In an excerpt from his exclusive interview with Mexico Oil & Gas Review 2016, Mauricio Herrera Madariaga, Executive and Administrative Coordinator of Fondo Mexicano del Petroleo sheds light on the purpose of the oil fund and erases all misconceptions that might exist surrounding its performance so far.
Q: Why did Mexico wait so long to open an oil fund, when most of the world’s oil-wealthy nations began their own in the 1990s?
A: Before establishing the Fondo Mexicano del Petróleo (FMP), Mexico had two existing funds, namely the Stabilization Fund for Budgeted Revenue (Fondo de la Estabilización de Los Ingresos Presupuestados), and the Stabilization Fund for Federal Entity Revenue (Fondo de Estabilización de los Ingresos de Las Entidades Federativas). These two existing funds are managed by the Ministry of Finance and have been relatively helpful in times when the federal revenue fell below what had been contemplated in the Federal Budget. In the future, even when the FMP’s long-term reserve is established, these Stabilization Funds (Fondos de Estabilización) will be the first line of defense in turbulent times. The funds from the FMP’s long-term reserve would only be available once all other resources have been depleted. Additionally, the Federal Government will only have access to the FMP long term reserve provided there has been a decrease, in real terms, of federal revenues for at least two years in a row.
Q: What is the role of the FMP?
A: Like most of the world’s traditional oil funds, the FMP is in charge of saving the country’s hydrocarbon wealth for future generations. This, however, is not its sole purpose, and this is where its objectives diverge from those of typical oil funds. The fund is also in charge of receiving and administering the revenues arising from Mexico’s hydrocarbons production, acting as a treasury within the oil scheme. The FMP has the obligation to transfer the revenues it receives from the country’s oil and gas operations following a decree that was established by law. Firstly, the FMP must make the payments due to the contractors that participate in E&P activities. Not only do we transfer the money to them, we are also in charge of calculating the payments due to them, which gives our fund a very unique operational framework. Next, the FMP must first make transfers to the stabilization funds, as well as to several funds that promote research in the sector. Once these transfers are made, the flow of resources will be directed toward the Federal Budget until a maximum of 4.7% of GDP is reached. The 3% threshold marks the limit after which the fund is allowed to make recommendations as to the spending of the oil revenue. Before that level, the government is granted discretion. All revenue received that exceeds 4.7% of GDP goes into a long-term fund intended for future generations.
Q: Why did the FMP fail to collect the percentage of GDP it aimed for in 2015?
A: I think there is a lot of misunderstanding in the industry when it comes to the operations of the FMP, and it is important to rectify this. At the beginning of each year, the fund assesses the percentage of GDP it will be able to receive based on an estimation of the oil price throughout the year. At the end of that same year, the fund then reassesses the revenue it collected taking into consideration the price of oil at the time of each transaction. Given the sharp drop in oil prices that the industry was experiencing at the time, it is no surprise that our final revenue and our estimates from the start of the year did not match up.
This is an exclusive preview of the 2016 edition of Mexico Oil & Gas Review. If you want to get all the information, plus other relevant insights regarding this industry, pre-order your copy of Mexico Oil & Gas Review 2016.