In an indication that Mexico may be headed toward privatizingits monopoly-run energy industry, Mexican President-elect VicenteFox, who takes office Dec. 1 under a vow to make the governmentmore professional and less political, has asked for and obtainedthe resignation of a top official of the country’s regulatoryenergy commission.

The resignation of Comision Reguladora de Energia PresidentHector Olea this week followed the release of a survey of 210Mexican businesses, which reported last week that high energyprices — especially natural gas, which fuels many of thecountry’s industries — are forcing cutbacks and even someclosures across the country.

Olea has been a supporter of the state’s monopoly-run energyindustry, which has come under a stepped-up attack by industry andCRE officials as energy prices have risen. Many in industry feelthat the lack of competition in Mexico has affected efficiency andcontributed to high energy prices. In fact, of the 300 medium-sizecompanies surveyed across the country by Mexico’s NationalTransformation Industry Chamber, 42% said they were considering areduction of their work forces as a “practical” way to offsetproduction costs that have risen along with natural gas prices.

“Around 88,000 jobs are expected to be directly affected and440,000 indirectly, and 210 firms are threatened with closure dueto the impossibility of absorbing the increase in the cost ofproduction,” reported the survey’s authors. Companies citedincluded the steel producer Hylsamex, a unit of Alfa, whichpartially suspended mining and other operations at the end ofSeptember because of rising natural gas prices. The closureaffected 1,250 jobs directly and another 6,000 indirectly.

Currently, Mexico’s monopoly is run by Petroleos Mexicanos —Pemex — and CRE, created in 1994, is its regulatory arm. Evenbefore Fox was elected as President, Pemex has taken more criticismby industry, which many say has stifled growth in Mexico’sburgeoning economy. The survey found that Pemex, the only naturalgas provider in the country, will receive about 40 billion pesosfrom Mexico’s energy companies this year, representing”unprecedented gains despite its lack of investment in extractionand poor maintenance of the distribution network of gas pipelines.”

In September, Mexico produced 4,656 MMcf/d of natural gas, whichactually was a drop of 95 MMcf/d from August. Imports also weredown, standing at 236.2 MMcf/d, down from 251.3 MMcf/d a monthearlier.

“The legal structure for making decisions on energy prices needsto be changed,” reported the survey.

Olea has dealt extensively with U.S. energy industries since hisappointment, and earlier this year he suggested that U.S. companiesshould run their gas pipelines into Mexico just south of the borderfrom one U.S. location to another to avoid U.S. regulatoryoversight.

Although the lack of regulatory oversight sounds appealing, inreality, many U.S. energy companies want Mexico to establish moreregulatory oversight to allow private investments, and thus morecompetition. Because Mexico’s natural gas market is so closely tiedto U.S. exploration, there are no differences in natural gasprices. The price of natural gas in Mexico is tied to the price ofnatural gas in South Texas.

With private investment, U.S. officials argue that Mexico wouldsee its supply base increase, and more exploration and development.But it’s not just U.S. officials urging the privatization. In fact,many officials who work at CRE feel the same way. At the MexicanEnergy 2000 conference in Houston in October, the director of CRE’snatural gas division, Alejandro Brena, said he expected changes tobe forthcoming — including constitutional changes allowing forprivatization (see Daily GPI, Oct. 27).

Brena, who was openly criticized by Olea following his remarks,said in Houston that unless Mexico strengthens its regulatorystructure and removes barriers, the energy sector would not be ableto 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 topadvisers, Fausto Alzati Calderon. Recently, Calderon said Mexicowould have to pump about $60 billion into new oil and natural gasproduction, refining and exploration projects and electricitygeneration if the incoming government wanted to achieve the goalsit set for the next six years in office.

Although Fox has in the past ruled out privatization forMexico’s oil and gas industry, Calderon and others are urging himto consider it again. Mexico’s natural gas needs are rising at arate of about 9% a year; electricity needs are rising at a rate ofabout 6% a year. Critics have charged that without privateinvestment, Mexico will face blackouts and energy shortages in thenear future.

In late October, Fox said at a news conference in Chile that heplanned to toss out politicians and appoint professionals toadminister the country’s energy commission. “My goal is toprofessionalize its administration, removing the politicians andappointing a professional administration board,” Fox said of Pemex.He also plans to change Pemex’ current tax status so that it willbe “equivalent to those of other companies it competes with.”Pemex’s CRE officials have openly criticized the tax system becausethey say that it prevents the country from having enough money toreinvest in new projects or to create new jobs.

Fox has pledged that his government would maintain Mexico’ssovereignty on its own energy policies. Although he did notelaborate, Mexico has 28.4 billion barrels of proven oil reserves,and is the third largest producer outside of OPEC. Oil accounts fora third of Mexico’s revenues, and about 7% of the total exportearnings.

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