Volume 46 Number 180,
January - March 2015
Energy Reform: 20 Years After NAFTA
Rosío Vargas *
Date received: May 30, 2014. Date accepted: October 30, 2014
Abstract

United States President Barack Obama’s visit to Mexico in May 2013 served as an opportunity to gain access to Mexican oil and gas, under the pretense of 20 years of NAFTA and the “need” to revisit it. Both national and foreign lobbyists devoted themselves to the task of orchestrating the strategy to fully open the Mexican energy sector by way of the proposed Mexican Energy Reform, passed on December 20, 2013. The constitutional amendments in these reforms further the openness stipulated in Chapter VI of NAFTA by eliminating the strategic nature of Mexican energy sector industries and fuels, practically designating them as just another commodity. The implications of the Energy Reform are a major affront to not only the economy, but also national, energy and territorial sovereignty.

Keywords: Energy reform, energy sector, oil, privatization, foreign investment.

INTRODUCTION 1

Twenty years after the North American Free Trade Agreement (NAFTA) was signed, business groups in the United States, Canada and Mexico still believe there are obstacles to "competitiveness" in the region. From the perspective of the United States, NAFTA was meant as a vehicle to open up opportunities for investment and services related to the energy and petrochemical industry in Mexico. The rights “reserved” to Mexico in the energy chapter agreed upon in 1992 were disappointing to the United States, although the latter remained certain that the agreement was not immutable and that energy provisions would gradually be relaxed as the North American energy industry became more integrated (Murphy Ewell E. JR. 2000: 77-78) The main barrier to opening up the Mexican energy sector was its Constitution: that is why after 20 years of NAFTA, an opportunity was seen to advance in these demands.

One year before the Energy Reform (2012), the United States Congress was already deliberating on the topic. In December 2012, the Senate Foreign Affairs Committee acknowledged that the United States was interested in Mexican oil and gas. A report addressing the Energy Reform, already anticipated to pass, wrote: “As a reliable, proximate and friendly neighbor, Mexican oil imports support U.S. energy security.” The document, drafted by the United States Congress, specifies that “Energy security is a vital issue for United States foreign policy and economic growth” (United States Senate, 112 Congress, 2012).

The last presidential campaigns in the United States (2012) were another chance to lobby for access to Mexican resources. The Republican candidate, Mitt Romney, was practically a loudspeaker for the interests of Rex Tillerson, CEO of Exxon-Mobil, who sought to ease Exxon's entry into Mexico along with other United States oil companies2 (Council on Foreign Relations, 2012; Brookes David, 2012).

United States President Barack Obama's visit to Mexico (in May 2013) also served that same objective. He would attempt to make a historic claim on Mexico, putting its oil and gas reserves up for debate. The press commented on the president's visit: “Twenty years after the North American Free Trade Agreement, Mexico’s oil reserves have remained closed to U.S. investment, but that may soon be changing” (Collins, 2013; ASCOA, 2013; The Economist, 2013). The process to draft and enact the Energy Reform took off starting at that moment and in December 2013, the Mexican President’s reform bill was finally approved by its Congress, not only undoing 75 years of nationalized oil, but also the 1992-1994 NAFTA negotiations, which maintained that the oil sector was a strategic area restricted by the Constitution and the Mexican state had the prerogative to exploit and manage the oil industry through its state company Pemex.

In contrast with the official Mexican discourse on the 1992 negotiations, when preserving the energy sector for Mexico was heralded as an achievement by the negotiators, in 2013, political figures were far from concerned with promoting national interests. During President Barack Obama’s fifth visit, the “opportunity to relaunch North America as a region” was trumpeted. "The three nations aim to take advantage of gas reserves in the region, which constitute the largest in the world, and thereby reduce the cost of productive chains, Sergio Alcocer, Undersecretary for North America, recently explained" (Terra-Noticias: 2014).

During NAFTA talks, the Mexican negotiators kept the energy sector off the table. When the talks ended, the outcome was reported as a success for the Mexican government. The five activities that Mexico restricted were the flag the country brandished to its United States counterpart, evidence of Mexican success to its people. The revelation that within 10 years, 100 percent of government procurement tenders for the energy sector (Pemex and CFE) would be opened up was considered the best deal that business people in Mexico could have obtained (Vargas, 1994: 42-45).

Aiming to achieve total openness, both foreign and national interests pushed to modify the Constitution to achieve some legal certainty to guarantee their investments. The 2013 Energy Reform amended fundamental articles of the Constitution (25, 27 and 28), sidelining the State from its role in strategic activities and exclusive management of this industry. Through allocations, contracts, permits and concessions, the reform managed to open all energy sector areas and activities to private initiatives. Although some legal experts believe it would not be necessary to open a new round of talks to incorporate these changes into NAFTA, some believe it would be, and therefore the changes ushered in by the Energy Reform would require modifying the “reservations.”3 As a result, one of the most important changes is the displacement of the State from its prerogative in managing strategic activities, which is just the precursor to even more privatization, a sign of the advancing power of transnational corporations.

