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Thursday, June 6, 2013

Reflections on Mexico's Energy Reform

La Jornada: Jorge Eduardo Navarrete*
Translated by Stuart Taylor

In the final days of the first half of the year, the Mexican Academy for Political Economy (AMEP) dedicated a couple of round table debates to in-depth discussion of two reforms that it is hoped will be put into motion after being debated and voted on by the legislature next fall. The press refers to them as the energy reform and the tax reform.

These terms far from reflect the tatters that the content of the respective initiatives are currently in, which appears to point to new adjustments to the secondary legislation on oil and to a sort of omnibus super-tax based on indirect taxes. I had the opportunity to chair the debate and take the minutes at the first round table, where nine presentations were heard and discussed. I will present some of the conclusions that I drew from the five-hour exchange, on one of the topics on which the future of the nation will depend in the next two or three decades and onward.

During the debate, each global and regional North American environment that would be affected by a reform in the Mexican oil sector was considered. Perhaps its most important component is now the substantial change that is expected to occur in the biggest market in the region: the U.S.

Before 2030, the United States, one of the largest hydrocarbon importers during a big part of the last century will become self-sufficient and, further down the line, it will have an exportable surplus. Initially, this surplus will be in natural gas (thanks to the rapid increase in the production of non-conventional gas--especially shale gas) and subsequently in oil (given the rapid increase in the extraction of non-conventional crude oil--tight oil). In this way, the U.S. dream of independence could become a reality in the field of hydrocarbons, as promised in different ways by every president since Richard M. Nixon--and seven have come and gone since then.

This persistent dream may be limited by various factors. The boom in non-conventional hydrocarbons will be almost completely exclusive to the United States; in 2030 it will produce almost three-quarters of the global total. The relative price advantage could disappear as soon as the environmental costs of exploitation, liquefaction and regasification for its eventual exportation are factored in. Having reserves of shale gas and tight oil might bring about an energy revolution, but it will be limited to North America.

For this regional environment, the goal of 2030 also holds a promise of independence for Mexico. If the United States wishes to free itself of its addiction to imported oil, Mexico can free itself of its dependence on public finances from revenues obtained from the exportation of crude oil. An essential component of any energy reform in Mexico is avoiding the exportation of crude oil, especially given the distressing level of reserves that our country has. Mexican oil made its biggest contribution to the country's development when it focused on satisfying internal demand. Its ideal goal is to provide energy and raw materials demanded by domestic industrial development, starting with petrochemicals and the operation of its national production plants. Crude oil exports should decrease in order to leave room for the nation's industrial comeback.

During a long period in the second half of the last century, importing U.S. oil allowed Mexico to conserve its reserves and accumulate strategic stock. Now, in the first half of this century, the drop in Mexican crude oil exports will allow it to conserve and increase its reserves, revitalize the diversification of industries and technological services, and find the actual tax base--not the immoderate taxation of a non-renewable resource, but by means of the gradual taxation of individuals' incomes. The link between the energy and tax reforms is quite apparent.

In the 1970s, around the time of the historic readjustment of the international prices of crude oil by the Organization of the Petroleum Exporting Countries (OPEC)--a club that we never wanted to be a part of--it was famously said that, in the twenty-first century, extracting oil to burn as fuel would be considered as primitive as chopping down forests to get wood. New hydrocarbon resources in deep waters or in shale formations must be conserved for superior economic uses in a future that stretches to the second half of the century. Furthermore, in the case of shale gas, because of the numerous environmental uncertainties that exist, it would be advisable to establish a moratorium of several decades, without excluding exploratory work to locate, mark out and quantify the reserves.

This postponement would also help to avoid discouraging sustained development of sources of low energy or those that are carbon-free. North America and other parts of the world began to gain ground before the boom in shale gas altered relative price relations and discouraged efforts to advance the true energy transition, substituting for them a rather more fictitious transaction within the fossil fuels themselves--all of which emit greenhouse gases.

It is likely that a significant part of the Mexico energy reform debate will be focused on how to carry out the type of reform passed in 2008. There will be debates on which segments of the petroleum sector can receive additional injections of private capital without reshaping current constitutional regulations. Based on the fallacy of Pemex's resource shortages (financial, technical and human), it will be claimed that it is essential to complement them with contributions from private individuals--both national and foreign. It will also be shamelessly claimed that none of this equates to privatizing or affecting the sharing of oil revenues in favor of the private sector.

Once again, the debate will be a shadow theater. It is clear that there will be no need for Pemex to receive aid from private individuals avid to take over part of the revenue, but it can navigate towards an internationalization of part of its activities, just like many of its peers--i.e., other state-owned oil companies on this continent and others. This will happen if Pemex orients itself to satisfying internal demand for fuel and oil--substituting for costly imports--and if it stops losing the majority of its gross income to a money-hungry public treasury reluctant to reshape the tax structure. Furthermore, it will happen if Pemex's budgetary and management autonomy is duly recognized so that it can act as an effective and profitable public body, and if its workers are permitted to choose honest and legitimate union leadership. Spanish original

*Jorge Eduardo Navarrete is a Mexican economist and diplomat. He has served as Mexico's amabassador to the United Nations, Germany, the United Kingdom, Brazil, Chile and Venezuela, among others. A graduate in economics of the National Autonomous University of Mexico, he has also been a researcher in its Center for Interdisciplinary Research in Sciences and Humanities.