How Mexico Can Restrike Oil

How Mexico Can Restrike Oil/Raul Gallegos is the Latin American correspondent for the World View blog.

Bloomberg |17-12-13

The far-reaching energy reform that Mexico’s Congress approved on Thursday was overdue, but it’s not enough to repair the damage caused by the state’s 75-year monopoly of the oil sector.

Politicians intent on modernizing the country’s crippled oil business will need to make the sector more transparent, strike deals with oil companies that are advantageous to Mexico, and convince leftist opponents — namely supporters of the Democratic Revolution Party, or PRD — of the benefits of reopening the industry to foreign investment.

They’re certainly not on board yet. The PRD has called for an energy-reform referendum. People arguing that the law is a giveaway to U.S. oil companies protested before the bill was passed and continued their demonstrations over the weekend as several Mexican states approved the law. In Yucatan, PRD lawmakers carried signs demanding an end “to the privatization” of state-owned oil company Petroleos Mexicanos — despite the fact that not a single company asset is actually for sale. Nevertheless, by Monday, the reform had been given the nod by 17 regional legislatures, allowing it to become law.

The matter brought out the worst shenanigans of the country’s radical left. On Dec. 11, PRD lawmakers, along with those from other movements, tried to stop the vote in the chamber of deputies; they locked the doors of the chamber, damaged the hall’s sound system and other equipment, and displayed a banner that read “Traitors.”

Homero Nino de Rivera, a deputy for the reform-supporting National Action Party, had to sneak past protestors into the main legislative building dressed as a police officer; he posted a photo on Twitter with the message: “And here I am dressed up as a cop to access my workplace. Amazing!”

On Thursday, Karen Quiroga, a PRD deputy, punched Landy Berzunza, a pro-reform colleague, scratching her left cornea. Quiroga justified the assault as a reaction to her despair over the reform. “I ache for Mexico. I ache too much,” she was quoted as saying in Mexico’s Reforma newspaper. She later apologized, but Berzunza has vowed to sue.

In addition to violence, there was nudity. Antonio Garcia Conejo, a PRD deputy, stripped down to his underwear during Thursday’s legislative session. “You are stripping the nation bare” with the energy reform, he said. What Garcia and his colleagues’ antics really laid bare was their ignorance.

Mexican actors and artists skeptical of the reform, including actor and director Gael Garcia Bernal, also did their part. In a campaign dubbed “El Grito Mas Fuerte” (“the strongest shout”), top artists backed the PRD’s referendum idea, demanding in a video: “I want to be asked.” Mexican journalist Carmen Aristegui insisted in a Friday column in Reforma that civil society has been largely absent from the energy reform conversation: “A reform that will change the face of Mexico. And where is society?”

Regardless of how loud they can shout, those who stand by Mexico’s obsolete oil nationalism are failing their country by blocking the investment and technology needed to fully develop the oil business. Leftists believe they can roll back the reform “under the idea that in our country, dogma beats reason,” Sergio Sarmiento wrote in a Friday column in Reforma.

Mexicans’ almost religious devotion to a state-controlled energy sector makes them resistant to change. In fairness, given a history of political reforms that have only benefited a select few, their doubt is understandable. Conejo, the lawmaker, compared the energy reform to Mexico’s controversial privatization of the once-state-owned Telefonos de Mexico SAB de CV, which was sold to billionaire Carlos Slim and his partners. The telecom company, now the landline unit of Slim’s America Movil SAB de CV, helped turn Slim into the world’s second-richest man, as measured by the Bloomberg Billionaires Index; it has also saddled Mexicans with some of the highest phone rates among member countries of the Organization for Economic Cooperation and Development. Comparing the privatization of a state monopoly to opening the energy industry to foreign investors may be flawed, but it illustrates why so many Mexicans remain skeptical.

Mexico’s new energy legislation makes clear that the oil held underground belongs to Mexico alone. But corrupt politicians could still give companies an easy pass by signing off on extremely beneficial contract terms or charging companies low taxes and royalties, hurting Mexico’s interests in the process.

President Enrique Pena Nieto and his allies have a difficult balancing act to pull off. They must offer oil companies attractive enough returns to make them willing partners in developing Mexico’s oil wealth while retaining good enough equity stakes in joint projects to benefit Mexicans. They must ensure that subsidies and other regulations — such as forcing foreign oil companies to hire Mexican workers and source from Mexican suppliers — don’t become obstacles to growth, as they have in Brazil’s oil industry.

Instead of holding back Mexico’s reform through meaningless antics, leftist politicians should assume a watchdog role and ensure that the government strikes the best, most transparent deals possible with foreign players.