It is not often that Americans look south of the border for solutions, but Mexico’s President Enrique Peña Nieto seems to have figured out a few things in his first year of power that have, in six years, eluded Obama.
Late last month, Peña Nieto spoke at the World Economic Forum in Davos, Switzerland. There, he highlighted his first-year achievements: “a legislative consensus with the two major opposition parties on the transformations and structural reforms that the country needed,” reports Mexico City’s The News. He pointed out that this has been achieved “in a climate of plurality and diversity.”
A few months ago, with great enthusiasm, I wrote about Peña Nieto’s proposed energy reforms—something his predecessor had been unable to achieve. (President Felipe Calderon’s critics believed his proposals violated the constitution.) The reforms, passed on December 12, 2013, amend Articles 25, 27, and 28 of Mexico’s constitution to allow profit- and production-sharing contracts and licenses. The reforms also put an end to government monopolies in the operation of oil and gas fields, while maintaining the Mexican government’s ownership of the country’s resources.
“The current government’s ability to build coalitions puts Mexico on the verge of its biggest economic victory since the North American Free Trade Agreement,” states Arturo Sarukhan, who has served in Mexico’s Foreign Affairs Ministry.
The reform is important because one-third of Mexico’s federal budget—including healthcare, schools, and infrastructure—comes from oil wealth that has declined 25% since its peak just a decade ago. It has the potential to transform Mexico’s economy by inviting foreign investment, which Peña Nieto successfully argued is needed to “allow Mexico to capitalize on its shale oil and gas deposits.”
Because almost all of the profits of Mexico’s state-owned oil company, Pemex, have gone back into the national coffers—and not into research and development—Mexico lacks the technical expertise to exploit its unconventional resources and deep-water deposits. Even in Mexico, the era of easy oil is over.
Fluvio C. Ruiz Alarcon, an independent director at Pemex, explains: “It will be vital to improve its technological competencies if Pemex is to remain competitive. It will need firm partnerships with companies from other countries.” He adds: “Pemex will need to change from a public entity to a productive state enterprise.”
Not everyone is happy. The day the reforms were signed, protesters pounded on metal barriers with rocks and spoons. Riot police stood guard. Inside, Reuters reported: “Critics lamented the energy reform as an act of submission and the end of an era, tapping into the pride many Mexicans still feel over President Lazaro Cardenas’ move to expropriate foreign oil companies’ assets in 1938 and create Pemex.” More than 1.6 million signatures have been gathered on a petition demanding a referendum on energy reform.
Sarukhan believes “There will be challenges.” He says: “One will be making sure the victory which has been won can be translated into public opinion. Privatization is still a dirty word to many people. … The devil will be in the details, which will be worked out in the next few months.”
In a thorough discussion of the topic, titled: “Mexico’s energy reforms: can Mexico emerge as a prime global oil & gas industry expansion prospect?” Roman Kilisek posits: “Here a difficult balancing act needs to be struck: Mexico has to offer international companies attractive enough returns on capital employed to make them willing partners in developing its oil and gas wealth while retaining good enough ‘equity stakes’ in joint projects to benefit and placate Mexicans.”
The critical phase of drafting the laws to implement December’s energy reform bill began February 1. These laws will spell out the terms and conditions for foreign international oil companies to explore and develop Mexico’s deep-water and shale resources. OilPrice.com reports: Mexican Congress has 12 months to develop energy-related environmental regulations and to establish the National Center of Natural Gas Control and the National Energy Control Center.”
Peña Nieto’s energy reforms are not a sure thing, but he understands how important developing Mexico’s energy resources are to economic growth—something that seems lost to Obama.
In his Davos comments, Peña Nieto said that Mexico is committed to “conditions of security and legal certainty.” And that “we’re seeking to be more competitive.” These attitudes, combined with the ability to “build coalitions” should offer lessons to President Obama.
Another thing that could be learned from Peña Nieto is that lower energy prices are the key drivers of economic growth. His energy reform also tackles electricity.
While most of the focus on Mexico’s energy reform has been on the oil and gas sector, Peña Nieto’s plans also end the monopoly held by the national utility CFE. Mexico’s manufacturing and commercial customers currently pay a surcharge for electricity, while residential, agricultural, and service industry users’ rates are subsidized.
Barclay’s Marco Oviedo points out: “Mexican industry this year has paid 45% more for its electricity than factories in the U.S.” Even though residential customers’ rates are subsidized, they are still, according the Financial Times: “Among the highest in the 34-member Organization for Economic Co-operation and development.”
Francisco Salazar, head of CRE, the country’s regulatory energy commission, has called the high price of electricity in Mexico “a deterrent to investment.”
Reuters reports: About half of Mexico’s current electricity is generated from natural gas, up dramatically since 2000, when costlier, dirtier fuel oil was the major electricity fuel.” Despite its vast, albeit inaccessible with Pemex’s current technology, supplies—estimated to be one of the world’s largest shale gas resource bases—Pemex is building pipelines to bring cheap U.S. shale gas into Mexico.
The Los Ramones natural gas pipeline will bring natural gas from Texas’ Eagle Ford shale—which extends into Mexico and may be even bigger than the portion on the U.S. side of the border—into Mexico’s industrial heartland. Kilisek believes that it will take years for Mexico to unlock those reserves, “while facing a severe natural gas shortage in the meantime.” He says that by the time the Los Ramones pipeline is finished, “natural gas demand will have already outstripped the pipeline’s capacity.”
To meet the demand, Pemex is importing Liquefied Natural Gas at more than five times the price of gas in the U.S. Rafael Ch, an energy researcher with Mexico’s CIDAC think tank, says: “The main problem is that we just don’t have the capacity to meet our future electricity demand.”
Peña Nieto understands the need to build pipelines to bring the needed supplies into the country. Meanwhile, in America, we’ve been waiting for 5 years for the Obama Administration to approve the Keystone pipeline. Peña Nieto understands that lower energy costs will help his country be competitive. Obama’s policies have increased electricity prices—both residential and industrial—in the U.S.
Having just spent the past week in Mexico, where I observed many impoverished communities, I am keenly aware of the need for Mexico to lift its standard of living and increase economic growth, which Peña Nieto understands energy can provide. As America’s economic numbers slip, this, too, is a lesson Obama needs to learn.
A version of this article first appeared in TownhallFinance.com.