20th January 2014
Invesco Perpetual’s head of emerging markets Dean Newman has hailed the reforms in Mexico including the end of a 75 year monopoly for the state oil company Pemex.
The legislation, says Newman paves the way for private energy companies, both national and international, to explore for, and produce, oil and gas under licences and profit-sharing agreements.
He argues that the “nationalised energy sector these days delivers few benefits to Mexicans. Petrol is more expensive here than in the US and even subsidised electricity tariffs are amongst the highest in the world”. (Financial Times, December 2013).
Furthermore, oil production in Mexico has fallen by a quarter over the past decade with factories having to pay 45% more for its electricity than factories in the US, according to Barclays (December 2013).
Figures 1a and 1b below show why energy reform is necessary.
Figure 1a). Production of crude oil – absolute change, thousands of barrels
Figure 1b). Quality of electricity 2010-2011 – interruptions and voltage fluctuations, weighted average
Source: Santander and Figure 1a): Pemex as at January 2013. *As of September 2012. Figure 1b): WEF as at January 2013. Note: Higher values indicate better quality standards.
Newman says whether Pemex is badly run or starved of capital, it has struggled to reap the benefits of what lies below the ground.
Newman says that estimates from JP Morgan (December 2013) suggest that opening up Mexico’s energy sector to competition from abroad could boost economic growth by potentially attracting up to US$20 billion of foreign investment annually.
“The overhaul could propel Mexico into the top five crude exporting countries and help to develop the largest unexplored crude area after the Arctic Circle and the country certainly has the potential to significantly increase productivity”.
Figure 2 below shows how total factor productivity in Mexico has fallen since 1980.
Figure 2. Mexico: Potential to significantly increase productivity
Source: INEGI and Santander as at 29 January 2013. Latest available data to 2010.
“By introducing competition to the oil sector, supported by key reforms in the telecoms market and education sector, Mexico’s untapped potential will soon start to be realised”, he adds.