Mexico needs new laws for private oil industry(1)

As Mexico is about to open its oil industry up to foreign investment, it will need penalties for negligence and regulations that force private firms to follow best practices in order to avoid problems like oil spills, analysts say.

On  Dec. 10 and11, the Mexican Congress approved the constitutional reform opening oil exploration, extraction, refining, transportation, distribution and sale of oil and its by-products to local and foreign private investment.

It is a decision that dismantles the very foundations of the 1938 nationalization of the oil industry.

“This is a good opportunity for the Mexican state to build a robust regulatory framework and above all to develop the capacity to penalize opportunistic or negligent behavior,” said José del Tronco, a professor at the Latin American Faculty of Social Sciences.

The expert said that if oil and gas production are stepped up, greater prevention of risks is needed, and companies should incorporate the environmental and human costs of their activities.

Congress passed the reform of articles 25, 27 and 28 of the constitution, making it possible for the government to sign service, production and profit-sharing contracts with private firms.

The reform also allows the government to grant permits or concessions for the exploration and exploitation of oil blocs , a mechanism used in countries like Argentina, Ecuador, Peru and the United States.

The corporations will also be able to store, transport and sell oil products,  which effectively breaks down the monopoly of the state-run Pemex oil company.

But Pemex, also a multinational corporation, will be just one more contractor, and will not maintain control over the activity or over the contracts with new operators, which will fall under the authority of the energy ministry.

The regulatory framework, Tronco said, would have to be very different than when it was only necessary to exercise oversight over one company governed by local rules. Multiple operators will participate in a range of activities, and controls and oversight will be hindered without clear rules that take into account international legislation.

In case Pemex commits breach of contract, the companies will be able to turn to international dispute settlement bodies, such as the North American Free Trade Agreement (NAFTA) panel procedures or the World Bank’s International Center for Settlement of Investment Disputes (ICSID).

The full extent of the reform will be defined by secondary laws that lawmakers will draft in the next few months, and by regulations to be put in place by the government.

The reform was approved in a record 80 hours by the legislatures of 17 of the country’s 31 states, which was needed to enshrine it in the constitution.

Now it has been sent back to Congress for final ratification, before president Enrique Peña Nieto signs it into law.

“International experiences are not encouraging,” Greenpeace Mexico spokesman Raúl Estrada said. “It isn’t clear how the people will benefit from throwing the industry open.

“They say it will draw investment, and that the investment will be spent on the secondary effects of the reform,” such as oil spills and pollution, he said.

 See Oil, second page.