We are facing the historic reversal of the 1938 nationalization of oil, which has progressed from sectors (downstream) to total openness (upstream), exploration and exploitation by the removal of strategic activities and by breaking Pemex down into business units, while deregulating, liberalizing and privatizing others. One of the principle mechanisms is contracts. Although the private sector has long participated in service contracts for upstream activities, the Mexican State maintained the prerogative in these activities. Later on, contracts permitted the entire production chain to be privatized. Now, “liberalization” (privatization) affects all activities in the sector, thanks to the recent amendments to the Constitution.

These interests have championed a so-called modernization, to achieve competitiveness and greater efficiency in light of the lack of investment resources, limited technology, corruption, the drop in oil production and the imminent risk of once again becoming oil importers. This goes hand in hand with the neoliberal paradigm in which anything related to the State is automatically inefficient and corrupt. However, these interests dodge important questions related to the income distribution, stagnation, recession and inequality that this model aggravates.

The discourse in favor of openness discredits the monopolies (Pemex and CFE) and, with little regard to the fact that they are both operationally rational (vertically integrated company) and constitutionally legitimate (for constituting strategic sectors), proposes putting an end to them. The main challenge of the reform will be to transform an inefficient state monopoly in an industry where competition among multiple actors favors efficiency. This argument is justified based on a proposal to make changes in the organization, but disregards the productive rationality of a vertically integrated company that allows for economies of scale and reduces costs. Major transnational companies have not given up on this logic of vertical integration, which exists from the oil wells to the gas pump. The proposal to involve multiple actors to improve efficiency would have to take into account the fact that the oil industry is made up of oligopolies and monopolies, so a structure of price fixers that would correspond to an organization with perfect competition is only a theoretical tool. It simply does not exist in the energy sector. Moreover, the term monopoly is not a valid term to describe Pemex and CFE because the Constitution pointedly did not define them as monopolies precisely because they are considered strategic.4 These histories or stories are accompanied by the media proposals from think tanks that appeal to the media demands in favor of the Energy Reform. Their recommendations address the entire range of activities related to hydrocarbons and the overall energy sector. Oil industry interests from the United States aim to achieve "access" and with it modify the rights of ownership in Mexico, as well as the very legal framework that governs how the energy industry works to advance the market model and private Anglo-Saxon rights as the legal backbone of the whole dynamic. The idea is for the United States oil industry to enter Mexico’s territorial space with plans to employ its economic project and achieve multiplicative effects for jobs and other United States industries,5 with the final goal of spurring economic growth (Pascual Carlos, 2013).

The market model can advance by encouraging profound integration with the rest of North America in the energy sector (Vargas, 2014). The proposal aims not only to extend the Anglo-Saxon model (common law) in which hydrocarbons are private (at soil level) and companies are too, but also to fortify integration through1) a smart border system,2) enhanced regulatory cooperation and3) energy security and sustainability on the agenda. Insofar as it is one of their objectives to project the region as the most competitive in the world, and Canada and Mexico participate in building energy security for North America (for the United States), this will be one of the pillars of success.



LOBBYISTS FOR ENERGY REFORM

Although the recommendations made by the International Monetary Fund (IMF) and the World Bank to enact the structural reforms they suggest are historic, in recent years, the international institution that has played the largest role in evaluating national performance on a variety of agendas and has emerged as the authority that directs the future of economic policy in Mexico is the Organization for Economic Co-operation and Development (OECD), of which Mexico is a member6 (OECD, 2010). A study by the organization on Mexico set its sights on reforming the energy sector, essentially dominated by two state-owned companies, Pemex and the Federal Electricity Commission (CFE), and stated that it would be necessary to "go further" than the changes introduced in 2008, which improved corporate governance for the company, gave it operational autonomy and a regime to contract goods and services. “These reforms must go further, perhaps even through a constitutional amendment, to allow for the sharing of risks and benefits with the private sector. Making Pemex more competitive could generate the right market incentives to increase its efficiency, although there also must be additional regulation to include the oversight of new participants” (González Amador, 2013).

The OECD reports not only presaged the constitutional changes, but some of the guidelines would also later by incorporated into the Energy Reform for Pemex to improve its "governance" by removing restrictions on (private) investment and strengthening controls to make operations more efficient, make it easier to share earnings with other companies and improving access to technology (OECD, 2010: 128).

Leading up to the 2008 and 2013 energy reforms, the demands of transnational and national corporations were expressed by multiple think tanks, mainly located in the United States, through diverse media, including forums, business organizations, journalists, experts, academics and more, as well as national political lobbyists, all in favor of the President's proposal. In Congress, there was support from the PRIAN-PVEM, and from the PRD, initially for the preliminary agreement known as the Pact for Mexico.

