Illustration by Bloomberg View

Mexico’s Latest Energy Revolution

By the Editors 

Mexico is on the brink of a quiet energy revolution. President Enrique Pena Nieto’s ambitious reform proposal, announced today, would enable foreign oil companies to help tap Latin America’s third-largest reserves, improve Mexico’s economic growth and move North America further on the road to self-sufficiency.


Pena Nieto and his Institutional Revolutionary Party, or PRI, want to let foreign companies such as Exxon Mobil Corp., Chevron Corp. and Repsol SA sign production-sharing contracts for oil exploration and output. (The companies would still be prohibited from operating their own fields.) Thus would Mexico return to the situation that prevailed from 1938, when the country expropriated oilfields from U.S. and British companies but allowed them to operate them, to 1958, when Petroleos Mexicanos, the state-owned oil company also known as Pemex, gained exclusive control of all phases of the petroleum industry.
In Mexico, foreign oil companies still trigger a national neuralgia: In one 2012 poll, 77 percent of respondents said foreign investment benefited Mexico -- but 65 percent opposed any foreign investment in the oil industry. Unfortunately for the celebrants of March 18th, the national holiday marking the expropriation of foreign oil companies, Pemex’s technological and financial limitations are becoming all too clear. Last month, its oil output was the lowest it has been in 18 years; Pemex is heading toward a ninth straight year of declining production. Since 2001, Mexico’s proven reserves -- oil commercially recoverable under current conditions -- have fallen by 41 percent.
Put more bluntly, at the present rate of extraction, Mexico’s existing reserves will last for only nine years. Mexico has much more oil to find, but Pemex lacks the technology and knowledge to tap new and complex deepwater fields. And because its finances and management are tightly controlled by the government, which relies on Pemex for about one-third of its revenue, it can’t make strategic investments. One analysis says that the money needed to exploit current opportunities is equivalent to 30 years of Pemex’s 2013 investment budget.
Passage of the reforms could unlock tens of billions in needed investment and lift Mexico’s annual growth by as much as two percentage points. A less-heralded but in some ways equally disruptive element of Pena Nieto’s proposal would break the electricity distribution monopoly of the state power company CFE, whose grip on power has left Mexicans with some of the highest electricity costs in the developed world.
Among his party, its allies and the opposition National Action Party (known as PAN), Pena Nieto has enough votes to make the constitutional change his proposal requires. He has another goal, however: preserving his Pact for Mexico, a remarkable alliance among the country’s three major parties that has enabled ground-breaking reforms in education and telecommunication. He delayed introducing his energy proposal last week to try to bring its opponents on board, or at least to keep them off the streets.
From a purely economic standpoint, it would make more sense -- and PAN has actually proposed -- to sell shares in Pemex. From a political standpoint, however, Pena Nieto’s moderate course is more likely to succeed and sustain the momentum for reform. Next on Pena Nieto’s agenda, after all, is a contentious plan to broaden Mexico’s tax base and lessen the state’s reliance on Pemex’s revenue.
U.S. intervention in this process would be about as welcome as last year’s U.S. soccer victory against Mexico. It can be most helpful on the margins: The U.S. Senate could ratify the Transboundary Hydrocarbon Agreement, already ratified by Mexico, which sets rules for handling potential oil reserves along the dividing line between the two countries in the Gulf of Mexico.
The U.S. has a strong shared interest with Mexico in building up cross-border energy infrastructure. Remarkably, the two countries have fewer than a dozen electricity transmission connections between them. Mexico also needs U.S. technological know-how to exploit its abundant shale gas reserves and build the necessary pipelines. Lower energy costs for Mexican consumers and businesses, in turn, will strengthen the country’s role as a market and a manufacturing platform.
Immigration reform in the U.S. is both a moral and an economic necessity, as we’ve argued, and is a key to the continent’s future prosperity. Mexico’s energy revolution is at least as significant. In fact, the best way to ensure North America’s prosperity may be to invest in cross-border transmission lines and pipelines instead of a longer and stronger fence