Continue shopping “Zama and the Failure of Mexico’s Energy Reform (Market Comment 116.1, portfolio edition)” has been added to your cart.
Carlos Salinas, a son of a former cabinet minister, was elected president on July 3, 1988 but with the broadly held suspicion of electoral fraud. His chief opponent, Cuauhtémoc Cárdenas, had been ahead in the voting returns earlier in the day when the government announced a computer system crash. When the computers came back up, Salinas had won. The Interior Ministry which oversaw the elections, was led by Manuel Bartlett (the current director-general of CFE).
Inspired by the success of the European Economic Union, a Canadian-U.S. free-trade agreement was negotiated under President Ronald Reagan and concluded in 1988. President Salinas and President George H. W. Bush on June 10, 1990, endorsed a bilateral trade agreement. Canada joined in 1991.
To promote its cause before a skeptical American public, Mexico’s finance ministry reclassified Mexico’s national trade accounts for exports to include what, previously, had been “border transactions” (of maquiladora assembly plants). By the reclassification, Mexico’s trade with the United States surged after 1991, making Mexico its “2nd largest” trade partner (after Canada). By our analysis, both rankings reflected intra-company trade (Ford-Canada exporting to Ford-U.S.), not true exports
A preliminary agreement was reached in August 1992, and signed by the three leaders on December 17. It was ratified by the three legislatures in late 1993 and came into force on January 1, 1994.
Throughout the negotiations, President Salinas insisted that “oil was off the table.”
At some point between August 1992 and December 1993, Mexico introduced a ten-year, declining tariff on natural gas, starting at 10%. “The tariff,” in the words of Pemex Director General Adrián Lajous, “would give Pemex time to prepare to compete.”
Based on conversations we have had with members of the three delegations that negotiated the terms of NAFTA, a Mexican tariff on natural gas imports was never discussed.
But as MidCon Gas pipeline developers would soon discern, the intent of the tariff was to serve as a barrier against private competition in natural gas transportation pipelines. Pemex threatened the prospective anchor customers in Monterrey with retaliation if they were to support the Texas-Monterrey pipeline that Midcon was proposing. “If you import gas from MidCon, you’ll pay an extra 10%; but if you continue to buy it from Pemex, we’ll absorb the cost.”
Lacking an anchor customer, the project was about to be canceled when Pemex offered to contract for long-term capacity on the future pipeline (currently operated by Kinder Morgan, Inc. Since then, no other pipeline developer has sought anchor customers in the private sector.
Ernesto Zedillo came to the presidency as the last-minute substitute-candidate of the PRI, owing to the assassination of Luis Donald Colosio ten weeks before the scheduled elections on July 3. Three weeks into his presidency, on December 21, 1994, Mexico abandoned the exchange rate band and allowed the peso to float freely. (We were told by a former official in the Finance Ministry at the time that this publication of this article on December 19 aggravated the capital flight that led to the devaluation of the peso two days later).
In 1999, the Zedillo administration reduced the 1994 declining tariff on natural gas to zero, three years in advance of the ten-year term. In the Energy Ministry, led by economist Luis Téllez and political scientist Lourdes Melgar (both with Ph.D.’s from MIT), unveiled an ambitious plan to restructure the electric sector. “The table was set” (it was said) for his successor to implement the plan. Some of the ideas were implemented but not until the Electric Industry Act of 2014.
On election night, July 2, President Zedillo made an unscheduled appearance on national television and–before all the votes had been counted–declared that Vicente Fox had been elected president.
On December 20, 2013, the Diario Oficial, the government’s federal register of acts of State, included amendments to constitutional articles 25, 27 and 28, with a lengthy transitional article that delineated the responsibilities of existing and new federal agencies. On August 11, 2014, some twenty laws were promulgated, which, taken together, amounted to hundreds of pages. The laws permitted private gasoline branding and private equity investments in oil and gas properties.
The National Hydrocarbon Commission (CNH) was restructured as the agency that would conduct international auctions of oil leases. The first lease auction was held on July 15, 2015. In the most contested block, Area 7, a near-giant oil reserver, named Zama, would be discovered.
Responding to a complaint voiced for two decades by natural gas pipeline companies and exporters, Pemex divested its natural gas pipeline system, which had been suspected of collusion with its gas marketing division. The ownership of the pipelines was transferred to a new system operator for natural gas (called CENAGAS). Pipelines workers remained Pemex employees.
A Hydrocarbon Safety Agency (ASEA) was created with the mandate to provide public oversight from the well tip to the gasoline pump. (The Macondo-1 oil-spill had happened only four years earlier.) The agency’s budget was not sufficient to hire and train safety inspectors; so, consultants were recruited. A National Hydrocarbon Fund was also established to provide transparent accounting of revenues and payments.
The market design for electricity underwent a major change in the generation segment. First, the system operator (named CENACE), which had been a department within CFE, was made into an independent agency. Second, the dispatching rules were based on “economic merit,” meaning the generator with the lowest cost was dispatched to the grid first, a rule that favored renewable power sources and penalized CFE’s coal and diesel plants. The transmission and distribution market segments remained closed to investors.
Having defeated a PRI presidential candidate for the first time in 70 years, Vicente Fox came to the presidency with the political capital sufficient to make major changes in the energy sector. On December 6, 2001, Pemex hosted a breakfast in the Hotel Nikko for 600 guests. Energy Minister Ignacio Pichardo spoke, as did one or two constitutional experts who opened on the scope of Article 27 in matters related to hydrocarbon. Luis Ramírez Corso and other Pemex brass presented the new, and eagerly awaited market opening. Instead of a market design in which companies would be rewarded according to the volumes of oil and gas discovered and produced, they would be paid according to a price list for specific tasks ($/foot drilled, for example) associated only with natural gas production. A company would be paid, however, only if there were sufficient funds in escrow account from the sale of the natural gas for which the contractor is accredited. Oil was not included in the contract. No major American or European company discerned an investment opportunity in the so-called “Multiple Service Contract” (MSC).
Despite its commercial unattractiveness, the MSC model was the first to introduce a commercial framework by which a private party could be paid, contingently and proportionately, on its success in natural gas production. That said, it was arguably in violation of the sixth article of the Petroleum Act of 1958, which prohibited contracts payable according to the results obtained (and which would not be abrogated until 2014).
In the electric industry, the Fox administration published regulations that would be challenged in the Supreme Court, which issued what may have been its first (and only) ruling against a presidential decree.
The Energy Reform of 2013-14 was supposed to have happened in 2008, Early in the year, the government urged the exploration of “Our treasure,” in deepwater reservoirs, and for which partnerships with companies that had the “new technologies” were needed. Most of the markets for equity investors stayed closed on account of opposition by PRI and PRD; but by inserting a dubious notion into the Pemex law, contractors in mature fields could be paid in proportion to their achieved level of production above a projected decline. The bidding rules included a technical tie, declared when two or more bids with within 2% of each other.
A consolation prize was the creation of the five-member National Hydrocarbon Commission (CNH) to provide public oversight of Pemex. Renewable energy generation was also promoted.
President López Obrador speaks of the “so-called ‘Energy Reform'” as an ill-conceived attempt to diminish the market presence and finances of the state energy companies. He suspended the oil lease auctions and the long-term power auctions, among many other measures to reset the oil and power markets.