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Mexico Has Reformed Its Energy Sector, Now What?

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By Dwight Dyer

MEXICO CITY – When Mexican President Enrique Peña Nieto signed into law the enabling reforms for his country’s energy sector last month, it marked the fulfillment of a campaign promise two years in the making. Although Mexico’s Congress last year agreed in principle to the reforms, the secondary laws passed last month actually define the parameters for the reshaped energy sector. Their passage is effectively the green light for private investors—both foreign and domestic—to enter the Mexican energy market.

So what happens next? A number of things all at once. The reforms themselves must be implemented and that means laying the ground rules and sign posts for private investment. Two days after Peña Nieto signed the enabling legislation, the National Hydrocarbon Commission announced which oil fields would be assigned to the state-owned oil company Pemex, which will retain the lion’s share of the country’s proven reserves, and by default which ones would be left to private companies. The first set of these blocs—which may require more expertise and greater investment to access—will be available in an initial bidding round next year. Mexico will also begin shoring up the regulatory bodies that will oversee the changing energy sector— new administrative councils for the Federal Electricity Commission and Pemex are set to be announced in late September or early October and the heads of the National Control Centers for the electric power transmission and distribution network and the gas pipeline network and for the Industrial Safety and Environmental Protection Agency were made known earlier this month

Yet even as wheels of bureaucratic change begin to spin, several challenges begin to loom on the horizon. The first is Mexico’s political left, which opposes the reforms and will continue seeking opportunities to backtrack. Two separate leftist political parties are backing popular referenda to overturn the reforms, but neither is likely to result in a reversal.  A more worrisome stumbling block is the federal courts’ absolute lack of experience in the energy sector. Not only is the regulatory framework still somewhat of a work in progress, prone to legal challenges, but also the Mexican judicial system is likely to give in to body English from the former state monopolies.

Official corruption could be another stumbling block. After Peña Nieto’s State of the Nation address earlier this month, his political opponents were quick to point out that his announced infrastructure investment will do little to spur the economy unless the country manages to rein in the pervasive corruption that hampers all levels of government. This will pose a challenge for new players in Mexico’s energy sector, too. Energy companies who are new to the market will need to learn how to navigate the Mexican business climate without running afoul of the Foreign Corrupt Practices Act, UK Bribery Act or other anti-corruption regulations. Patience will be a virtue. Efforts by all branches of the Mexican government to tackle corruption will move slowly, and change will likely come as too little too late for the current administration to make a difference before the end of the president’s term in 2018.

Perhaps the biggest question mark for potential investors in Mexico’s energy market is the security situation. Extortion and kidnapping are growing problems, criminal organizations in Mexico are powerful and well-resourced, and years of forceful government action have failed to stem the violence. These security threats are serious, but they are not unmanageable. Even if the Mexican government is unable to curb criminal activity, most players in the energy sector should be able to implement security programs that will adequately mitigate the threat.

Dwight Dyer is a senior analyst at Control Risks, an international political, integrity and security risk consultancy. For more analysis, sign up for a free trial of our Country Risk Forecast.