Mexico opens energy sector to foreign investors

During a ceremony at the presidential residence Los Pinos in Mexico City, Mexican president Enrique Peña Nieto announced a new proposal for the nation´s energy reforms on Monday the 12th of August. The sweeping proposal already represents the country´s biggest economic overhaul and basically implies that Mexico´s historically closed energy sector should be opened up to foreign investors like BP PLC, Royal Dutch Shell and Exxon Mobil.

The initiative entails among others the amendment to two key articles in the Mexican constitution, notably articles 27 and 28, which ban certain contracts and allow the state to be mainly in charge of the oil and gas (exploitation) industry. An amendment would give private companies a chance to participate to the oil sector by means of negotiating on lucrative profit-sharing agreements with the government to drill for oil and gas and are also entitled to a share of the profits. Ultimately, this would facilitate foreign investment to enter the country and cushion the sliding oil output.

One of the main goals of this proposal is to eliminate obstacles to economic expansion, which includes the staggering energy sector due to a growing demand and a deflating supply that spurs Mexico to increasingly import from other countries. According to the Financial Times, Mexico is already importing half of its gasoline from the U.S. As a result, national companies are charged with 25% more for electricity compared to other countries, which affects their competitive position on the world market.

It goes without saying that these plans have caused some commotion and division of public opinion, especially in Mexico. Financial Times highlights a survey conducted by Mexican University CIDE (Centro de Investigacion y Docencia Economicas) saying that 65% of the Mexicans is against private investment in the state-owned oil monopoly, PEMEX.

Since the oil and gas sector was nationalized in 1938, this controversial energy proposal is also causing political conflicts. The left-wing Democratic Revolution Party opposes the energy proposal, whereas Nieto´s ruling party, the Institutional Revolutionary Party and the National Action Party already announced they will support the initiative, which would eventually still result in a sufficient amount of votes to pass the proposal.

If the reform will be enacted, this will represent the largest private sector in 75 years in Mexico that opens up to the international market and it appears to bring new opportunities to foreign enterprises looking for investment opportunities in Mexico.