Mexico’s Energy Reform Key to North American Energy Independence

Mexico’s energy reform program is critical to the pursuit of energy independence in North America. This is according to Dr. Tony Payan, director of the Mexico Center at the Baker Institute at the University of Houston. Dr. Payan testified before the U.S. House Committee on Foreign Affairs, subcommittee on the Western Hemisphere. The topic was “Pursuing North American Energy Independence, Mexico’s Energy Reform.”

The purpose of the remarks is to examine the basis for Mexico’s recent energy reforms, to assess the major threats to its effective implementation and success, and to identify policy challenges. If these reforms are addressed, it can lead to a strengthening of U.S. relationship with Mexico.

ENERGY REFORM WAS NOT A CHOICE

Mexico consumption of crude oil is increasing and the production has fallen from 3.5 million bbs per day in 2008 to 2.3 bb/d in 2015. Without increased production in 2020 Mexico could become an importer rather than an exporter of crude oil. Dr. Payan also notes Mexico today imports substantial natural gas, perhaps as much as 50% of its requirement. PEMEX, the state oil company, provides from 30% to 35% of the federal Government of Mexico (GOM) budget. For this reason PEMEX has not had the capital to replace its quality crude oil reserves. With the 50% reduction of the price of crude, the income from the Mexican crude oil exports has fallen 50%. This is one of the reasons the Mexican peso has fallen in a year from 12.95 to 16.29 to the US dollar.

Mexico’s energy reform is intended to open the Mexican oil and gas market to foreign investors who bring capital and technology. The key issue is will the reform bring in a market economy or a state managed economy? The proposed contracts give the GOM the right to cancel a contract at any point and not allow non Mexican law courts to deal with any claims. Mexico’s energy reform is more restrictive than other nations and gives the GOM excess power over the sector.

MAJOR THREATS TO ENERGY REFORM 1) Weakness of the RULE OF LAW 2) PROPERTY RIGHTS, NATURAL RESOURCES AND SOCIAL CONFLICT 3) CORRUPTION

1)      The weakness of the rule of law in Mexico is historical and structural. The civilian police-justice system in Mexico has emboldened organized crime in the country. The Merida Reform has been ineffective and needs to be revised to fight organized drug cartels.

2)      In Mexico the individual owns the land, but the state owns the mineral rights. Foreign companies will negotiate with the land owner for access to the oil field. About 51% of the land is owned by ejidos or indigenous tribes-so companies will have to deal with social groups not individuals.

3)       Corruption on local, state, and nation levels is an endemic issue.  A major concern is what US liability US companies will have dealing with corruption in Mexico which is wide and tolerated.

POLICY RECOMMENDATIONS

1)     The Merida Initiative should be replaced with a more comprehensive policy towards Mexico.

2)     Focus American Foreign Policy on strengthening Mexico’s institutions, particularly the police and judicial system.

3)     Aggressively include Mexico’s political class in corruption investigations.

4)     The US must develop a more comprehensive policy towards Mexico, one that considers labor integration, manufacturing chains, energy swaps in oil and gas, and financial sector integration, along with additional funding targeted to the promotion of institutional reform in Mexico’s police and judicial system.

The entire testimony can be read below or viewed at www.bakerinstitute.org.

MC Testimony Payan MexicoEnergyReform