The 2013 Energy Reform reworked the 2008 lobbying strategy through publicity notes and advertising slogans not only in favor of the proposal, but also with guidelines to produce the changes they sought (Vargas, 2011: 115-162). The difference between the 2008 and 2013 reforms was essentially the form, but the strategy was the same. In 2008, the Council of Foreign Relations (with headquarters in Washington) led the effort through its national support in the Mexican Council on International Affairs (Comexi) and the Mexican Energy Network at the Mexican Autonomous Institute of Technology (ITAM),7 while in 2013, the lobbying was led by the Woodrow Wilson Center Mexico Institute, with an affiliated group at the ITAM.8

It is striking that some of these think tanks have opened branches in Mexico and formed strong connections with like-minded academic and business organizations, whose roots can be traced back to financial institutions and corporations. In Mexico, Comexi is one such think tank whose corporate partners are: Exxon-Mobil, Telmex, Bimbo, Kansas City Southern, Toyota, BAL, Femsa, Banamex, Scotiabank, Grupo México and Union Pacific. Some of its presidents have included Luis Rubio (Center of Research for Development, A.C., CIDAC) and Andrés Rozental (brother of the former Mexican foreign affairs minister Jorge G. Castañeda), who leads his own consulting firm specialized in advising multinational companies on corporate strategies in Latin America. He is also a consultant to the transnational HSBC. The current president of Comexi is Jaime Zabludovsky.

In 2013, the Woodrow Wilson Center lobbied on behalf of corporate interests (Mexico's Intelligence, by George Baker) and the United States government to bring about greater change in Mexico as part of deepening integration in North America. On the recommendation of the Woodrow Wilson Center, in November 2012, the document entitled "A New Beginning for Mexican Oil: Principles and Recommendations for a Reform in Mexico's National Interest" (Enríquez et al., 2012) sought to provide conceptual “clarity” on the difference between owners and operators. Owners would determine the ways in which the resource could be exploited, while operators "have been given a concession or production-sharing agreement" and therefore can book reserves without having ownership of the subsoil. This booking serves the companies for purposes of financial management, including requesting the debt for their assets, that is, the oil that is the object of the contracts granted them. The proposal to differentiate between the owner and the operator would prove to be a key change made to the decentralized public organizations Pemex and CFE by turning them into the production enterprises of the State, as stipulated in the 2013 Energy Reform.

Business people were led by the North American Competitiveness Council, whose national arm is the Mexican Institute for Competitiveness (IMCO).9 The CIDAC, the Business Round Table and the Mexican Council of Businessmen were other key leaders. The IMCO was striking, as it professes to be a non-partisan organization that works on public policies to strengthen Mexican competitiveness through 1) influencing the public policy agenda, 2) keeping competiveness current and 3) achieving financial self-sufficiency. However, it is funded by the Alliance for the Security and Prosperity of North America (ASPAN), the Hewlett Foundation, the Inter-American Development Bank, the Mexican Council of Businessmen, the British Embassy of Mexico and the United States Agency of International Development (USAID). Through this last it receives strategic directives from the State Department, whose main objective is to strengthen U.S. foreign policy, cooperating with destination countries in various areas.10 The IMCO is clearly associated with international agencies,11 and as such, its analyses serve the demands of transnational corporations and foreign countries.

IMCO proposals were key in formulating the content of the Energy Reform. Its book, They Changed the Map On Us: Mexico Before the Twenty-First Century Energy Revolution, pushes for constitutional change on energy issues. The initiatives set forth by the Mexican President (PRI), as well as initiatives from the PAN, and the transitory articles and bylaws derived therein, directly express their suggestions. Initiatives presented by the PAN (Torres, 2013) and the PRI confirm the extraordinary influence of IMCO on the core of the Energy Reform. Some of the main proposals were: Pemex must operate as a true company. It will be essential to remove the restrictions imposed on it for being part of the federal budget and remove State control of profits and spending with political, rather than industrial, criteria.

  • Opening the sector will require the creation of a new fiscal regulatory framework, transparency and accountability.
  • Original ownership of hydrocarbons does and should continue to belong to the nation, which is and shall continue to be the only original owner of hydrocarbons.
  • The decision to concentrate the task of exploiting the oil wealth of the country in a single enterprise has produced an operator that, due to its size and complexity, is very difficult to effectively manage and control.
  • The false argument of risk is reiterated. In reality, it just aims to justify sharing oil income with private and foreign enterprises.
  • Taking into account an inter-generational logic, a portion of the oil income that goes to the State should be allocated to a sovereign investment fund that would yield benefits for future and current generations.
  • Mexico should take advantage of and be part of the energy revolution in North America to turn energy into a factor for competitiveness for all sectors of our economy. The potential for private investment in transportation and distribution, both for gas and oil resources, should be reviewed and expanded.
  • Exploiting new resources is costly and riskier and they are more difficult to identify and extract. This is not manageable for a single company.
  • Mexico's energy sector is more closed than Cuba, Iran or North Korea (Lomelí, 2014).
  • In less than two decades, the United States will become a net oil exporter, which will directly affect Mexico by reducing the demand for imported Mexican crude oil.
  • In the majority of countries selected, there are regulators independent from the operators of the industry.
  • These operators help the State to reduce the risk associated with oil activities and the investment required to develop and exploit resources.
  • As compared to the rest of North America, Mexican gas prices are not competitive.
  • The capacity to explore and produce crude oil and gas (upstream) must be multiplied. This will be achieved through associations between Pemex and other operators.
  • Pemex must operate as a true company. It will be essential to remove the restrictions imposed on it for being part of the federal budget and remove State control of profits and spending with political, rather than industrial, criteria (IMCO, 2013).



