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Pressures Mount for Privatizing Mexican Energy

Pressures Mount for Privatizing Mexican Energy

In an indication that Mexico may be headed toward privatizing its monopoly-run energy industry, Mexican President-elect Vicente Fox, who takes office Dec. 1 under a vow to make the government more professional and less political, is hearing calls from friends and foes alike to restructure the energy industry and allow more private investment.

Mexico's natural gas needs are rising at a rate of about 9% a year; electricity needs are rising at a rate of about 6% a year. Critics have charged that without private investment, Mexico will face blackouts and energy shortages in the near future.

Fox, who successfully ran under a promise to reform the government, steps into office next month on the heels of a report this month that found many medium-sized businesses across the country are suffering because of high energy prices, especially high natural gas prices. Nearly half reported they are facing cutbacks, layoffs and even closures to compensate.

Of 300 businesses surveyed by Mexico's National Transformation Industry Chamber, 42% said they were considering a reduction of their work forces as a "practical" way to offset production costs that have risen along with natural gas prices.

"Around 88,000 jobs are expected to be directly affected and 440,000 indirectly, and 210 firms are threatened with closure due to the impossibility of absorbing the increase in the cost of production," reported the survey's authors. Companies cited include the steel producer Hylsamex, a unit of Alfa, which partially suspended mining and other operations at the end of September because of rising natural gas prices. The closure affected 1,250 jobs directly, and another 6,000 indirectly.

The top 105 public companies in Mexico have reported an 18.67% drop in net profits for the third quarter of 2000, compared with the same period in 1999, even with increased sales and operating profits. Higher energy prices curtailed the performance of chemical, steel and cement companies. Glass company, Vitro, reported that even though its sales were higher, it suffered a 17.5% drop in operating profits because of high natural gas prices.

"A big challenge for Mexico will be to increase our natural gas production," said Dr. Hector Olea Hernandez, who stepped down this month at the end of his five-year term as chairman of the Comision Reguladora de Energia, Mexico's energy regulatory arm. "Natural gas use is growing at a rate of 9 to 10% a year. That's the base amount. If we cannot keep up with demand, we'll have to import more than half of the demand, and it will take a great investment."

Olea, appointed by Mexican President Ernesto Zedillo in November 1995, is remaining with CRE to ensure a smooth transition until Fox takes office. He said his mandate had been to open the natural gas markets to distributors and transporters. Those mandates have been met, he said. The new administration will be faced with the challenge of making substantial investments to ensure Mexico remains a producer and not an importer.

"We have the supplies and the rules that would make it work," Olea said. "Now we need new leadership and new confidence that can make the system work."

Under Zedillo, Mexico gave top priority to developing a natural gas infrastructure. CRE was created to regulate the industry, opening up distribution, transport and storage sectors to private companies. Laws were passed giving CRE the power to oversee bidding processes for distribution and transportation permits.

In the past five years, CRE has awarded 21 distribution permits and 63 transportation permits, with about $2.2 billion in private investments. Four international gas distributors: Gas Natural, Sempra Energy, Tractebel and Gaz de France have all made major commitments toward developing distribution zones.

However, Mexico's natural gas policies have not been completely successful. Even though distribution and transportation of natural gas was opened up in 1995, Petroleos Mexicanos --- Pemex --- has not had the funds to explore and produce new natural gas reserves. Nor has the state-owned monopoly allowed independent companies onto its turf to take up the slack.

Even before Fox was elected as president, Pemex had been criticized for stifling growth. The industry survey, which noted that many medium-sized businesses are suffering with high natural gas prices, found that Pemex will receive about 40 billion pesos from Mexico's energy production this year, representing "unprecedented gains despite its lack of investment in extraction and poor maintenance of the distribution network of gas pipelines."

In September, Mexico produced 4,656 MMcf/d of natural gas, which actually was a drop of 95 MMcf/d from August. Imports totaled 236.2 MMcf/d, down from 251.3 MMcf/d a month earlier.

"The legal structure for making decisions on energy prices needs to be changed," reported the survey.

