Energy reform driving speculation on big growth

Foreign investors
Foreign investors

For the last few months of 2013, observers in Mexico and abroad looked on from the sidelines as local pols here blustered over energy reform in the most grandiose of terms.  Free markets will mark the path to a glittering tomorrow!, supporters whinnied.  Traitors to the fatherland will have us enslaved by rapacious foreign robber barons!!, opponents brayed, expectorating spittle.  But since the historic reform legislation was signed into law on December 20, 2013, of course nothing so exciting as glitter or enslavement has occurred.  This is because no one with any skin in the game is likely to move a muscle before the reform’s secondary legislation is promulgated, as has been widely discussed in the media.

The secondary legislation will provide the critical details that establish the terms under which investors such as foreign oil and gas companies will be able to participate in Mexico’s energy industry.  Foreign companies attracted to potential opportunities in Mexico want to know “how will I be able to make money, and how much money will I be able to make?” before bidding on contracts or partnering with Mexico’s national oil company Petroleos Mexicanos (Pemex).  The Executive branch of the Mexican government, led by President Enrique Peña Nieto, is currently preparing the package of regulations, which will consist of 26 new laws or modifications to existing laws, according to Energy Minister Pedro Joaquín Coldwell.  The president of the energy commission of the Mexican Senate, David Penchyna, has said that the proposed legislation will be sent to Congress “by April.”  This should allow at least two months, and probably plenty more, for the government to build up the opportunities for private sector investment and for observers to speculate about the potential effects of the anticipated investment boom on Mexico’s economy.

In the run-up to the passage of the reform, a number of important companies, both foreign and domestic, have expressed possible interest in investing in Mexico’s energy industry if the secondary regulations create sufficiently attractive opportunities.  These include global behemoths such as Shell, GE, Halliburton, Techint and Schlumberger as well as Mexican powerhouses AHMSA, Alfa and Grupo México, and many others from countries including Russia and China.  With regard to investment, the wait for the regulations together with political needs is generating some fanciful daydreaming: Energy Regulatory Commission (CRE) Director Francisco Salazar has suggested up to US$700 billion in energy sector investment (including investment by Pemex and electricity monopoly CFE) over the next 10 years.  An optimistic projection from Deutsche Bank suggests US$15 – $20 billion in new foreign investment in energy projects and GDP growth of 5%, and a number of other specialists are suggesting US$10 billion in fresh foreign capital for starters if the new regulations provide favorable conditions.

But before we all go high fiving each other and remodeling our kitchens, the energy reform will need to successfully notch a number of milestones, beginning with the approval by Congress of the secondary legislation.  Adding to the political theater, groups on the left continue to maintain that they will work tirelessly to repeal the reform or at least ensure that it is not implemented.  Former presidential candidate and professional umbrage-machine Andrés Manuel López Obrador (AMLO) has already filed a legal complaint with the federal Attorney General’s office (PGR) accusing President Peña Nieto of betraying the fatherland.  López Obrador currently leads a social-political movement called Morena, the result of a split with the institutional left’s Party of the Democratic Revolution (PRD), which Morena considers to be collaborationist.  Members of the PRD and their allies in smaller parties opposed the reform in Congress mainly through tactics such as calling officialist legislators’ mothers whores from the rostrum and blocking access to the plenary chambers with piled up furniture.  The PRD now seems to be caught in a moment of strategic fuzziness – they know they want to go on record as opposing the reform, but they’re not sure what tactics to employ and they don’t want to exacerbate their already weak position in Congress.  For the moment, they are seeking to organize a popular referendum that would demonstrate a citizen majority against the reform.  This approach suits President Peña just fine, as it is likely to lead to indefinite fiddling around with no results.  In the meantime, interested parties on all sides await publication of the proposed secondary regulations.

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