LOBBYING IN THE MEXICAN CONGRESS

Lobbying efforts finished on a high note during the discussion of the Energy Reform in the Mexican Senate, in the midst of a process full of irregularities, making it an undue process, where it has been speculated that interest groups directly participated in designing the proposal or in the final decision approved.12

Up for debate were not the initiatives sent by the Mexican President or those of the PAN, which would supposedly be included in the final decision, but rather a new Constitutional proposal (such as the incorporation of 21 transitory articles), with significant changes, oriented towards the drafting of bylaws that deserved in-depth analysis. However, in the end, a text known as "Opinion on Substantial Changes to the Constitutional Texts" was incorporated. Looking at the lack of definitions and what is missing from the base initiatives of the so-called "pre-opinion," fundamental questions emerge that would imply substantial changes to the Mexican energy sector.

The meddling of interest groups and the behind-the-scenes changes made to the text of the Energy Reform would already seem to be part of decision-making in the Congress, similar to what occurred in the final phase of approving the 2008 Energy Reform. The direct participation of lobbyists for transnational companies in national decision-making, through their national partners, is evidence of the power of these actors and the fact that the Mexican Congress has become an entity that responds to their demands.



THE RESULTS OF THE ENERGY REFORM

The decree published on December 20, 2013 in the Official Gazette of the Federation (DOF) incorporated changes to Articles 25, 27 and 28 of the Constitution, as well as 21 transitory articles. The bylaws were to establish the specifics of the fundamental changes made to the Constitution.13

The Energy Reform package includes the enactment and publication of nine new laws, which are as follows:

  • Petróleos Mexicanos Act
  • Electricity Industry Act
  • Hydrocarbons Act
  • Federal Electricity Commission Act
  • Hydrocarbon Revenue Act
  • Mexican Oil Fund for Stabilization and Development Act
  • National Agency for Industrial Security and Environmental Protection of the Hydrocarbon Sector Act
  • Geothermal Energy Act
  • Coordinated Energy Regulatory Agencies Act

Besides the transitory articles, nine new laws were enacted and another 12 were reformed. In addition, a strategy was created to openly allow foreign investment, through laws proposed between June 11 and 14, 2014, to be debated and voted in the Full Senate from June 23 to 28. These laws would culminate the opening of the oil industry, electrical system and overall energy system to private capital.

The Constitutional changes eliminated the “reservation” with which the energy sector had remained closed off in NAFTA by labeling hydrocarbons and electricity as tradable goods and practically opening the entire production chain to private transnational capital. The Energy Reform will sideline the State from strategic activities in the sector and with it the appropriation of its direct dominion over and exclusive right to comprehensive exploitation, under the argument that competition, with the inclusion of numerous operators, will move us towards a market structure that has promised to lower fuel prices for consumers.

The reform package that has grown over time (April 30, 2014) is a sign of what is known as the plundering of a nation (Harvey, 2004), or accumulation by dispossession driven by the transnational elite. This plundering is not entirely evident because it is concealed by "liberal" legal paraphernalia that exalts the advance towards a market through the legal-technical rhetoric wrapped up in its real meaning. This article will highlight here a few concepts that may illuminate this idea.

The Hydrocarbons Act contains the legal framework to modify ownership rights through assignments, new forms of contracts and the “temporary occupation” of land and territories. One result of this mechanism is the Round Zero to which Pemex has been subjected.14

The Secretary of Energy (Sener) required Pemex to conduct this Round Zero for exploration areas and production fields, which means that Pemex had to certify that it has the technical, financial and performance capacity needed to exploit and extract hydrocarbons efficiently and competitively. This Round Zero, scheduled for presentation by Sener on September 17, 2014, was ready a month early, meaning it practically coincided with the enactment of the secondary legislation of the Energy Reform on August 11, 2014, which shows it was released with political motivations.

The real objective of this Round Zero was to remove Pemex as the sole operator of the oil industry in the name of the Nation, as Article 27 of the Constitution stated in the version under the Lázaro Cárdenas administration, which was modified to prohibit exploration and production contracts in 1960 with then-President López Mateos. The idea was to replace Pemex with many private operators, preferably foreign. With this new model, Pemex would be just another operator in the Mexican oil industry, likely to disappear soon as a result of the loss of income for the federal government, meaning that reserves and territories would be strictly assigned to it on the basis of not deepening the fiscal hole of the budget, because the very existence of a Round Zero and a Round One means that oil income will be handed over to foreign parties and Pemex will be downsized as its reserves and territories are restricted (number of square kilometers assigned).



