Perspective on the Energy Reform in Mexico

Written By: Dr. Mario Melgar-Adalid

Cacheaux Cavazos & Newton

There are different variables to the so-called energy reform in Mexico that one must be aware of in order to understand its current status and scope. Since the announcement on August 12, 2013 by the government of President Peña Nieto, this issue has held the attention of the country and that of broad international sectors that understand the economic impact for the global petroleum industry from such a modification to the Mexican position on this issue, which position currently adheres to a nationalist tradition and resistance to change. In the end, the Mexican Congress will have the last word, and it has now received two formal initiatives for constitutional reform. The first initiative was presented by legislators of the National Action Party (PAN) and the second was that of President Enrique Peña Nieto. Both initiatives seek to modify the text of the constitution and achieve greater openness in the petroleum and electric energy sectors. As expected, the Institutional Revolutionary Party (PRI) has embraced the Peña Nieto initiative for reform as its own. Various members of the Party of the Democratic Revolution (PRD), each acting on their own behalf and without there being an official position on the matter by such party, have presented other initiatives, but in either case, have manifested their rejection as to the proposals by PAN and the President. It is highly likely that the President's initiative will be the focus of discussions in Congress. The latter is due to the fact that PRI has the majority in the House of Representatives and the Senate; however, such majority would not encompass the two-thirds vote required to modify the Constitution. Therefore, the participation of PAN is required to reach the qualified majority established by the Constitution for constitutional reforms or amendments. Furthermore, it is possible for certain PRD legislators and some members of the minority parties (the Green Party, and the Labor and Convergence Party) to join the President's initiative. Generally speaking, PAN and PRI have expressed the need for constitutional reform and eventual reforms to Articles 27 and 28 of the Constitution. On the other hand, PRD has announced that it does not believe it is necessary to reform the Constitution. The previous two positions have already been manifested in the media and academia. Everyone agrees as to the need for reforms, specifically as to the state-owned company Petróleos Mexicanos (PEMEX), in order to allow for the participation of domestic and foreign private capital in the petroleum and electric energy sectors. It should be noted that the debate has focused on oil, while the electric energy issue, which is also of vital importance, has been set aside, possibly due to the magnitude of the oil issue. A review of the initiative proposed by President Peña Nieto shows that the constitutional reform proposal adds a few sentences and makes minor deletions to the current text of the Constitution, albeit of great significance. On one hand, the proposal states that as to radioactive minerals, the State will not grant concessions or contracts. This same provision currently exists in the text of the Constitution, also establishing that as it relates to solid, liquid and gaseous oil and hydrocarbons, concessions and contracts will not be granted nor will those previously granted survive, and the Nation will carry out the exploitation of these resources in accordance with the terms provided by the Regulatory Law of Article 27 regarding oil matters. In reality, this Law is a law that establishes the powers and scope of the activities of PEMEX. The reform proposal does not mention this prohibition and simply states that "concessions will not be issued." Nevertheless, it makes reference to the respective Regulatory Law so that such can determine the manner in which the Nation will carry out the exploitation of such resources. The reform also addresses the Nation's exclusive control over the national electric system, as well as the service for transmission and distribution of electricity. The Constitution establishes that there will be no concessions, even when the State may enter into contracts with individuals in accordance with that established by laws that will determine the manner in which individuals may participate in the other activities in the electric industry.

The reform to Article 28 of the Constitution is akin to that of Article 27 with respect to electricity, oil and other hydrocarbons. It is proposed that in Article 28 the reference to oil and electricity as strategic areas in which the State exercises exclusive functions, be removed insomuch as the Regulatory Law will establish the terms for participation by individuals and how to exercise such functions in the oil, hydrocarbon and energy sectors. As a result, language is added stating that the State no longer has monopolies in such areas and that they will be subject to that established in the proposed reform to Article 27. There will be debate in Congress, and it is expected that such debate will lead to an energy reform that will generate greater economic growth and more jobs. The final reform arrived at must encompass three matters related to competitiveness: guaranteeing an efficient and timely supply of energy, combating exorbitant costs for electricity and natural gas that have an adverse effect on the productivity and provide for the application of taxes from oil and gas extractions to productive investment by PEMEX and not to operating costs, as is currently the case without the energy reform. The most important details will be found in the regulatory laws on oil and energy. In this sense, such laws are of constitutional relevance and, as a result, the authors of the Mexican doctrine (De la Cueva, Carpizo) have considered the regulatory laws to the Constitution as an integral part of such and as constitutional laws.

For more information about Dr. Mario Melgar-Adalid of Cacheaux, Cavazos & Newton, please visit www.ccn-law.com or the International Society of Primerus Law Firms.