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and CFE’s role and relationship with the federal budget.
Previous to this reform, Pemex and CFE bore the implied responsibility of maximizing profits for the federal budget as they were the only constitutional operators in their sectors. However, the reform makes it clear that it is the State on which this responsibility relies, thus, giving both Pemex and CFE the freedom to follow a more sustainable route and enabling them to exploit, in a more efficient way, their experience and comparative advantages.
From the concept of productive firms of the State comes the participation of the private sector. The State, in order to maximize profits for the federal budget, will decide to which firms assign a contract, including Pemex and CFE which may also establish contractual relationships with private firms. These contracts will necessarily be attached to the precondition stating that those hydrocarbons found under Mexican soil are property of the State.
Another key aspect, closely related to the above characteristics, is the creation of the “Fondo Mexicano del Petróleo” (Oil’s Mexican Fund). This fund will have the purpose of receiving, administrating, and distributing the income derived from the new contractual assignments mentioned in the reform; i.e. the ones established by the State with the firms of the public and/or the private sector.
Q
In which ways will this impact Mexico’s energy sector?
The energy reform in its constitutional terms and with the implementation of a well structured regulatory system, can impact
Mexico’s energy sector in several ways. These include more competition in the sector, a stronger and feasible incentive to increase production, as well as an attraction of better technology for the exploitation of non-conventional fuels.
Mexico has always been in a privileged geological position. This location however, requires new technologies and the participation of public and private firms in order to make the energy market profitable, mainly for the State, but indeed also for the participants. The energy reform in its constitutional form can create a system where: the State can significantly increase its revenues, Pemex and CFE can delineate a sustainable growth path, and the private sector can benefit from a more open sector.
As already said, these impacts nonetheless, depend on the secondary laws, which have the main challenge of implementing regulations that can maximize the State’s profit and at the same time create production incentives for the public and private sector.
Q How will the reform benefit investors?
The first benefit comes from the fact that previous to the energy reform the possibility of participation for external investors was nonexistent in the oil sector. Therefore, and regardless of the economic returns, the energy reform expands the range of investment opportunities, raising competition in the sector, and by itself, promoting more attractive returns to investment.
The energy reform also outlines the forms in which the State can carry out contracts with public and private participants. These forms include (1) services contracts, (2) shared utility or production, and (3) licenses, or a
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combination of these three. To this extent, the firms can decide the form that best fulfil their economic objectives.
Q
What should investors be aware of when pursuing Mexico’s energy
sector?
When investing in Mexico´s energy sector, interested investors should consider as many factors as they would consider in any other investment. The energy industry in Mexico is already showing a significant resurgence, and there is a lot of potential going forward. One of the key aspects investors should be aware of is the group of resolutions taken by Congress in terms of the secondary laws, and especially in the definition of the regulatory structure for the participation of the private sector. This regulatory structure will mostly define the returns for the investor.
Q
Is there anything else you would like to add?
Mexico’s energy reform represents a very important step into establishing a legal structure that will enable the country to face the challenges of the new world energy dynamics. However, this process should be seen as an unfinished development that needs to be constantly addressed due to the still increasing demand for energy and the inevitable new ways to obtain it. As for now, the energy reform has been a positive step forward and will benefit the Mexican economy as a whole.
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