Economics: Unpopular reform a major success
Round 2, Phase 4 of tenders provided the most eloquent example to date of just how successful Mexico's 2014 energy reform is proving to be. The largest single group of exploration and production blocks that Mexican regulators have auctioned to date drew an unprecedented level of participation from both Mexican and international companies.
The latest bid round emphasized the extent to which Mexico is on track to substantially expand its output of oil and gas, with the authorities estimating the areas awarded have a production potential of close to 2.8 billion barrels of oil equivalent. It also allowed Pemex to clear a major hurdle in deep water E&P as the national oil company won two blocks separately and two others in alliance with international majors. It has also served as a major source of immediate and future funds from signing bonuses and a take of close to 65%. But in defiance of such multiple indicators of success, missteps in the way the energy reform was sold to an initially skeptical public have produced considerable political blowback. Wooed four years ago by promises that the reform would put an end to monthly upward price adjustments dictated by the finance ministry, the public has grown disillusioned as pump prices have climbed due to the combination of rebounding crude prices and growing domestic demand that has required ever greater imports even as the peso has lost ground against the dollar. Moreover, assurances from reform advocates that it would quickly set Pemex on the road to financial health and recovery as a major producer have been followed by years of declining production and financial health.
This key election year provides fertile ground for politicians to exploit such concerns by the Mexican public. We remain convinced that the energy reform can prove to be the brightest part of the Peña Nieto administration's legacy, but it would be best for officials to develop a strategy for fully and honestly communicating that prices will continue to fluctuate, and that the government will work to mitigate the impact of price increases with the few mechanisms at its disposal.
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