Many U.S. energy companies want Mexico to lay out rules to encourage private investments, and thus more competition. Because Mexico's natural gas market is so closely tied to U.S. exploration, there are no differences in natural gas prices. Currently, the price of natural gas in Mexico is tied to the price of natural gas in South Texas, even though the country only imports 7% of its natural gas.

Natural gas criticisms and suggested reforms also are leading to calls to reform the country's electricity sector.

Mexico Energy Minister Luis Tellez last week called for a reorganization of the state-run electricity sector to help draw in the $50 billion needed to meet the country's power demands for the next 10 years. Tellez, who also leaves office Dec. 1 as Fox comes in, said Mexico has to create a system that allows for competing generators and distributors.

"Mexico cannot stay on the sidelines of this energy revolution by continuing to provide electricity through monopolies," Tellez told national senators in a legislative briefing last week.

And at the Mexican Energy 2000 conference in Houston in October, the director of CRE's natural gas division, Alejandro Brena, said he expected changes to be forthcoming --- including constitutional changes allowing for privatization (see NGI, Oct. 30).

Brena said in Houston that unless Mexico strengthens its regulatory structure and removes barriers, the energy sector would not be able to meet the demands of the country.

In a clear show of strength for the future of privatization, Brena's remarks were echoed by one of President-elect Fox's top advisers, Fausto Alzati Calderon. Recently, Calderon said Mexico would have to pump about $60 billion into new oil and natural gas production, refining and exploration projects and electricity generation if the incoming government wanted to achieve the goals it set for the next six years in office.

Although Fox, whose background is in business, has in the past ruled out privatization of Mexico's oil and gas industry, Calderon and others are urging him to consider it again. In late October, Fox said at a news conference in Chile that he planned to toss out politicians and appoint professionals to administer the country's energy commission. "My goal is to professionalize its administration, removing the politicians and appointing a professional administration board," Fox said of Pemex. He also plans to change Pemex' current tax status so that it will be "equivalent to those of other companies it competes with." Pemex's CRE officials have openly criticized the tax system because they say that it prevents the country from having enough money to reinvest in new projects or to create new jobs.

But change will not come easily. Many Mexicans consider the state-run energy system part of their national sovereignty. "Privatization does not guarantee efficiency or lower prices for the population," said Mexico Senate Energy Commissioner Oscar Canton, a member of the left-leaning PRI (Institutional Revolutionary Party), which has opposed privatization.

But Fox has pledged that his government would maintain Mexico's sovereignty on its own energy policies. Although he did not elaborate, Mexico has 28.4 billion barrels of proven oil reserves, and is the third largest producer outside of OPEC. Oil accounts for a third of Mexico's revenues, and about 7% of the total export earnings.

There are doubts as to how far Fox could open up Mexico's energy and oil industries to private investment, especially considering the divided Congress he will have to deal with and his lack of identification with any political party, even the PAN (National Action Party), on whose ticket he ran his successful presidential campaign earlier this year.

The Congress that Fox will inherit will have many PRI and PRD (Democratic Revolutionary Party) members, both of which are traditionally against privatization, especially of Mexico's oil industry, which accounts for more than one third of the government's income, mostly through Pemex.

But even before he takes office, state officials are working toward change. Last week, Mexico's Senate presented a request to the Finance and Energy Secretariats and Pemex to reformulate the country's natural gas price policies by not indexing prices to the South Texas market.

Olea said the work is just beginning. While Olea is departing as chairman, he said the CRE's four commissioners are expected to remain and finish their terms. He said he was unsure who would be selected to run CRE once Fox is in office.

"We must continue our reform program," said Olea. "Natural gas was the first step, and now we have to do the same with liquid natural gas, then electricity, and keep doing the things that are working." He said he expects the new president and the changed CRE to establish a "second generation of reforms" in the natural gas field.

"It's important that CRE has a vision. If that means competition within the industry or the private is a challenge for us as a country," he said. "We've accomplished a great deal and now it is time to move on. Not just for CRE but for the energy industry overall."

Carolyn Davis, Houston

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