In Mexico, Old Habits Die Hard

Mexico's president threw open the door to reforming the energy sector, potentially reversing 75 years of revolutionary legacy. Now the ambitious overhaul is colliding with messy political reality.

Politics, the same force that drove Mexico's energy nationalization on the eve of World War II, is threatening to trip up the country's efforts to join the energy revolution that has already turned the United States into an oil and gas powerhouse.

Energy firms have long eyed Mexico's abundant reserves, so the industry cheered when President Enrique Peña Nieto pushed through a constitutional amendment late last year to allow foreign investment in the energy sector for the first time since 1938. But now that Mexico's legislature is hashing out the nitty-gritty reform details -- including big questions such as what role state behemoth Petróleos Mexicanos, or Pemex, will play, and what kind of terms will be offered to foreign companies -- tricky politics have intervened, quashing hopes that foreign investment could begin flowing as soon as next year.

Originally in agreement to roll back some of the actions taken decades ago that led to the seizure of energy fields owned by outside corporations, Mexico's three main political parties are squabbling over exactly how and to what extent.

Peña Nieto's ruling Institutional Revolutionary Party, or PRI, secured the needed support of the center-right National Action Party, or PAN, to push through the constitutional amendment. But the PAN wants to secure its own goals first -- namely, political reform to end the PRI's decades-long stranglehold on power, especially outside the capital. As a result, it held up energy reform debate this month, likely pushing back passage of the key legislation until later this year.

Meanwhile, the leftist Party of the Democratic Revolution, or PRD, is leery of the whole notion and wants a national referendum to challenge Peña Nieto's plan. PRD heavyweights tell anyone who will listen in Washington that the energy reform is on thin ice, warning investors to steer clear of the sector.

It's not an arcane issue of energy policy. For many Mexicans, especially left-leaning voters, state control of the energy sector is synonymous with the country's revolutionary heritage. State control of natural resources, embedded in its constitution and crystallized in the 1938 nationalization, was long considered one of the revolution's signal achievements.

The other big question is whether the government will use reform to keep money flowing into government coffers -- oil wealth underpinned Mexico's economic development for the second half of the 20th century but oil exports have been steadily declining, in part because of a dearth of foreign capital and expertise -- or whether it will unleash nimble, private-sector firms that could rejuvenate an underperforming economy long-term.

The proposals so far seek to extract "the most revenues possible at the earliest possible stage of the industry" through upfront fees, royalties, profit-sharing, and tougher new tax rules, said Jose Valera, co-head of the oil and gas practice at Mayer Brown law firm in Houston, which analyzed the legislation. Proposed changes would tax the earnings of foreign oil and gas workers -- who pioneered the fracking revolution -- if they spend as little as one month in Mexico.

"That's another example of how they want to maximize revenues now at the expense of huge benefits down the road," he said.

Trying to chart a middle ground between the business-friendly right and a left skeptical of seeing foreign firms snatch up Mexican natural resources and wealth, the PRI risks disappointing everyone.

"This PRI proposal is not using fully the opening that the constitution gave it," Valera continued. "It is still too rent-seeking, and too Pemex-centric. They can and should go a lot farther than this in the final legislation."

Some observers see worrisome parallels with Brazil, which hoped to turn massive new oil finds into a bonanza for the government by setting stiff terms for foreign firms, giving a prominent role to the state-owned oil company, and mandating the use of locally built gear. All of this discourages foreign interest in Brazil's offshore oil sector, overburdens Petróleo Brasileiro, or Petrobras, and slows down the country's anticipated oil boom.

The Mexican government seems on track to make similar mistakes, such as reserving a huge preserve of oil and gas wealth for Pemex -- thereby essentially maintaining much of the status quo. That's why outside observers are watching Mexico's preliminary steps, known as "round zero," so carefully.

"Round zero is very, very important," Valera said. "We're either going to have an 800-pound gorilla in Mexico or we're going to have a more fragmented industry that allows for the participation of more players in more areas in Mexico."

If the market truly opens up, the small and midsized American oil and gas firms that unleashed the shale boom in the United States should be well poised to jump in. The huge Eagle Ford deposit in Texas, for instance, extends right across the border into northern Mexico. That means that companies well-versed in hydraulic fracturing techniques should be able to quickly tap Mexico's reserves. And geographic proximity should give smaller firms and advantage too.

But for all the upside of opening a nearly virgin market, there are plenty of downsides. The dire security situation, especially in northern Mexico, poses huge challenges. The geology, while similar, is not necessarily identical to what foreign companies know so well; basins in the United States that seemed like carbon copies of Eagle Ford, for example, have proved trickier to tap. And the U.S. oil and gas boom, with a safer environment and stable regulation, still has plenty of life left in it.

"Smaller companies have a lot more to lose than larger companies, so they will be holding their cards close but looking at their opportunities" in Mexico, said Fred Lawrence, the international liaison for the Independent Petroleum Association of America, a trade group.

As for what the Mexican government hopes to achieve through reform, turning around slumping production and quickly unleashing a lucrative energy boom can be undercut by the combination of political friction, few changes at Pemex, and lower-than-expected levels of foreign investment.