RESULTS OF ROUND ZERO15

The results of Round Zero indicate that Pemex was “downsized” more than Sener announced, pursuant to the following table.

 

 

 

 

In addition, it has been said that the 12 assignments given to Pemex cover 71% of current crude oil production and 73% of natural gas production.

However, Tables 1 and 2 reveal that the “downsizing” of Pemex in terms of assignment of reserves was far more pronounced than what Sener admitted, because in reality, only 48.32% of reserves requested were granted, and not the 68% that Sener, Pemex CEO Emilio Lozoya and Gustavo Hernández, CEO of Pemex Exploration and Production (PEP) claimed. The errors or differences regarding these official figures reveal this greater "downsizing," based on the following:

  1. Comparing what was requested with what was granted based on varying reserve data, Pemex requested reserves in January 2013 with the Round Zero and Sener granted reserves in January 2014, which means that 1P reserves are 4% less and probable reserves are 2% less.
  2. Pemex was not given 3P reserves even though it requested 71% (31.6 billion barrels) of them, which considerably brought down its assigned reserves.
  3. This explains why the exploitation time frame fell from 36 years (requested by Pemex) to 20 years, as Sener announced.
  4. All of this shows a highly unfavorable attitude towards Pemex.
  5. Although it is said that Pemex can participate in round 1 and subsequent rounds, either alone or in partnerships, this will be very difficult, because it will depend on the good will of the Secretary of the Treasury and Public Credit (SHCP), which is charged with assigning resources.

    In addition, the chance for oil resources to be transferred to private companies is based on provisions of the fiscal regime proposed in the Hydrocarbon Revenue Act for contracts. Even when Pemex receives the assignments it has requested, it is invited to migrate them to contracts, in which it may or may not participate. This is an opportunity to transfer reserves, profits, income and production to private foreign investors.

    Another aspect of the plundering appears in the Hydrocarbons Act (Ley de Hidrocarburos 2014) known as “hydrocarbons easement” (servidumbre legal de hidrocarburos) or “temporary occupation.” Its precedent is Transitory Article 8 (strategic). The secondary laws agree to remove the figure of expropriation and replace it with “temporary occupation.” For reasons of public benefit and the social interest, “temporary occupation” was created, as well as legal easement, both in the Hydrocarbons Act as well as in the Electricity Industry and Geothermal Act. This means that any property of interest for businesses in the energy industry may be subject to "temporary occupation" or the construction of easements. To make this acceptable to the Mexican public, payments will be made (to the owner of the property) on the order of 2% of the contractor's profits for oil and 3% for gas.

    Hydrocarbons easements shall be decreed to the assignee or contractor and governed by the provisions of federal common law and any controversy that should arise therein, regardless of its nature, shall be subject to the jurisdiction of federal courts. They may issue either judicial or administrative rulings, pursuant to the terms of this act and other applicable laws.

    This act, which brings about the legal plundering of lands, is an opportunity for the border between Mexico and the United States to be pushed south, under the pretext of geological continuity between the Eagle Ford deposits located in Texas and the Mexican territory (Morales Gil, 2012). The exploitation of oil and shale gas in the north of Mexico (and in the rest of the country and in Chicontepec) is seen as a chance for the Texan industry to exploit these resources in Mexico, as investors could acquire lands and bring water from wherever (in fact, it already brings water from the Panuco river to Nuevo León to exploit shale gas and has begun fracking in Chicontepec).

    The Mexican Oil Institute (IMP) will intervene to mediate the negotiations, with experts to conduct evaluations and set a new offer. If in 10 days it does not receive a response, article 101 stipulates that the IMP shall notify Sener, which will propose to the Federal Executive the constitution of a new “hydrocarbon easement” through an administrative ruling, or through expropriation, pursuant to the terms of applicable legal provisions.



    FROM OPERATOR TO OWNER: THE PEMEX ACT AND THE CFE ACT

    One of the main arguments of the lobbyists for Energy Reform was the “insufficient organization and Mexican legal framework," meaning it was necessary now to differentiate between the administrator and the owner. The real idea was to incorporate a notion of governance in a scheme in which the State is not the single and most important actor and private investors in a company delegate management to a bureaucracy that administrates and watches over business profits. For Pemex and CFE, the incorporation of this concept of corporate governance introduced, in addition to the distinction between owner and administrator, a dual system in which both parts are no longer governed by the State-Owned Company Act and The Laws on Acquisitions, Works and Leases and Services of the Public Sector, and in which the General National Assets Act shall only operate for real-estate property belonging to Pemex. Pemex and CFE are being transformed from decentralized organizations into productive State enterprises, thereby uprooting the basic foundation of Mexican administrative and ownership laws. In less than two years, Pemex and the CFE will become "productive State enterprises" (EPE in Spanish). This is no minor change to the legal regime, as it will oblige them to compete with transnational companies (while still being subject to the same fiscal regime), and they will also have to pay a portion of earnings to the State each year, with the so-called "state dividend,” until 2016, which “will be set at a minimum 30 percent of revenue after taxes.”

