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Official Confirmation of Former Energy Secretary as Mexican President-Elect is Welcome News for Potential Investors

Published: 9/7/2006
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The confirmation of Felipe Calderón of the National Action Party (PAN) as Mexico's president-elect will be welcomed by those calling for the reform of Mexico's state-controlled oil sector.

Global Insight Perspective

 

Significance

The confirmation of Felipe Calderón of the National Action Party (PAN) will be welcomed by investors as Calderón's policy programme for the energy sector was more investor-friendly than that of his main rival the populist candidate Andrés Manuel López Obrador (known as AMLO, of the Democratic Revolution Party—PRD), who opposed any kind of foreign investment in the oil sector.

Implications

The main energy challenge facing Calderón following his inauguration in December will be introducing reforms that ease the financial pressures on Pemex and permit increased investment in exploration and production (E&P) to maintain current production levels over the medium-to-long term.

Outlook

The state oil company Pemex's monopoly over oil E&P is so ingrained in the national psyche that no party, irrespective of its political leanings, would consider its privatisation. Furthermore, although Calderón is in favour of allowing Pemex to form alliances with foreign companies for deepwater exploration, any opening to foreign investment is likely to be limited (and conditional on congressional support).

Election Outcome was Critical for Mexico's Energy Outlook

Mexico's top electoral court the Federal Electoral Tribunal (TRIFE) on Tuesday brought a formal end to the legal contest plaguing the Mexican presidential election of July 2006 and proclaimed Felipe Calderón as Mexico’s president-elect. The decision effectively closed the legal channels for leftist candidate AMLO to contest Calderón's narrow victory. In a sign that the electoral court's decision could mark the start of a new chapter with a greater spirit of cooperation to heal the recent political rifts, Pemex's oil worker's union (traditionally aligned to the Institutional Revolutionary Party—PRI) yesterday placed advertisements in national newspapers expressing its support for Calderón.

Although confirmation of Calderón's victory will not have come as a surprise, the news will still be welcomed by investors in the energy sector. As a former Energy Secretary in the Vicente Fox government Calderón was the presidential candidate with the most direct experience of the energy sector. He had also been regarded as the candidate likely to introduce the most far-reaching reforms to open up the sector to greater private investment. In his electoral platform, Calderón indicated that he plans to keep Pemex as a state-owned petroleum company, but proposes allowing Pemex to form strategic alliances with other companies to enable it to acquire new technologies for deepwater drilling. Calderón also indicated that he would back further tax cuts for Pemex and is in favour of public-private refining ventures.

By contrast, under a government headed by AMLO, foreign companies would have remained locked out of the oil sector, and the current legal framework would have remained unchanged. The PRD would also have been opposed to issuing shares in Pemex as a means of injecting fresh capital into the company. Instead, increased investment aimed at offsetting production losses from the Cantarell complex and increasing the oil-reserve-replacement ratio would have been funded through reforms to “modernise” Pemex. In particular, the PRD candidate had planned to make savings by eliminating corruption within the company and gradually reducing the taxes it pays to the government.

Outlook and Implications

Mexico's oil sector is at a critical point. There have been warnings that Mexico risks losing its status as a net exporter without new investment to improve its medium-to-long-term supply outlook (see Mexico: 10 May 2006: Mexican Oil Sector at a Crossroads). Pemex's oil output rose during the first three years of Fox's administration, but stabilised at around 3.3 million barrels per day (b/d) between 2003 and 2005 and is now falling. Recent monthly output data for Mexico's main field, Cantarell—which has in recent years accounted for a large share of the country's total production—has indicated that the field is declining faster than Pemex's official predictions. Data released by the Energy Secretary showed that production from the Cantarell field fell by 13% to 1.74 million b/d in June 2006 from the same month in 2005 and again in July to 1.71 million b/d. In addition, Pemex's heavy fiscal burden and the constitution's bar on foreign companies holding oil E&P concessions continue to act as deterrents to greater investment in boosting both reserves and production. Prospective reserves in deepwaters of the Gulf of Mexico (GOM) are seen as a ray of hope, but Pemex does not have the financial or technical capacity to develop them on its own.

Although Calderón is probably the most capable of July's three presidential candidates to confront these challenges, his task will not be easy. Fox's earlier struggles to pass his reform agenda through Congress will provide a warning to his successor. Although the PAN secured the largest representation in Congress at the legislative vote of July 2006 (206 out of 500 seats in Congress and 52 seats in the Senate), it will not have the two-thirds majority needed for the passage of constitutional amendments. This means that the new president will be forced to broker intra-party alliances to secure the approval of any future energy reform. The political turmoil of the past two months also means that he will be forced to incorporate some elements of AMLO's policy platform, especially on poverty reduction, if he is to form a government of national unity and reduce the risk of further street protests.

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