Mexico’s Energy Reforms: Key To Economic Growth?
By: Luis Ramirez Thomas, MSFS,
President, Ramirez Advisors Inter-National, LLC
On Monday, August 1, 2014, President Enrique Peña Nieto signed a package of landmark energy reform bills into law thus ending the 76 year old state monopoly of Mexico’s state-run oil, gas, and electricity industries. Among the key changes are provisions that will permit the exploration of oil and natural gas by foreign companies in partnership with Petroleos Mexicanos (“Pemex”), the importation of natural gas and gasoline, and the establishment of gas stations by others than Pemex.
Although the laws are now finalized, their full implementation will take several years – until January 1, 2018. At that time Mexico’s Treasury Department (“Hacienda”) will eliminate all controls over the price of gasoline.
For those of us that grew up in Mexico, the prospect of a non-Pemex gas station is surreal. But so are many other aspects of the reform. So much so in fact that over the past few days and weeks leading up to the approval of the reforms by the Mexican Senate, little else garnered much political discussion throughout Mexico. Globally the interest this has caused for the world’s largest oil and exploration companies is truly palpable.
As with any law in Mexico, especially structural changing laws of this magnitude and complexity, it will take quite a bit of time for their implementation. The first sections of the law governing hydrocarbons, electricity and geothermic energy to name a few, will take effect on August 12, 2014. In September of 2014 the new governing boards will be named for both Pemex and the Federal Commission of Electricity (CFE). By December of the same year, the plan for the restructuring of Pemex will be presented, including the creation of a totally separate subsidiary that must be created and will be dedicated to exploration and production.
By January 1, 2015, gasoline prices will adjust solely based on inflation rather than what had become the traditional “gasolinazo”, the term that referenced the dramatic announcements of major increases in gas prices from one day to the next. Then on January 1, 2016, Mexico will permit the importation of natural gas and permits for the establishment of other-than-Pemex gas stations will start being issued. A year later, January 1, 2017, Mexico will permit the importation of gasoline which stands to create a competitive market thus affording consumers a choice as to where they purchase their gasoline.
The structural changes are many, including a number of labor changes, particularly with regards to the pension funds for employees of Pemex and CFE – which number in the hundreds of thousands.
While overall sentiment is quite positive that this reform was needed if Mexico is to continue to emerge as one of the most significant economic players in the global economy, the forecasts are still mixed. It is clear that by 2035 Mexico’s energy demand will double and the system that was in place was not up to the task. Pemex, although one of the largest oil companies in the world, was marred by losses, dwindling reserves by traditional measures and lacked the financial wherewithal to invest in new technologies that would allow it to tap into new fields and reserves. The opening up of the energy sector has clearly brought many companies and new resources to the table. The ultimate test will be the ability for Mexico to attract new investment, create new jobs and have the energy sector be a foundation for future growth and development.
HERMOSILLO, Mexico — Luis Gonzalez grew up in a low-income household with his parents, siblings, grandparents and aunt, parlaying his grandmother’s message of hard work into a 19-year Major League career highlighted by the winning hit in the 2001 World Series. So as he looked out at a crowd of several hundred high school and college students Tuesday morning and told them to follow their dreams, he was living proof that they can come true.”When I stood at home plate facing Mariano Rivera in Game 7 of the World Series, I wasn’t thinking about how big the moment was,” said Gonzalez. “In reality, I was thinking about my family. Of all the people in the world, only one person had that opportunity, and it was me.”