The proposals for reform hold great potential in terms of helping Mexico establish Pemex as a global leader in the oil and gas industry. However, the constitutional changes will not spell out exactly how foreign oil and gas investment in Mexico will proceed. The Proposal drafted by the current administration refers to ‘profit sharing’ agreements with foreign oil and gas companies that allow them to receive the cash equivalent. As certain analysts points out, ‘profit sharing’ is not a term used in the oil and gas industry for contract agreements, unlike ‘production sharing’. This has left many potential investors reaching out to specialized consultancies to help them understand what exactly profit sharing would imply.
To add to the complexity of the situation, there is the question of how the SEC and other regulators will interpret Mexican law. Unless foreign investors are able to list profit-sharing agreements with Pemex as reserve holdings, the proposed reform will not be successful in attracting the much need capital injection into the sector in Mexico. Investors in oil and gas are not interested in profits, instead, they place a high value on physical reserve assets and their potential for future production.
Furthermore, the series of secondary laws could take some years to be implemented. There is therefore a huge element of uncertainty around the reform, and given the disappointments of past reforms falling short of minimum expectations, international investors are not holding their breath. According to a recent survey, 65 percent of Mexicans oppose opening up the oil and gas sector to foreign investment. This number is not surprising when one takes into account the fact that oil is deeply anchored in the nation’s history, and the political element in the energy reform debate holds great influence. PRI’s proposal, which offered something of a middle ground between PAN’s liberal proposals and PRD’s proposal for minor fine tuning to Pemex, seeks to convince the nation that they are proposing a conservative solution to modernizing the NOC. However, it is this very intention to soothe the nation’s political anxieties that could cause the proposed reform to become a catastrophic failure, as strategic decisions in the energy sector are based on political reasons and objectives, rather than sound economic sense. The target of increasing natural gas production by 25 percent by 2018 is a perfect example. This objective makes no economic sense in the current environment, when the US is offering the cheapest prices in the market for natural gas.
Unless the decision is made to start running Pemex as a proper corporation with the objective of constantly adding value to shareholders, the reform will not have a positive impact on the industry. One proposed solution is to create a totally new company with a majority stake held by the State, and the rest floated on the stock exchange to raise much needed capital. This would show that Mexico is fully committed to developing a competitive local environment and offer some level of satisfaction to international players that State intrusions would be limited.