Why is Pemex So Hard to Modernize? Analytical Framework Based on Congressional Politics

8/22/2019 Why is Pemex So Hard to Modernize? Analytical Framework Based on Congressional Politics

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WhyisPemexsoHardtoModernize?

AnAnalyticalFrameworkBasedonCongressionalPolitics1

GillesSerra2

August27,2011

PreparedfortheseminarPolticayGobiernoatCIDESeptember8,2011

Summary:

WeanalyzethepossibilityofreformintheMexicanoilindustry.Wedosoby

studying the politics of energy reform as they occur in Congressional

negotiations. The main contribution of the paper is to offer a theoretical

framework based on the following elements: identifying the main issues

regarding Pemex; identifying themain political agents in charge of reform;

and locating the positions of these agents on those issues.Our analysis is

aidedbyaseriesoforiginalgraphsthathelpusvisualizethekindofcoalitions

that are conducive to change. We claim that three issues will tend to

dominate the debate: private investment, labor accountability, and fiscal

autonomy. We also identify the agents that are pivotal in creating a new

legislation:theChiefExecutive;thethreemajorparties,namelythePAN,the

PRD, and the PRI; and the internal factionswithin eachparty.We use this

framework to understand past reforms such as those of 2008, and to

speculateaboutfuturereformsthatmightbeattempted intheperiod2012

2018.

1ThisresearchbenefittedfrombeingpresentedatUCBerkeley,RiceUniversity,theUniversityofOxford,andthe

annualmeetingofAmericanPoliticalScienceAssociation.Allerrorsareresponsibilityoftheauthor.

2DepartmentofPoliticalStudies,CentrodeInvestigacinyDocenciaEconmicas(CIDE),MexicoCity,[email protected].


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Introduction

Pemex is exceptionally difficult to reform. Mexicos giant oil company is facing daunting

challengesasitstrugglestomaintainitslevelsofproductivity.Indeed,itsproductionofoilhas

steadilydecreasedforseveralyearsinarow.Thereisdisagreementonspecificproposals,but

mostpolicymakersagree thatchangesofsomekindarenecessary to its legal framework, its

operations,itsmanagementanditsfiscalstructure.Accordingly,severalhighrankingpoliticians

(including the last three Presidents) have advocated for the reform of Pemex and the oil

industry in the country. Progress has been elusive, however. In the past two decades, for

political reasons, theMexican governmenthas found itdifficult to implement the structural

changes that could improve theperformanceof itsoil company. Indeed, thepolarizationof

ideologicalpositionshasmadeanyconsensusvirtuallyimpossibletoreach.Inparticular,astrict

interpretationof resourcenationalismhas seriouslynarrowed the rangeof changes thatarepolitically acceptable (Mares 2011).Accordingly, any reformer hesitates to touch Pemex for

fearofcommittingpoliticalsuicide: inthatsense, ithasbecomeasortofthirdrail issue. In

themeantime,aswedocumentbelow,theoil industry inMexico isshowingthreeworrisome

trends:adeclineinproduction,adeclineinreserves,andadeclineinexports.

ThegoalofthispaperistoanalyzethepossibilityofreformintheMexicanoilindustry:Whyis

itsohardtoachieve?Whyhavepastreformsbeensomodest?Andwhatneedstohappenfor

profoundchangestobeachievedinthefuture?Wepayspecialattentiontothepoliticalfactors

underlyingthereformprocess:themainstakeholders,theirinterests,theirideologies,andtheir

negotiationsinCongress.Wehopethisanalysiswillclarifythestepsthatneedtobetakenfor

reformmindedpolicymakerstosucceedinmodernizingacompanyofsuchsignificance.

Thestakesare large fortheMexicanpeoplewhosewellbeing isstillhighlydependentonoil

revenues. Indeed, petroleum and its derivatives are a fundamental part of the Mexican

economy.Anydecline inoilproductioncanbeexpectedtohaveaseriouseffectoneconomic

growth. Furthermore, the government remains highly dependent on taxes levied on the oil

industry:between30and40%oftheFederalGovernmentRevenuecomesfromroyaltiespaid


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byPemex.3So,ifPemexcontinuestoslowdown,thegovernmentslongrunfiscalbalancewill

beindoubt.