Fluvio Ruiz Alarcón, a board member of Pemex, said this week in Washington that the state-owned oil giant can't possibly meet the government's ambitious production targets before 2020.

"It may not be until the next decade that the current energy sector reforms have any material impact on Mexican production and on global oil supplies," concluded Energy Aspects, a consultancy, this month.

Yuri Cortez - AFP - Getty


Bank Run

Tea Party Republicans want to shutter the Export-Import Bank. Would American companies suffer if the government didn't lend an occasional helping hand?

When FirmGreen Inc., a small California energy firm, wasn't able to secure private financing it needed for a major expansion three years ago, company executives reached out to the federal government's Export-Import Bank for help. The bank came through, giving a Brazilian company $48 million in loans so it could buy FirmGreen technology to convert gas from one of the country's largest landfills into natural gas.

The company has been vying for a similar contract in the Philippines, but it wasn't so lucky this time around. The culprit? Growing uncertainty about whether the bank will survive a concerted effort by Republicans to kill an entity that they believe improperly picks winners and losers and funnels taxpayer money to companies in China and Russia.

The future of the Export-Import Bank has become the latest issue to divide the Republican Party, with Tea Party-backed lawmakers proposing to allow its authorization to expire at the end of September and traditional GOP supporters in the business community lobbying for it to stay open. Letting the bank's charter lapse, supporters say, would make it harder for American companies to sell their products overseas, give other nations a competitive advantage over the United States, and jeopardize hundreds of thousands of American jobs.

No matter, say powerful Republican critics like incoming House Majority Leader Kevin McCarthy (R-Calif.), who shocked Republicans from the party's pro-business wing Sunday when he told Fox News that he would support letting the bank expire. "I think Ex-Im Bank is one that government does not have to be involved in," he said. "The private sector can do it."

House Financial Services Committee Chairman Jeb Hensarling (R-Texas), another leading bank critic, says he's also concerned that the bank could inadvertently harm American national security. "The taxpayer money goes overseas to China and Russia -- nations that openly challenge our economic and security interests," he said at a hearing over the bank's future Wednesday.

If Hensarling and his allies get their way, the United States would become the only major economy that doesn't bolster trade with government-backed loans. Created during the Great Depression by Franklin D. Roosevelt, the Export-Import Bank helps finance the export of American goods, either by lending directly to foreign companies to buy goods or services from U.S. businesses or by insuring the deal for the U.S. company. The bank authorized $27.3 billion worth of loans that made $37.4 billion worth of exports possible and supported 250,000 U.S. jobs in 2013, according to the bank and the U.S. Chamber of Commerce.

Bank President Fred Hochberg said the institution has made money since it was reauthorized in 2012 and returned nearly $2 billion to the U.S. Treasury. He also argued that the agency helps U.S. companies remain globally competitive.

"Every industrialized country has its own version of Ex-Im, and each is tasked with supporting the domestic exports of their respective nations," Hochberg testified before the House Financial Services Committee Wednesday.

Boeing, the United States' largest exporter and the bank's biggest beneficiary, said letting the bank's charter lapse would make it harder to sell its airplanes abroad. John Kvasnosky, a spokesman for the firm, said in a statement that the bank's demise would mean "Boeing will be placed at a competitive disadvantage to Airbus and other airplane manufacturers, all of whom have government export credit agencies to support customer financing."

Delta Air Lines CEO Richard Anderson, by contrast, backed critics' charges that the bank was indeed subverting the free market by picking winners and losers. Anderson told the House panel Wednesday that when the bank helps Boeing sell planes to foreign airlines, some of which are state-owned, Delta loses out. "We have to compete against deeply subsidized government airlines that are in turn deeply subsidized by our government," Anderson said.

The bank's survival seems increasingly unlikely given the power of its GOP critics, but it does have some Republican support on Capitol Hill. On Monday, for instance, 41 House Republicans sent their leaders a letter urging them to reauthorize the bank. On Tuesday, Senate Majority Leader Harry Reid of Nevada and Minority Leader Mitch McConnell of Kentucky said they wanted the Senate to debate a reauthorization bill. Although McConnell has pointedly declined to predict its fate or say whether he supports reauthorization, Sen. Chuck Schumer (D-N.Y.) said at a breakfast hosted by the Wall Street Journal Wednesday that he believes the Senate can pass the bill and then use a conference committee to try to save it.

Bank supporters were dealt another blow Monday when the Wall Street Journal reported that four officials are being investigated over allegations of misconduct, including accepting gifts and cash in exchange for government financing.

Still, business groups haven't given up the fight to save the bank. Christopher Wenk, the Chamber of Commerce's senior director for international policy, said the pro-business advocacy group was calling on state and local chapters to contact their member of Congress when the lawmakers are home during the July Fourth and August recesses, especially in key districts.

"In a perfect world, we wouldn't need an export-import bank, but if you look at what the rest of the world is doing to support their exporters it would be asinine for the U.S. to unilaterally disarm," Wenk said. "September 30 is 27 legislative days from right now, so there's a real urgency about this."