-Op-Ed-

MEXICO CITY — I am no energy specialist, but after reading and listening to experts in recent months, I have learned about the fundamental requirements that should drive any major energy-sector reform. Can smart energy policy become the most powerful platform for Mexico’s economic growth?

Ramón Espinosa, an analyst at the Inter-American Development Bank who focuses on Latin America, has evaluated the results of strategies pursued in several key countries to develop their respective energy resources. His work takes into account the rules each nation has established and gauges the various results over two decades of industry development.

Espinosa has identified the Latin American countries that have succeeded, and those that haven’t, using two basic measures of success — the industry’s growth and its ability to contribute to the development of the country’s economy. Peru and Colombia are among the most successful, while Venezuela, Ecuador, Argentina and Mexico lag far behind. Brazil was among the winners until a couple of years ago, but has since slipped.

So what makes the difference? Espinosa believes that much of the credit or blame is linked to the nature of regulations and the relative strength accorded to regulators. Where rules are designed to promote the industry’s development, it prospers, and when objectives become confused or contraditory, disaster ensues.

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Offshore oil platform located in the Gulf of Mexico — Photo: Chad Teer

Brazil is a fine example: Its first wave of reforms in the 1990s sought to create a real energy market where Petrobras was the preeminent actor, operating from a favorable position but without overstepping its role. Initial legislation conceded no perks or privileges to Brazil’s state oil firm, which allowed various actors, both domestic and international, to become interested in participating in the industry and bidding for contracts the government was putting onto the market.

In recent years, however, the government changed its legislation and included contradictory criteria. Now investments are required to have a determined percentage of local content and Petrobras must be a partner in contracts. The result is that no relevant actor in the world today that has the technology and capital that Brazilians (and we Mexicans) need has sought to participate. Brazil is thus no longer on the successful list.

If the aim is to attract investment and technology, legislation must respond to market traits and prove competitive amid the multiple of states developing their oil and gas resources. Too often, Latin America’s focus seems inverted: We think the rest of the world is salivating at the prospect of exploiting our (potential) oil and gas resources, and we need only put up a Welcome sign. That might have worked a decade ago, but not now, given the discovery of oil reserves and the technological advances of the last 10 years.

In the new energy world, our main client will be largely self-sufficient. This market entails a competitive logic unprecedented in recent decades — it’s a buyers’ market, in other words.

As a prominent oil executive said, there are so many projects in the world today. What’s missing is the capital they require. The world’s great actors will evaluate their investment options based on potential returns and legal security. Currently, no serious firm would participate in a project that does not assure attractive returns and is not free of political intervention.

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A Pemex gas station in Rancho Salvador Sol Torres — Photo: Coolcaesar/GNUFDL

This calculation applies not just to Mexico but to all investment options in their portfolio. The Left's proposals to subject energy reforms to a referendum constitute an additional, and enormous, cost (and risk).

Without a properly competitive framework that attracts relevant players in the world, we are wasting our time. Clearly the big players will propose many conditions before legislation creates a new regime, independent of the conditions they could actually live with, and which are unknown beforehand. The investors the government wants to attract will make their assessments after relevant legislation is passed, and if that legislation is insufficient, it could prove disastrous.

I can say from what I have learned that beyond the merely technical, the crucial difference lies in three factors: the regulator’s (real) independence as the higher authority; the absence of absurd requirements like partnership with Pemex or obligatory contracts with the oil-sector union; and finally, developing an energy market that allows protagonists to act with market criteria. So, what’s at stake? Everything — perhaps even the current presidency.

*Luis Rubio is President of Mexico’s CIDAC (Centro de Investigación para el Desarrollo), an independent body engaged in political and economic research.