Sunday, November 2, 2008

Energy Reform in Mexico

Since March of 2008 the energy reform has been in the public agenda. Government proposed to allow private investment in refinery and transportation of oil. It pretended also to allow risk-sharing contracts in offshore exploration and oil extraction. Political opposition forced to a two-month debate in the Senate. As a result, two more proposals were sent to Congress.

As the financial crisis deepened last September, Government decided to give PEMEX independence in its investment and budget planning. This constituted the first step towards three more reforms. All those changes in the opposite direction of the official proposal. The approved reform will indeed provide PEMEX with more independence, however, it will not allow for more oil extraction, thus limiting the original purpose. It is a reform in the right direction, but it is considerably short.

Two substantial changes will privilege Mexican suppliers, although there are not many firms that can provide the machinery necessary to find oil in deep water in Mexico’s Gulf.

Yet another important figure compels to incentives for contractors to increase efficiency in their assignments, this scheme is just in the borderline of risk-sharing contracts. However, according to industry ‘s legal experts, big oil firms would not have enough incentives to participate in contract allocations for exploring.

After long debates that exposed different views over the legal boundaries of the official proposal in the risk-sharing contracts it is for certain that economic rent from oil extraction must be well defined, and that this particularly complicated task will make the difference every time the sector face a possible reform. Strictly speaking, there is economic rent only when oil is extracted, and not when oil is refined or sold as gasoline, for example. Opposition thinks different: defining economic rent as all the money oil can generate at any stage in industry.

The latter approach cannot answer a simple question: why is public sector forced to absorb every single penny oil generates, even in advanced stages?

There is no incentive for public firms to do it efficiently, clearly, there is wealth lost in the process.

Furthermore, important limits that recent reforms did not correct are that incentives for contractors to reveal information remain low. This is, since there will not be any reward for extracting oil, then PEMEX supports all the risk instead of sharing it.

This reform can be labeled as one that prevented private investment from Mexican oil, but the cost is, necessarily to have less oil available for exportations. Since oil revenues account for almost 40 percent of public expenditure, this will only make a new fiscal reform a clear urgency.

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