    Officials ascertain that Pemex and CFE will actually benefit because they will have greater autonomy over how to handle their resources. But in reality, these entities will be gradually dispossessed of their public nature; they will no longer be inalienable and guaranteed against prescription or seizure, just like the eminent domain that governs the resources. This is the result of the secondary legislation for Pemex and CFE.

    By turning the State into the owner, separate from the administrator of the company, it will no longer take part in daily operations and the company will make its choices autonomously based on business and corporate logic.

    The Administration Council for EPEs shall stipulate the policies, terms, guidelines and procedures for the dismantling of, transfer of title, collateral deposits or liens on industrial installations for both Pemex and its production companies or, when appropriate, subsidiary companies (Rosas, 2014).

    The CFE shall be subject to the strict legal separation stipulated by Sener to foster open access (Transitory Article 20). The impact of this restriction translates into a separation between its divisions, regions and even its subsidiary production companies and affiliated companies. Subsidiary and affiliated companies shall, among other actions, offer electrical energy and associated products to the wholesale electricity market with no restrictions and with competition. In addition, open access shall be granted to the National Transmission Grid or the General Transmission Grids.

    In this way, the corporate governance and oversight and auditing models proposed by the OECD define the principles of private property for which the laws of public rights no longer apply, under the pretenses of a flexible legal framework under which these companies should operate.

    In summary, the heart of the Pemex and CFE reform is precisely the establishment of a corporate governance model that will enforce the rules of private property in and on State enterprises. These enterprises will now be governed like any private company, with the necessary regulation, although it will be more rhetoric than reality.

    At the same time, the promise is to maximize oil profit and generate economic value. Article 42 of the Hydrocarbons Act instructs officials, regulators and producers to maximize production, which will really just lead to the over-exploitation of fields and the multiplication of the number of private oil companies whose sole objective is to maximize earnings in as little time as possible. This may lead to the maximization of oil income, but through contracts, it will allow corporations to access and capture the lion’s share of that income based on their experience, asymmetrical information and power.

    The risks are high, insofar as profound and monumental legislation, with no sign of gradual implementation, has been proposed. Here are some of the risks:

    • Because the government is weak compared to transnational corporate figures, it is likely that regulatory agencies will be swept up by these actors.
    • An enormous and onerous centralized bureaucracy will be created.
    • The Executive Power will be fortified through Sener.
    • The new regulators will serve more to place and ease foreign investment than to "regulate" (as has been the case to date).
    • Industrial, technological and trade dependence will grow.
    • The fiscal contributions of Pemex and CFE to the public coffers will drastically fall, counterbalanced by increased public debt and tax hikes for Mexican people.
    • Mexico will turn into a hydrocarbon export enclave for United States industry (with some share of Mexican companies). Export volumes of 1.2 to 1.6 million b/d between 2013 and 2018.
    • Potential to speed up the exhaustion of reserves. Less likely to develop the refining industry.
    • In the short and medium term, Pemex will retreat to shallow-water and conventional reserves.
    • Strategy to gradually privatize installations known as fierritos. Turn Pemex and CFE into companies that merely grant contracts. In the long-term, their annihilation.
    • Dependence on U.S. gas is striking, as well as a shift towards environmentally harmful forms of exploitation, such as oil and shale gas.
    • Lands and territory surrounding the works may also be affected. All oil and electricity industry activities are recognized to be of social interest and the public order, which leaves the property owners of the lands where the works are carried out defenseless.
    • Jobs in the oil and electricity industry will be displaced.



    LEGAL IMPLICATIONS

    • Public policies and regulations that corporations consider to be factors that weaken their “future expected benefits.”
    • Private companies may oblige governments to annul standards, regulations and conditions of contracts.
    • They will have the right to sue the Mexican government in international courts if they do not agree with governmental actions or policies (for example, the outcome of an oil contract) that undermine their expected earnings. A “regulatory expropriation” (such as a tax) could be considered a violation that deserves compensation. We must remember that the failures of international and supra-national courts cannot be appealed. If they are not fulfilled, assets will be confiscated.



    ALTERNATIVE PROPOSAL

    In light of all this, we must ask ourselves, is there an alternative model? There certainly is. The definition of an energy policy should begin with a comprehensive vision, based on the objectives of energy security and national strategy grounded in a model of competitive advantages and not a scheme of specialization that rests on the production of raw materials with no added value. The policy must be multidimensional and structured to bring about progress. It must be a State policy that does not prioritize exogenous conditions and addresses industrial, fiscal and technological development, foreign trade, the relationship with monetary policy and the energy supply. Concretely, a policy oriented towards creating, adding, modifying and overturning a variety of legal provisions related to the national energy sector, without amending the Constitution, because once amended, there are no limits on what can be done, including turning over the country itself to foreign interests. This policy would fortify Pemex and CFE through a process of real self-determination, separating them from their financial contributions to the national coffers. Considering that on the international level, it is fashionable to maintain strategic control in both private and public enterprises, this policy would be the course to follow, in addition to maintaining ownership of resources, driving the demand for national goods and services and reinvesting oil income in the company itself to develop capacities and create jobs, among other important goals.



