Potential Constitutional Amendments would end Pemex Monopoly in Oil and Gas Sector and would Privatize Electric Power Generation

On Monday, August 12, Mexican President Enrique Peña Nieto of the Partido Revolucionario Institucional (PRI) introduced his administration’s much anticipated energy reform proposal, which would bring broad changes to Mexico’s oil and gas and electric power sectors.

Summary of PRI Proposal

In the oil and gas sector, the PRI’s proposal includes proposed constitutional amendments that conceptually would seek to: (i) end the 75 year old monopoly of Petróleos Mexicanos (Pemex) in E&P activities by allowing both Pemex and private sector companies to enter into profit-sharing contracts with the Mexican federal government; (ii) allow private sector companies to participate in the midstream and downstream markets, including the pipeline transportation, petrochemical and refining sectors; and (iii) restructure Pemex into a commercially-oriented entity, coupled with a pending tax reform to be introduced in September, that would allow Pemex to operate on an independent profit-basis, reinvest in its projects and enter into joint venture agreements with private sector companies.

In the electric power sector, the PRI’s proposal includes proposed constitutional amendments that conceptually would seek to: (i) privatize all electric power generation; (ii) create a competitive wholesale power market through which a new independent system operator would dispatch power; and (iii) limit the monopoly of the Comisión Federal de Electricidad (CFE) to electric transmission and distribution activities.

Unlike the recent energy reform proposal of the Partido Acción Nacional (PAN), the PRI’s proposal maintains the Mexican constitution’s prohibition of private ownership of all hydrocarbon reserves and does not allow concessions or production-sharing contracts.

However, the PRI’s proposal also contemplates the development of implementing legislation that will provide much of the detail that will be needed by private sector companies in order to evaluate the potential economic conditions and overall legal regime associated with the PRI’s proposal.

In a potential foreshadowing of the content of such implementing legislation for the oil and gas sector, Enrique Ochoa Reza, the Undersecretary of Hydrocarbons in the Mexican Energy Ministry, indicated in a press conference following the announcement of the reforms that while payments to private companies will be in cash, the intent will be to structure the profit-sharing contracts in a manner that will allow for the booking of reserves in accordance with the relevant regulations of the U.S. Securities and Exchange Commission. Undersecretary Ochoa also indicated that the first profit-sharing contracts might focus on deepwater and shale exploration opportunities and could be undertaken as early as 2014 if the PRI’s proposal can be approved this year.

Required Next Steps in the Mexican Political Process to Enact Reforms

In order to enact the PRI’s proposed constitutional amendments, a two-thirds approval by both chambers of the Mexican Congress is required and 17 of Mexico’s 32 states’ legislatures must also ratify their approval. Most political analysts anticipate that approval by the Mexican Senate will not be an issue given that the PRI and the PAN hold 70% percent of the seats in that chamber and, likewise, those two political parties enjoy combined majority voting blocs in the state legislatures.

However, the expected political battle will be in the Chamber of Deputies of the Mexican Congress, where the combined voting bloc of the PRI and the PAN is 8 votes short of the two thirds requirement. Thus, in order to gain ratification of any energy reforms, the PRI and the PAN will have to gain votes from one of Mexico’s other political parties.

The third major political party, the Partido de la Revolución Democrática (PRD), has already voiced its opposition to both the PRI’s proposal and the PAN’s proposal. Analysts point to the Partido Verde Ecologista de México, Mexico’s green party, as a potential source of votes given that it has historically allied itself most often with the PRI.