Mexico is expected to take the first crucial steps towards improving its oil sector and liberalizing aspects of state-owned Pemex’s management. An energy reform proposal was sent to the Mexican congress on April 9 by president Felipe Calderón, and will be voted on shortly. Analysts are confident that the bill will be passed and, despite one opposition party, PRD, claiming this is "back door privatization", key players of the other opposition party, the PRI, support the reform.
The reform does not touch on the constitution so only a simple majority is required for the bill to pass but this also means that privatization is ruled out. However, there are still high hopes that the legislation will inject new life into Pemex’s flagging oil production. In the first quarter of 2008, oil production fell 7.8%, year on year. "These reforms are eight years overdue – Pemex is sorely in need of change or Mexico will become a net importer of oil," says Walter Molano, head of research at BCP Securities. "Some think this reform is too light to really bring about the changes Pemex needs." Pemex’s chief executive, Jesus Reyes Heroles, said at the World Economic Forum meeting in Cancún. "We have to make clear for Pemex, this reform is a matter of survival."
"The government will retain full ownership of Pemex but with this reform there is a chance to invest in a more smart and intelligent way," says Gerardo Rodríguez, deputy undersecretary for public credit for Mexico. "There is scope for the private sector to get involved and work with Pemex. The concept of this reform is to take much needed steps to liberalize the company and make it function optimally."
Secondary laws
There are five secondary laws that govern Pemex on the agenda, which in turn will provide new flexibility to the management and allow private sector participation in exploration, transportation, storage and refining. The CEO of Petrobras, Jose Sergio Gabrielli, announced, at the Cancún conference, that his company would be interested in assisting Pemex with offshore projects in due course.
Bankers covering the region are most interested in the reforms to financial independence. Under the new laws, Pemex will be able to handle its debt management without prior approval from the secretary of finance. "These reforms can only help in terms of financing Pemex. We have been talking to them a lot on the phone trying to develop a strategy – they will have plenty of borrowing needs in the coming months," says a senior banker. "They will need to raise more capital for exploration and develop new investor relations partners once these reforms have gone through."
New board
The reforms will also lead to improved corporate governance at Pemex – yet another move that could improve ratings and reduce the cost of financing. The revamped board of directors will include four highly experienced independent members – a marked move away from a board of directors that has been deemed, in recent years, as the government’s right arm, providing cash and jobs to the Pemex union.
The reform also carries with it a MXN100 issue that will be sold to the public. It’s "a smart political move to bring the average citizen closer to Pemex," says Rodrigo Valdes in a Barclays Capital research report.