Mexico’s oil reforms: transparency now or never?

A few weeks ago we released the Spanish translation of Oil contracts: how to read and understand them, which we hope will bring some degree of clarity to the subject for our friends in Latin America and elsewhere. The publication is timely, coming just as one of the region’s most important petroleum producers, Mexico, pushes through reforms to end the 76-year monopoly of its national champion, Pemex.

It’s telling that much of the feedback we have received on the Spanish book so far comes from Mexico, because the reforms offer a potential leap forward for oil contract transparency. It would be a shame if this opportunity were missed.

The constitutional reform bill says that legislation implementing the reforms will regulate the “inclusion of transparency clauses in contracts that allow any interested person to consult them”, while also calling for external audits of costs and revenues and disclosure of payments for services received (Transitory Article Nine). And according to the Atlantic Council, the government has indicated that citizens will be able to audit all fiscal flows between the government and companies.

If the laws implementing the reform retain these transparency provisions, it could be a game changer for many of us in the contract transparency movement. Our work tends to focus on countries with large private sector contracts – places like Iraq or Libya, Nigeria or Azerbaijan where private companies enter into contracts with state-owned firms. Environments in which a state-owned giant controls everything, like Saudi Arabia and the Gulf states, or like Mexico until a few months ago, tend to be information poor and pretty much immune to the influence of civil society.

With any luck, the oil reforms in Mexico will make our work more actionable there. The reforms enshrined in the Mexican constitution in December lay the groundwork for a new contractual regime, and with new contracts comes a new opportunity for transparency – that’s where we hope Contratos petroleros. Cómo leerlos y entenderlos finds its niche. We think the book will add to the sense of urgency in the transparency community in Mexico, with an eye on the new commercial opportunities there.

This isn’t so much about Pemex’s stalwart fields like Cantarell and Ku-Maloob-Zaap, which contribute more than half of Mexico’s oil production, and which the state company will probably get to keep. It’s about the deep offshore and shale deposits Pemex has yet failed to exploit. Once implementing laws are passed and licenses allocated, billions of dollars in private money will flow in. Surging deepwater production in the US Gulf of Mexico offers a hint of what may lie under Mexican waters, while the shale-rich states of Tamaulipas, Coahuila and Nuevo León also seem to beckon. Half of the Eagle Ford shale deposit, for example, is Mexican; the other half, in Texas, is already producing more than a million barrels per day.

History may not be much of a guide, though, to understanding how these reforms and the resulting commercial feeding frenzy might play out. What’s happening in Mexico right now is pretty much without precedent. A hundred years of history are dotted with oil industries nationalized: think of OPEC and resource nationalism in the Arab world in the 60s and 70s, and before that Mexico itself in 1938. There aren’t many cases of national monopolies suddenly opening up and letting private players in. The Russian firesale privatizations of Gazprom and Rosneft in the early 90s don’t offer much insight, since the entire political-economic system around them was in collapse. Neither do the partial flotations of other state oil companies offer many clues, like Colombia’s Ecopetrol and Brazil’s Petrobras, the latter of which attracted $25 billion in private sector bids in 2012. For all Pemex’s structural reforms, its CEO will still serve at the pleasure of the Mexican president and the company will remain wholly state-owned.

We’ve also never seen reforms happen so incredibly fast. Last August it was still a mystery to most people what the reforms might look like. It sufficed for The Economist to call Pemex ‘unfixable‘, lament the company’s overtaxation by the government and its poor investment decisions that compounded the need for reform. Fast forward to December and the Mexican Congress was putting the finishing touches on amendments to three articles of the constitution, shortly before enshrining them in law with the approval of a majority of Mexico’s 31 states. That was phase one. Phase two, which we’re now in the middle of, includes the passage of implementing laws during the legislative session that runs from January to June 2014. At the same time Pemex will seek to retain some or all of its existing exploration and production areas to form its asset base in the so-called ’round zero’, followed by the first competitive auctions for license areas, occurring a year or so after implementing legislation is passed, probably in mid-2015.

Just how fast is that? Think about it this way: in Nigeria, the first draft of the reformist Petroleum Industry Bill came out in 2008. Six years of bitter debate later, the law has yet to pass.

Of course, Mexico’s political environment is very different from Nigeria’s. Reform at that speed is possible partly because the stars have aligned for President Enrique Peña Nieto’s governing party PRI, which pushed the reform through with the help of PRI governors in 20 of 31 states and with the PAN party, PRI’s main partner in pushing the reforms, controlling a further six states.

The next couple of months will tell us a lot about how ‘open’ Mexico’s future oil sector will be in transparency terms. Many in Mexico are skeptical about official overtures to good governance, suggesting they may be more about the Peña Nieto government’s reputation management abroad than meaningful reform at home. And indeed, we won’t know the details of the disclosures called for in the reform bill until the government passes implementing legislation. But if these provisions are backed up in the new oil law, civil society may have more data to work with than in the past.

We hope the Spanish contracts book serves as a call to action for those with a stake in what contracts the Mexican government eventually makes available. We’ll be keeping an eye on developments there and welcome collaboration on work in Mexico going forward. Until then, feel free to circulate the publication and send any feedback to amrit.naresh@openoil.net.

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