    CONCLUSIONS

    A little over 20 years after NAFTA was enacted, the United States saw a chance to advance its economic and political project, aiming to strengthen its own economy through access to the Mexican energy industries, to take part in the direct and indirect economic benefits, hoping for multiplicative effects on other sectors of its economy. Income appropriation will increase through contracts, permits and concessions, as well as all associated (collateral) business.

    The Energy Reform is a response to the past 20 years of NAFTA, promoting a new direction that seeks to deepen the power of corporations in Mexico, as Mexico joined the Trans-Pacific Partnership Agreement.

    The Energy Reform removed the final barrier to advance in the project to privatize the Mexican energy sector with a market model, which is really a mechanism to modify the production, ownership and resource and income distribution model of the sector, to the benefit of private, preferably transnational, interests.

    The approval of the Energy Reform is evidence of the capacity of corporations to raze national laws that stand in the way of their earnings. NAFTA granted multinational corporations new privileges and extreme enforcement. This reform permits the total privatization of the energy sector and resources.

    For now, officials and lobbyists have allowed certain activities in the sector to continue to be labeled as strategic, setting their sights on these activities prevailing over the interests and assets of civil society. It is a semantic use of the term, because the activities once known as strategic are those that have now been turned into tradable goods or commodities. However, the changes implemented are far from a faithful interpretation of the liberal models in developed countries; they are rather more in line with the capitalism of our Mexican compatriots, which has tended to favor those in the upper echelons of power.

    The productive transformation of the Mexican energy sector will not only make it more dependent on the United States, but will also deepen the structural asymmetries between the two economies, insofar as the income derived from oil exploitation and the electricity industry will be transferred. Because the model does not really have a proposal to develop endogenous capacities, improve technology or innovation or develop human capital, the economic value built up over generations will be destroyed, and job dislocation will rise. It is hard to believe that the proposed model will alter the prevailing accumulation model, which acts to the benefit of the few (preferably foreign).

    While foreign corporations and national oligarchies are the winners in this reform, the rest of the Mexican people lose out on any benefit whatsoever derived from this sector. This is a class conflict that will be aggravated as hydrocarbon and associated activities are turned over to private entities. This will renew the class conflict, and, in the context of oil, the historical struggle for the appropriation of the surplus.



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*Center for Research on North America at the UNAM, Mexico. E-mail address: rvargas@unam.mx

1 An earlier version was presented at the seminar, "20 Years of the North American Free Trade Agreement” held at the Post-Graduate Studies Department of the Faculty of Economics at the UNAM, in January 2014.

2 "‘Romney’s energy proposal aims to increase U.S. meddling in Pemex.’ His plan is just a facade to facilitate Exxon-Mobil's entry in Mexico: Michael Klare. According to the Republican candidate's policy, the government should step aside in crude oil extraction."

3 Jaime Cárdenas is one such person who believes it would not be necessary to renegotiate NAFTA to validate the changes implied in the 2013-2014 Energy Reform, while Dr. Ruperto Patiño believes it would be. Institute of Legal Research of the UNAM during the seminar "The Energy Reform," October 1, 2013.

4 http://imco.org.mx/banner_es/reforma-energetica-leyes-secundarias/ (viewed on October 27, 2014).

5 According to the National Bureau of Economic Research, 40% of Mexican exports to the United States contain inputs produced in the latter country. As such, Mexican economic growth will drive increased production in the United States, supporting economic growth and boosting Mexico’s export statistics http://www.as-coa.org/articles/mexico-opening-energy-reform (viewed on October 26, 2014).

6 The study was charged with evaluating the corporate governance practices of Pemex with a focus on its Administration Council, referring to OECD guidelines on the corporate governance of state-owned companies.

7 The 2008 Energy Reform was promoted by the Mexican Council on International Affairs (Comexi) through seminars and, specifically, the Mexican Energy Network based out of ITAM. The council was charged with spreading ideas in the magazine Foreign Affairs in Spanish, edited at the ITAM. The think center that drafts this publication is the Council on Foreign Relations, created by David Rockefeller in 1921, a little known but extremely influential organization in international affairs that has grown in power, prestige and range of fields of action.

8 Under the leadership of the British expert Duncan Wood, the Woodrow Wilson International Center for Scholars (WWICS) has published diverse studies, including "A New Beginning for Mexican Oil: Principles and Recommendations for a Reform in Mexico’s National Interest,” February 7, 2013.

