGY REFORM (MEXICO, 2013): CHARACTERISTICS, ADVANTAGES, DISADVANTAGES - HISTORY - 2024

The energy reform (Mexico, 2013) was a constitutional change presented by Enrique Peña Nieto, Mexican president at that time, on August 12, 2013. The reform was approved by the Senate and Congress in December of that same year, entering effective on the 21st, when it was published by the Official Gazette of the Federation.

The scope of the legislative change was the energy policy of the Mexican State, especially in relation to oil and its exploitation. In 1938, President Lázaro Cárdenas had nationalized the oil industry and, decades later, other reforms had taken place that reinforced the exploitation of these resources by the State.

Illustrative table of the energy reform in the Mexican electricity industry - Source: Jorge Luis Esquivel Zubiri under the Creative Commons Attribution-ShareAlike 4.0 International license

Peña Nieto's intention was to partially liberalize that market. Although the reform kept the property of the deposits in the hands of the State, its approval opened the possibility that they would be exploited by private companies.

Likewise, it promoted the development of the electricity system so that it was based on economic principles, although the power of regulation by the state was maintained. This reform had, and still has, defenders and opponents. Depending on the sector, different advantages and disadvantages of its implementation are pointed out.

Background

The 1917 Constitution, a product of the Mexican Revolution, included a fundamental article for the country's energy policy. Thus, Article 27 established state control over the country's subsoil and its natural resources, including oil and the rest of hydrogen carbides.

In addition, it established that the government could offer concessions to individuals to exploit the deposits.

Petroleum Expropriation

The regulatory law of the aforementioned constitutional article was not developed until much later. It was in 1938 when President Lázaro Cárdenas issued a decree that nationalized the oil industry and gave the State the exclusive right to exploit hydrocarbons.

During that same period, a law was published to create the necessary instruments to enter into contracts with individuals so that they could exploit the deposits, although always on behalf of the Federal Government. Likewise, it established the conditions for gas distribution.

Other reforms

In 1958, a new law affected article 27 of the Constitution. In this case, the option of signing contracts with individuals was eliminated. In this way, all productive activities remained in the hands of Petróleos Mexicanos. Two years later, this law was included in the Magna Carta itself.

Ernesto Zedillo

After several decades with the same legislation, in 1999 they began to talk about a new energy reform. President Ernesto Zedillo presented a bill before the Senate to legislate on the privatization of some areas of the electricity and oil sectors.

2008 energy reform

The government of Felipe Calderón, already in 2008, proclaimed the need to carry out a profound energy reform in the country. The president's intention was to open the oil industry to private companies.

His proposal was to reform the legal functioning of Petróleos Mexicanos and the rest of the organizations related to the energy sector. With this change, they could sign contracts with third parties to boost industrial activity. However, the reform did not touch the ownership of resources, which continued to be in state hands.

Calderón claimed that PEMEX was in a state of near bankruptcy. The reasons were the drop in crude oil production and reserves, so it was essential to look for new deposits in deep waters. However, the company's lack of experience in this activity made it necessary to search for private partners.

Enrique Peña Nieto

When he was still a candidate for the country's presidency, Peña Nieto promised to carry out a new energy reform. The politician pointed out that it was the only way to lower electricity prices and for the population to benefit.

After winning the elections, Peña Nieto got down to work. Its reform was finally approved in December 2013. In it, it opened the energy market for companies to compete for its exploitation.

characteristics

Although PEMEX had generally performed well for fifty years, the global market had changed a lot. The need to adapt to the new reality was one of the reasons given for carrying out the reform.

The legislative change was profound. The different agencies that participated in the reform had to draft seven laws and reform eight others that were already in operation.

Laws involved

The 7 new laws that had to be enacted were as follows:

Hydrocarbons Law. 2. Law of the Electrical Industry. 3. Geothermal Energy Law. 4. Law of Petróleos Mexicanos. 5. Law of the Federal Electricity Commission. 6. Law of Coordinated Regulatory Bodies in Energy Matters. 7. Law on the National Agency for Industrial Safety and Environmental Protection of the Hydrocarbons Sector.

For their part, the eight that were reformed were:

Foreign Investment Law. 2. Mining Law. 3. Law of Public Private Associations. 4. Law of National Waters. 5. Federal Law of Parastatal Entities. 6. Law of Acquisitions, Leases and Services of the Public Sector. 7. Law on Public Works and Related Services. 8. Organic Law of the Federal Public Administration.

Ownership of hydrocarbons

The reform promoted by the Peña Nieto government did not abolish state ownership of hydrocarbons or of oil income.

Instead, the part added in 1960 to article 27 of the Constitution was eliminated. This modification prohibited contracts for the extraction of hydrocarbons. With the reform, the participation of the private sector in the exploitation and exploration of hydrocarbon deposits in exchange for a payment based on the benefits became legal.

Likewise, the reform totally abolished Article 28 of the Constitution, thereby allowing individuals to participate directly in the value chain after extraction. This involved matters such as transportation and refining. To do this, companies had to request permission from the State.

Finally, PEMEX was divided into two parts. The former took over exploration and production, while the latter took over industrial transformation.

Contracts

With the energy reform, four types of combinable hydrocarbon contracts were created. These can be services, shared utility, shared production, and licensing. Through the last three, the State can transfer the financial and ecological risks of exploitation to the contractors.

Each of the signed contracts must be approved by the Mexican State and go through a public bidding process. According to the law, the winner will be the one who offers the most benefits to the country.

Service, utility and shared production contracts will be signed as well as licenses that will be assigned by the Mexican State through public tenders, where the winning supplier will be the one that offers the highest profit for the country.

On the other hand, the winning companies of the bids have permission to participate in the stock market activity.

