One advantage of having centralized political parties is that things can move fast. The PRI and PAN together control most state legislatures, which over the weekend ratified the constitutional amendments. Mexico’s energy sector is now reformed.
The real action, however, isn’t in the constitutional text, but in the transitory articles.
Here are the big takeaways:
- Pemex is turned into just another big oil company, although it will retain a few advantages when competing for blocks;
- Pemex loses control of natural gas distribution, ending its conflict of interest between the country’s need to import more gas and the company’s desire to keep gas prices high;
- Oil blocks can be thrown wide open to concession agreements should Congress so desire (which appears to contradict the reformed text of Article 27);
- The Mexican Petroleum Fund is a damp squib that is unlikely to make any difference. Mexico is not about to wield a world-purchasing sovereign wealth fund, a la Norway.
Article 1 is boilerplate, stating that the amendments and transitory articles will take effect when they are published in the Diario Oficial de la Federación, e.g., after half the state legislatures finish ratifying them.
Article 2 preserves existing labor rights. Considering the amount of change that Pemex is about to be hit with, that’s vital to preserving labor peace. I shudder to think what might happen otherwise.
Article 3 is an actual transitory article mandating that Congress pass laws turning Pemex and CFE into “productive state enterprises.”
Article 4 ditto: it gives Congress 25 days to create the laws enabling service contracts, production sharing agreements (PSAs), profit-sharing contracts, or licenses. It also mandates that Congress write its laws with the goal of maximizing public revenues.
This article lays to rest any doubt that “licenses” might mean something other than “concessions.” The giveaway is how it describes the payments due private contractors under the various forms. Service contractors will be paid in cash. PSA-signers will receive a percentage of the oil produced, whereas profit-sharing agreements will (rather intuitively) give the signers a percentage of the profits. License holders, finally, will be paid “with the delivery of title to the hydrocarbons once they have been extracted from the subsoil.” In other words, license holders will have the right to lift oil and gas, and once they have lifted it, then it will be theirs.
There is nothing wrong with that kind of arrangement, as long as the government has designed-well the auctions and imposes appropriately high royalties and taxes; with near-confiscatory windfall rates built in should prices rise high enough. But these arrangements are nonetheless concessions, pure and simple. How Mexican lawyers will reconcile this transitory article with the reformed text of Article 27 is beyond me.
Article 5 puts state enterprises — specifically mentioning Pemex — on the same footing as private enterprises. It also demands that they recognize that subsoil hydrocarbons are state property, not their property.
Article 6 gives the Energy Ministry the responsibility for allocating blocks to Pemex. It also forces Pemex to justify its allocations. In fact, it requires Pemex to apply with 70 days for the right to exploit its current blocks that are not under production. The Energy Ministry then has 180 days to approve the application.
There are a few wrinkles which give Pemex some advantages, but surprisingly few. In places where it’s currently begun exploring, it will be able to continue exploring for a minimum of three and a maximum of five years. It will, however, have to present a detailed exploration plan in order to do so.
In addition, if new allocations to other producers interfere with current Pemex operations, then it will be able to demand compensation.
Article 7 allows Congress to favor domestic Mexican companies when making allocations or signing contracts. This will also favor Pemex.
Article 8 basically says that when the right of the state to dig for hydrocarbons or string up transmission cables interferes with other property rights (such as, say, private mineral concessions) then the state’s rights shall prevail.
Article 9 mandates that all contracts with state or private enterprises be made with “maximum transparency.” It goes beyond the boilerplate, however. The contracts need to be (a) public; (b) subject to external audits paid for by the contractors; (c) clearly report all compensation in kind, taxes, and other payments.
Article 10 goes into more depth about how Congress should go about designing and regulating the contracts mentioned in Article 4. It also mandates that the President should send Congress a bill switching “general subsidies for subsidies focused on energy consumption.” Don’t ask me what that means.
Articles 10-15 go into a little more depth about the Mexican Petroleum Fund. First, it won’t manage tax revenues. This is interesting, because currently Mexico gets all of its oil revenue from taxes on Pemex. Presumably the petroleum tax code will need to be rewritten to allow foreign capital to enter; right now, taxes are high enough to push Pemex into the red.
Second, the fund will have to top off the fiscal accounts whenever oil tax revenue falls below the same percentage of GDP that it generated in fiscal 2013. (That number is not yet known, but in 2011 it amounted to 6.1% of GDP.) This applies even if the fund has to dip into its savings to do so.
Third, the fund has to be used to pay off federal debt (including, in effect, financing current deficits) up to a value of 3% of GDP. The text says “annual flows,” which apparently means income from oil revenues, not income from investments. This would seem to mean that the Treasury gets first dibs on oil income up to 9.1% of GDP.
In addition, an additional 0.15% of GDP is to be used to pay expenses associated with the (misbegotten) switch to private pensions, another 0.15% to finance renewable energy projects, and a final 0.15% to pay for research and training in the hydrocarbon sector. The transitory article explicitly allows Congress to modify these percentages.
In other words, the fund start looking for returns once public oil revenues top 9.6% of GDP.
Moreover, the value of the fund is effectivelycapped at 10% of GDP. After that, “the annual financial returns associated with the resources of the Mexican Petroleum Fund destined for long-term savings will be transferred to the Federation treasury.”
Article 16 instructs the President to order that all natural gas pipelines be transferred from Pemex to a new National Natural Gas Control Center. It isn’t clear how the Control Center will function, but if it allows private investment in pipelines then it could be, to quote Joe Biden, “a big f—king deal.”
Articles 17-21 are really what I would think of as transitory articles, instructing Congress to write various bits of enabling legislation and reform the legal code to bring the constitutional amendments into effect. But Article 21 opens the likelihood that Pemex’s union leaders will be stripped of their board seats: “Its organization, administration and corporate structure shall be in accordance with international best practice … Pemex’s professional board members in service at the time this decree comes into effect will remain in their offices until the end of the period for which they were nominated, or until said organism is converted into a productive public enterprise and a new Board of Directors is nominated.”
That is a pretty big change.
I do not know if transitory articles are considered full parts of the Constitution, or if Congress can change them via ordinary legislation. Either way, these add up to some major changes.
That said, deepwater development will still be slow, onshore tight oil and shale gas slower, and the biggest near-term change will likely be the rapid construction of pipelines from the United States to central Mexico. It is a revolution, but it is going to take time to play out.