Mexico’s Energy Policy in NAFTA – A Game Changer

I. THE MEXICAN GOVERNMENT WILL CERTAINLY NOT PROCEED FURTHER TO PRIVATIZE THE STATE-CONTROLLED OIL PRODUCTION COMPANIES.

<<<<<<< PEMEX is the jewel of the Mexican energy industry. To lose it would be a bitter blow for the Mexican establishment. In contrast to many Western countries, oil and other natural resources are regarded as state property. The new left-wing Mexican government makes all this even more likely. >>>

Mexico recently elected a new government to the national parliament that is less liberal in terms of its economic outlook. The signs are not good for an early privatization of  PEMEX, precisely because of the leftist attitude of the new government. While the previous government would have allowed some degree of privatization, the new government does not see privatization as a key objective. Also one has to take into account that Mexico will still have enormous oil reserves in the coming years, even if production rates continue to fall. This inevitably leads us to conclude that it will be less attractive for American investors to invest in the Mexican oil fields, because they need more and more capital, to be invested in the oil fields that still have an adequate return-on-investment for them. Capital must also be invested to maintain the production rate or flow rate of the oil field.

In the event of privatization of PEMEX by the Mexican state and its release to foreign investors, the United States is expected to be the largest beneficiary. But this is the crux of the matter, that Mexico wants to let American investments flow into the Mexican oil sector when it is no longer worth doing so when Mexico won’t be able to operate these oil fields herself. Whether this calculation will work we will know in the coming years.


II. MEXICO’S ENERGY POLICY IS DETERMINED BY NAFTA

<<< NAFTA is currently being renegotiated, which could also burden relations between Mexico and the United States. >>>

It is more than likely that the amendments to the North American Free Trade Agreement will also affect the energy industry and energy trade between Mexico and the United States, and will have an impact on energy exports. Mexican oil exports will certainly be affected, in one way or another. It is also likely that American oil investors will find it harder to invest in the Mexican oil market. Overall, opportunities for American investors to invest in the Mexican energy market will be limited.


III. EXISTING RISK OF TERRITORIAL CLAIMS BETWEEN MEXICO AND THE UNITED STATES

<<< Between Mexico and the United States, there are still ample border disputes in the Gulf of Mexico about who is allowed to tap the energy reserves near the state border. >>>
Most of Mexico's remaining oil reserves are located in the Gulf of Mexico, a body of water controlled by the United States. The fact that there are energy reserves in the Gulf of Mexico is enough to fuel conflicts about who owns the energy reserves, especially those oil fields where affiliation is not clear. >>>

IV. ENERGY COOPERATION BETWEEN THE UNITED STATES AND MEXICO

<<< One of the major advantages of privatizing the Mexican government's stake in PEMEX would be its geographical proximity to Houston, Texas, which is a world leader in oil production and processing, including oil refining. >>>

Because the city of Houston is so close to the Mexican border, there are real logistical advantages in terms of moving oil across the border. Mexico’s oil fields are also close to the border. Both countries would complement each other very well in oil production and processing, especially as Houston has some of the finest oil refineries in the world.


V. My general impression on Mexican energy policy, especially Mexico’s oil policy

<<<< Mexico's energy policy is strongly oriented towards NAFTA and the energy policy of the United States of America: In my opinion there are many good reasons why the Mexican government should push ahead with the privatization of PEMEX right now and not only in a few years when it is no longer worthwhile to make the investments due to the remaining lifespan of the oil fields. At the moment it still makes sense to invest in the Mexican oil fields. >>>

 

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