Finally, the government reserves the power to suspend those contracts that do not comply with the conditions with which they were signed, both for not complying with the works or for having provided false information. All concession companies are subject to Mexican law.

Competition in the energy sector

One of the key points of the reform was the opening to competition between companies to take over the farms. Thus, the reform allows private companies, whether national or foreign, to invest in hydrocarbon deposits.

Regulatory institutions

To control the energy sector, the Mexican State established that four institutions would be in charge of supervising the entire reform. These were the Ministry of Energy (Sener), the Ministry of Finance and Public Credit (SHCP), the National Hydrocarbons Commission (CNH) and the Mexican Petroleum Fund.

All companies that become part of the energy market in Mexico must go through the control of these four organizations, either to obtain contracts or to collect profits.

Transparency

One of the great concerns of many sectors was to control that cases of corruption did not occur. To avoid this, the reform established a series of mechanisms to guarantee transparency.

Among these procedures is the obligation to make public all the contracts concluded, in addition to the payments made to the companies involved.

Likewise, it was forbidden for any member of government commissions and institutions to meet privately with executives of oil companies.

Pemex and CFE

The enacted reform also led to changes in PEMEX and the CFE. In this way, both organizations became productive state enterprises. Both were also obliged to compete on equal terms with private companies.

This implied modifying their way of organizing, adopting a way of operating similar to that of a private company. To do this, they had to appoint a director who would be in charge of the daily operations and, in addition, elect a board of directors, responsible for the decisions taken.

Land occupation

The new laws on the exploitation of hydrocarbons eliminate the option that the area granted to an individual through a contract covers land that already has an owner.

If a company is interested in starting to explore in an area with an owner, it must make a prior agreement with the owner.

Jan agreed, the percentage of profits that the company must pay to the owner of the land must be clearly reflected. According to the law, this will be between 0.5% to 2% if you exploit oil or natural gas, and 0.5% to 3% if you exploit shale gas.

Cross-border deposits

The reform also took into account the possibility of deposits appearing in maritime areas bordering the United States. In this case, the legislation states that PEMEX must participate as a partner in the project.

On the US side, the Senate approved the Cross-Border Hydrocarbons Agreement in December 2013. Through this standard, it agreed to collaborate with Mexico to extract materials in an area of ​​more than half a million hectares located in the Gulf of Mexico.

Prices

Apart from the exploitation of hydrocarbon deposits, the new legislation also introduced changes in the fuel price policy.

In the case of gasoline and diesel, time limits were established to liberalize the price. The deadline for this to happen was January 1, 2018. As of that date, the State would not have the power to limit or control the price of these substances.

Regarding electricity rates, the reform did not include any change to what was established to date.

Mexican Petroleum Fund

When the State received its share of the benefits obtained, the energy reform established that the one in charge of receiving all the income would be the Mexican Petroleum Fund. The only exception was that obtained by the contributions derived from the appropriations included in article 27 of the Constitution.

Likewise, this Fund became responsible for managing and making the payments established in the contracts.

All the income received as a proportion of the value, in gross, of the hydrocarbons obtained, must be allocated, after passing through the Mexican Petroleum Fund, to the so-called Oil Revenue Stabilization and Entity Revenue Stabilization Funds. Federative.

Renewable energy

One of the lesser known aspects of the reform is the boost it was intended to give to renewable energies. For these to gain ground, some legal obstacles that prevented new projects were eliminated. Apart from this, preferential green credits were provided

Finally, the State created a body to control the activities of the hydrocarbon sector in terms of safety, both industrial and environmental.

Advantages and disadvantages

The energy reform received, since its implementation, positive and negative reviews. The results are still being analyzed, since it has been a few years since it began to work. Experts, often depending on your positioning, point out several advantages and disadvantages.

Advantage

Many analysts consider the organizational restructuring of PEMEX to be one of the positive points of the reform.

On the other hand, they point out that the international image of the country has been strengthened and that this has led to a growth in private investment. This capital is being used to explore new deepwater deposits.

According to the data published by those in favor of the reform, the results so far are positive in terms of investments. More than 70 contracts have been signed, representing almost $ 60 billion of investments. The calculation of the benefits for the State is 70% of that amount.

On the other hand, they also affirm that the entry of new players in the electricity market is good news for the country.

Disadvantages

Opponents of the reformist measures point to the loss of autonomy on the part of the State as the main disadvantage. To do this, trusting fully in private business means ending up being dependent on it.

Likewise, they accuse the government of not having created sufficient mechanisms to tackle corruption in PEMEX, as well as that there is little clarity in the distribution of benefits.

On some specific issues, the expected reduction in gasoline prices has not occurred. Although the government, as established in the legislation, has been reducing subsidies, liberalization has not brought advantages for consumers.

Something similar has happened with the price of LP gas, the most used in homes. This went from cost 7.12 pesos per liter in 2016 to 10.83 two years later.

References

1. Ormad, Abraham. Main characteristics of the energy reform in Mexico. Obtained from Pensageotermia.com
2. OSV Consulting. Background Energy Reform of 2013. Obtained from implementationdelareformaenergetica.com
3. Torres, Mauricio. 20 keys to understanding how the energy reform was. Obtained from expansion.mx
4. Grant, Will. Mexico energy reform divides opinion. Retrieved from bbc.com
5. US Energy Information Administration. Mexico's energy reform seeks to reverse decline in oil production. Retrieved from eia.gov
6. Feldstein. Martin. How energy reforms will help Mexico grow. Retrieved from weforum.org
7. Center for Strategic and International Studies. Mexican Energy Reform: Politics and Predictions. Retrieved from csis.org
8. Penalty, Daniel. Pemex Blues: The Downside to Mexican Energy Reform. Retrieved from huffpost.com