Mexico’s three parties split three ways on constitutional reform.
- The PRI wants a modest reform that will let Pemex sign joint ventures to develop offshore fields and possibly expand gas and tight oil production on land.
- The PRD wants no constitutional reform, but wants to cut taxes on Pemex and turn it into a fully autonomous profit-driven corporation. (Or so they say.)
- The PAN wants to throw open the Mexican hydrocarbon sector, making it look more like Brazil or Colombia. It also wants to reform the way the federal government profits from the sector, imposing a scheme that looks almost exactly like the Alaska Permanent Fund, only with the profits going to the government rather than to individuals.
Interestingly, the PAN introduced its reform before the President, moving on July 31, 2013. President Peña sent his proposal to the Senate on August 12. (The PRD published its relatively vague statement a week after the President, on August 19.)
Public opinion is at best unclear. In September, polls showed 52% of the population in favor of the President’s proposal, but only 15% “strongly” favored the reforms. Moreover, 61% opposed allowing Pemex to sign profit-sharing contracts with private companies.
So how is the battle shaking out? First, the PRI and PAN wound up at loggerheads over a new tax bill. The PAN walked out over last-minute provisions raising the top income tax bracket from 30% to 35%, a hike in the border state VAT to 16% from 11%, and a 5% tax on junk food. (The maquiladora industry also screamed that they would now have to apply for a VAT rebate rather than simply not paying it.) The final bill had to be passed with PRD support.
Now the PAN insists that it will only support energy reform if the PRI agrees to a series of political reforms. (You can find the detailed constitutional proposal at this link. Among much else, it includes the re-election of senators (once) and deputies (3x) and a run-off presidential election should nobody garner 40%+ of the vote. President Peña got 39% last year.)
With PRD support off the table, there are two possibilities. The first is that the PRI holds firm against political reform, but swings right on energy. We wind up with more radical reform akin to the one in the previous paragraph. The second is that the PRI relents on political reform, figuring that it still will (a) have a good shot at the presidency; and (b) be able to maintain control over its congressional delegation even with term-limited re-election.
My prediction is the second. The PAN reform is still a large bone for public opinion to swallow. It could easily trigger mass demonstrations, or worse. Moreover, the benefits would be limited, at least in petroleum. Foreign companies will still likely want to form joint-ventures with Pemex in the deepwater, and onshore development is likely to move slowly even under a new PAN regime.
Moreover, from the point of view of your average Mexican, it does not matter if the PAN is correct! Let’s assume that its reforms trigger a massive tight oil boom in northern Mexico, a veritable explosion of hydrocarbons. After all, the northern range is an extension of the Eagle Ford shale. Well, estimated breakevens in the Eagle Ford are $75-$85 per barrel. Many of the big companies have failed to make it work in South Texas. The implication is that even if production explodes, there will not be huge windfalls to tax away. Now, gas production could be a different story. Mexico needs natural gas. But the faster and easier way to decrease gas prices in Mexico is to import more from the United States.
That means that the PAN reform will be, in the short-term, all political cost and no benefit. It is hard to see the PRI signing on to that, especially since it is not clear that the PRI shares the long-term vision.
The most probable outcome is something like the PRI reform, tied to political reform. The less likely outcome is that the PRI tacks right to give us a radical Panista reform. It is also possible that nothing will happen, and we will get something like the PRD reform.
Call me in a few months, tell me how I did.