Energy reforms set out to open up petrochemical industry in Mexico

On Monday President Enrique Peña Nieto of Mexico announced an initiative in energy reform that would open up the field of petrochemistry. With the proposal to modify Article 28 of the Constitution, this sector, in its most basic form, would cease to be an area exclusive to Petróleos Mexicanos (Pemex). The text set before Congress this Monday would allow the private sector to participate in the post-extraction processes under a scheme which will be established with further legislation and regulated through licenses administered by the executive branch.

One of the proposed measures regarding hydrocarbons aims to "extract basic petrochemistry from strategic areas of the country and make sure that activities such as processing of natural gas and crude oil refinement, distribution and commercialization of the aforementioned products and their by-products, can be carried out legally by government bodies as well as those from the social and private sectors through licenses provided by the federal government."

"Besides the government groups, the participants operate directly under a scheme regulated by the value chain framework in the post-extraction stage, including transport of the subsoil extracts (crude oil, natural gas, and its liquids), as well as the products obtained after processing (petrochemicals, by-products), always within the terms set by law through licensing contracts from the federal government."

Mexican law divides the petrochemical sector into basic and secondary. The secondary has received private investment since the 1980s while the basic remained in government hands. Montserrat Ramiro, project director at the The Mexican Institute for Competitiveness (IMCO) maintained that, if the measure Peña proposed is approved, private petrochemical companies will be able to take over the entire production line without having to rely on Pemex to provide raw materials. This situation would lead to greater competition.

IMCO said that higher competition will lead to a liberalization of prices in basic petrochemistry and that Pemex would have a greater opportunity to grow. "Pemex is in a very complicated position because it's not allowed to compete," Ramiro continues. "Until now the prices for raw materials have been set by the State. But the product that it sells has a market. You can't be competitive like this."

Samuel García, an economic analyst, concurred. According to García greater competition could lead to lower prices on oil products. "If you open these markets to competition there will certainly be a reduction in prices, but only as long as there is private investment."

However, the success of the energy reform measure and the investment of private capital in the basic petrochemistry industry will depend on the contracts and functions that the State offers those investors. Until now, Peña's proposal only deals with the constitutional amendment, which, if approved, will open the door to the legislative changes that will define the terms of implementation.

Specialists interviewed by this newspaper all agree that the dearth of detail about the way the reform might be carried out keeps investors in suspense.

García said that Mexican investors might increase their participation in the petrochemical sector while foreign investors are more likely to look into oil exploration and processing. Ramiro, on the other hand, said that this new scheme in the petrochemical industry does not have great appeal for private investors. It might serve as a new strategy for the public enterprise to curb its losses, she added.

The Research Center for Development (Centro de Investigación para el Desarollo or CIDAC) noted in a study that the absence of a market scheme in the Mexican petrochemical industry dwarfs its opportunities and allows corruption and lack of transparency. Pemex announced 11,270 million pesos (860 million dollars) in losses in 2012, setting the stage for an outlook where import of oil products represented twice the national output.

Translation: Dyane Jean François