9 The Mexican secretariat for the North American Competitiveness Council (NACC) is housed in the Mexican Institute for Competitiveness (IMCO). This is clearly indicated in NACC, “Meeting the Global Challenge. Private Sector Priorities for the Security and Prosperity Partnership of North America, Report to the Leaders,” April 2008, p. 19.

10 USAID, together with the CIA, has frequently been accused of carrying out activities for the latter agency in a variety of scenarios, including the destabilization of governments that are not aligned with United States policies, through different means. Authorities from the agency have acknowledged their support for political forces that oppose Latin American governments, including those where there are democratic regimes in place.

11 On their funding (from USAID, United States Embassy, British Embassy, Inter-American Development Bank (IDB), available at: http://imco.org.mx/conoce-imco/?consejo#financiamiento (viewed October 27, 2014).

12 Prior to its approval, Senator Enrique Burgos, President of the Committee on Constitutional Points, and David Penchyna, President of the Energy Committee, presented a document to the Joint Committee, entitled "Opinion of the Joint Committee on Constitutional Points, Energy, Legislative Studies, First, with a bill to reform and add various provisions to the Political Constitution of the United Mexican States in the realm of energy." The Political Coordination Group (Jucopo) met that day at around 2:00 p.m. and came to the following agreements: a) Set a work schedule for the Joint Committees, from 10:00 a.m. to 8:00 p.m., and on Sunday, December 8 and Monday, December 9 starting at 11:00 a.m., "the previous notwithstanding that if necessary, they may continue to meet on subsequent days until the aforementioned discussion has concluded, based on the guidelines of the Rules of the Senate." b) Discuss during these sessions the articles reserved and not leave them for the full session. Based on that, the aforementioned “Opinion” would begin to be discussed the next day, that is, Sunday, December 8 at 10:00 a.m. The document consisted of 300 pages, delivered to the Committees electronically in the Senate Gazette at 2:00 p.m. on Saturday, and was to be read and analyzed in around 18 hours (with no rest) for the next session convened. This situation is strikingly irregular because an Opinion was delivered, rather than a draft opinion created by various authors besides the members of the Joint Committees. The Rules of the Senate clearly state in Article 182 that "legislative opinions are documents formulated in committees, for which they are proposed to the full house for a decision on the initiatives or bills referred by the president."

13 Some of the most important changes included in the transitory articles were as follows:

  • The fourth transitory article orders Congress to provide the legal framework for service contracts, shared profit contracts, shared production contracts and licensing contracts for the exploration and extraction of oil and solid, liquid or gas hydrocarbons, as well as the payments made by the State to its production companies or private parties, for activities related to the exploration and extraction of oil and all other hydrocarbons. This transitory article is equivalent to granting concessions and their corresponding rights of ownership, direct domain and exclusive rights to exploitation and profit to national and foreign corporations.
  • The fifth transitory article confirms the transfer of ownership rights of hydrocarbons and the oil and electricity industry to private and foreign companies, by establishing that State production companies, as well as private companies, may for assignments or contracts report expected benefits for accounting and financial purposes, provided that the respective assignments and contracts specify that all oil and solid, liquid or gas hydrocarbons located in the subsoil are the property of the State.
  • It should be noted that the above article mentions the subsoil. In the soil is where oil privatization occurs through "onerous transmission," just like leasing in the United States and Canada, a term equivalent to concessions. In addition, booking constitutes an indirect form of making Mexican oil reserves an asset to back the financialization of corporations and banks.
  • The seventh transitory article stipulates that minimum percentages of national content shall be established by law as well as mechanisms to promote national industry; this law shall also be subject to international treaties. It is relevant to note that the Mexican State cannot demand a certain percentage of national content, as stipulated in the Reform (35% by 2025) for the contracting of national companies and technology transfer, as stipulated in NAFTA. Therefore, this subjection to international treaties entirely cancels out the intent and content of this transitory article and essentially makes it constitutionalized demagogy (NAFTA, 1994).


14 The Secretary of Energy (Sener), with the technical assistance of the National Hydrocarbons Commission, shall award assignments to Pemex for exploration fields and areas that are already in production, as long as it can demonstrate the technical, financial and performance capacities, also subject to an exploration or development plan. If this exploration plan is not fulfilled, the area will revert to the State. It is essential to note that in compliance with the constitutional mandate provided for in the Sixth Transitory Article of the Decree published on December 20, 2013, on March 21, 2014, Pemex submitted to Sener an application for award of exploration areas and production fields that it believed to be in operable condition through assignments. The Sener issued its resolution within 180 calendar days following the submission date. Pemex shall be entitled to, with prior approval of Sener, transfer the assignments awarded to it through contracts with private entities. If the State production company believes it is appropriate to associated with private entities, the National Hydrocarbon Commission shall extend a tender, subject to the guidelines stipulated by the Secretary of Energy and the Secretary of the Treasury and Public Credit.

15 Estimates for this section were made by Heberto Barrios Castillo, advisor in the Senate of the Republic from the PT faction.

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