MOGR recently interviewed Iván Alemán Aleksei, Chief of the Legal Unit at Mexico’s Energy Ministry. Below are some excerpts from this interview regarding the myths of the Mexican Constitution.

Q: Could you help us clear up the realities and the myths behind the 27th and 28th Articles of the Constitution in terms of national and international participation within the Mexican oil and gas industry?

Iván Alemán Aleksei (Image courtesy of diariojuridico.com.mx)

Iván Alemán Aleksei (Image courtesy of diariojuridico.com.mx)

A: The reality is that all hydrocarbons found within national territory and subsurface are property of the nation and it will continue being this way. This will not change and it is the same everywhere in the world. There is a big myth that, by the act of opening certain activities within the industry, the resources will stop being owned by the nation. The important breakthrough here is to design a scheme under which Pemex is allowed to arrange different types of agreements with private companies, even when the NOC maintains control of the resources. These are the kind of amendments to the Constitution that should be discussed.

Another important subject to be debated is whether Pemex should become a decentralized organism. If it is decided that Pemex should act more business-like, it should then be established as a business, from the judicial standpoint. This is also a Constitutional reality: only decentralized organisms can perform strategic activities. Therefore, to drive a state-owned company such as Pemex towards the execution of crucial activities, the Constitution would have to be modified.

On the other side, the strictness of our regulation is also a myth. In the US, for example, legal security of individuals is profoundly advocated, restricting the modification of the terms of concessions earned. If we were as strict as we vow to be in Mexico, the same thing would happen: openness in the shale gas market would mean that the government could not modify terms in a concession and would necessarily have to keep certain standards and law requirements to validate its strictness. Our legislation is not strictly closed; it actually allows many variables and options, but only if we know how to exercise that freedom. If we do not take advantage, the results will still be the same, and reforms will continue to be the central issue of the conversation.

Q: One of the perceptions within Mexicans is that if privatization is allowed in the national industry, Mexico will lose its sovereignty. What is your perspective on this?

A: This is definitely a myth. The new government will submit a Federal Budget proposal formed mainly of contributions charged to Pemex on its extraction and export activities. Those activities result in the Mexican benefits, not on Pemex financial results. Pemex revenues as a decentralized organisms are part of a different thing. Any company that extracts oil pays a certain tax percentage and earns a profit or a loss. Those tax contributions that oil companies pay conforms the Federal Budget.

Therefore, it would be exactly the same deal if Pemex would extract the hydrocarbon and ended up selling it locally or through exports. The only variation from these two scenarios is that, if hydrocarbons are sold within the country and the subsequent activities of refining, transport, storage, and distribution take place within Mexico, it would bring more national wealth in the form of job creation than if it is exported in its crude form. If oil was always exported, the main business in the industry would only consist in extracting and trading hydrocarbons, which by themselves, would maintain the sovereignty of the country.

A: With the inclusion of ISCs, international companies are further allowed to work in oil extraction projects. What is the difference between this and privatization?

A: What this new contracting model adds to the previous one are supplementary components in the economic structure of the contract. At the end of the day, these agreements are still service contracts: the only thing that Pemex is doing through them is to pact with outsourced companies to help them in the completion of its business, which has always happened. The difference relies in that the law now recognizes certain stimuli in reward of good performance of the service companies, plus additional alterations when that performance involves technological progress and production advancement.

In the strictest sense, this is not a privatization, but a service providing contract. Privatization implies that the only ones allowed to extract and exploit hydrocarbons would be private companies, and not state-owned companies. It is important to differentiate between this and the fact that Pemex leans on outsourced companies to improve efficiency in its operation. The only debate within these contracts is the remuneration schemes and the incentives implied. Obviously, due to the regulatory framework constraints, companies cannot be paid in hydrocarbons. That does not mean that their effort should not be recognized and a payment scheme established that rewards or penalizes them on performance.

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