Enrique Pena Nieto was elected president of Mexico yesterday, restoring the country’s Institutional Revolutionary Party (PRI) to power after a 12-year hiatus.
Plagued by a history of authoritarianism, repression and corruption, the PRI had a spectacular fall from grace in 2000 after 71 years of uninterrupted governance. However, over the past decade, the rival National Action Party (PAN) has done little to endear itself to the Mexican population – the main two sticking points being an out-of-control drug war and lackluster economic growth.
That has opened the door for the PRI and the fresh-faced Nieto to assume power.
Between the two issues that got him elected, Nieto may find the economy easier to manage. That is to say, rather than take on well-financed and heavily entrenched drug cartels, it may be simpler to liberalize Mexico’s economy.
Modernizing Mexico’s economy would go a long way towards helping Nieto validate his campaign pledges to increase wages and make it easier for companies to hire and fire workers. It would also demonstrate the PRI is not the same party it once was.
After all, it was the PRI that nationalized Mexico’s oil industry in 1938, anointing the state-owned Pemex as the country’s sole producer and retailer. For decades, that decision has prevented Mexico from capitalizing on the full potential of its resources.
Mexico’s oil output declined by 25% between 2004 and 2009 before leveling off in recent years. And Pemex has struggled to find more reserves. But even now, the company is still prohibited from forming joint-venture contracts with third parties.
Here, Nieto is already telegraphing reform.
“Being hostages to that ideological position has stopped us from taking a much more audacious step and a greater opening up of the energy sector,” Nieto said in an interview with the Financial Times. “I think we should take it.
Pemex “can achieve more, grow more and do more through alliances with the private sector,” he said.
Nieto’s predecessor, Felipe Calderon, has already laid the groundwork for change in this arena. In fact, last month, Pemex awarded a handful of companies contracts to drill four mature oilfields in Mexico.
Schlumberger Ltd. (NYSE: SLB) and its U.K.-based partner Petrofac, were among the lucky winners, acquiring the rights to develop the Panuco field. Panuco holds about seven billion barrels of oil, but has been terribly underdeveloped. The spread of fields has approximately 1,600 oil wells, of which only 200 are being operated.
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Schlumberger stock jumped 5% last week on the news.
However, while the contracts signed by Schlumberger and others offer incentives based on performance, they do not grant the companies a share of the production. That is something that will have to change if Mexico is serious about luring more foreign oil majors to its energy sector.
For instance, Exxon Mobil (NYSE: XOM) CEO Rex Tillerson says his company is currently working with Pemex and is interested in expanding its presence in Mexico. But he won’t get serious until things change.
“We’re in the risk business,” he said at a meeting of the Council on Foreign Relations in New York. “We’re not real keen on service contracts, we’re not real keen on fixed-margin contracts. Although we have some of those, they’re not particularly great for us.”
Tillerson said he’s hopeful Mexico “will open up opportunities for greater partnerships and collaborations, and bringing technology to bear on the huge resources that Mexico has.”
And Mexico’s resources are indeed sizeable. The country ranks as the world’s sixth-largest oil producer, with proven reserves of 12.4 billion barrels. And its proximity to the world’s largest oil consumer is key at a time when oil production in the Middle East is threatened by political turmoil.
While it may seem counterintuitive, it would greatly benefit Mexico to open up its energy sector to foreign oil majors, which are far more experienced and technologically advanced.
It could generate more income for the government, create jobs, lower domestic energy costs and send a powerful message to the rest of the world that Mexico is open for business.
That would be a real boost to an economy that’s already expected to grow 3.7% this year.