Thestakesarehighfortheglobalmarketaswell.Amongoilcompaniesintheworld,Pemexis

theeleventh largestoverall,and the fifth largeststateownedcompany.4Thusanabsenceof

Mexicanoil

could

lead

to

further

increases

in

international

prices.

This

would

be

particularly

hurtfultoAmericanconsumerssincetheUnitesStatesreliesonoilsuppliesfrom itssouthern

neighbor,which isoneof its three largestsuppliers.Suchbeingthestakes, it isworthasking

whychangestotheoilindustryinMexicoaresoslowtocomeabout.

We claim thatany solution toPemexs situation isultimatelypolitical.Withoutablepolitical

maneuvering, the statusquowillprevail indefinitely.Pemexwill stagnateandoilproduction

willcontinue

to

decline.

Therefore,

agood

understanding

of

the

political

process

in

Mexico

is

crucial for improving theoddsofa futurereformoftheenergysector.Note thatany reform

mustbetheproductoflegislativenegotiationsinCongress.Sothecrucialroleofpoliticalelites

andgovernmentinstitutionsshouldnotbeunderestimated.

And yet,political analysesofenergy reformarehard to find. In spiteof an activedebate in

termsofpolicyadvocacy,littleanalysishasbeendoneaboutthepoliticalconstraints.Anotable

exceptionis

Elizondo

(2011)

who

describes

all

the

attempted

energy

reforms

of

the

last

five

administrations,fromPresidentDelaMadridtoPresidentCaldern.Moreresearchofthiskind

isworthdoingifwearetounderstandthebarrierstomodernization.

Withthatpurposeinmind,thispaperdevelopsanewframeworktostudythepoliticsofenergy

reform inMexico.Weuseconcepts fromseveraltheoreticaltraditions inpoliticalscience.5 In

particular,wewillsuggestawaytoanalyzetheformationofcongressionalcoalitionsbasedon

specificgraphs

to

visualize

the

positions

of

different

political

actors.

3Tobeexact, in2010therevenuefromrightstooilasapercentageofthefederalgovernmentsrevenuewas

30.8%.

4AccordingtothelistoflargestoilcompaniescreatedbyPetroleumIntelligenceWeeklybasedon2009data.See

www.energyintel.com/Pages/About_PIW.aspx.

5Wemainlyuseconcepts from thespatialvotingmodel,whichcharacterizespolicy issuesas lineardimensions,anddepictsideologicalpositionsaspointsinspace.


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Thecontributionofthispaperisfourfold.First,we identifythemain issuesofcontentionthat

systematicallyarise indebatesandnegotiationstoreformPemex.Weclaimthatthree issues

capture most of the tension between the main political actors: the involvement of private

capitalintheoilindustry;theaccountabilityofthelaborunion;andthefiscalburdenonPemex.

Second,we

identify

the

positions

of

the

main

stakeholders

on

those

issues.

Political

parties,

the

Executive,andotherkeyplayershavestrongpreferencesonthosethreedimensionsthatwill

determinethetypeofcommitmentstheyarewillingtoagreeto.Third,westudythetypesof

coalitionsthathavebeenformedinthepastandmightbeformedinthefutureinordertopass

newlegislation.Theneedforcoalitions,andthetypeofcoalitionsthatcanbeformed,hingeon

thestructureofCongressandthespecific lawmakingrules inMexico.Andfourth,weanalyze

thepossibilityoffuturereforms.Basedonourconceptualframework,wesuggestsomeofthe

eventsthat

could

spur

significant

agreements

to

be

reached

in

future

administrations.

But

the

paperstartsbyprovidingsomecontextaboutthesituationofPemex.

ThecurrentchallengesofPemex

Pemex iscurrentlyfacingseveralhurdles.Asotherauthorshavepointedout,thesituationof

theMexicanoilindustryingeneralisnotoptimistic(Whitehead2011).Notably,oilproduction

hasbeendecliningsteadilyinthepastyears.Itpeakedin2004withanaverageof3.4millions

ofbarrelsperday,butithasdecreasedyearafteryearsincethen.Theaverageforthemonthof

June2011wasonly2.5millionsofbarrelsperday.6

Exportsarealsofalling. Inadditiontoadecrease inproductiontherehasbeenan increase in

thedomesticdemand forgas,oilandpetrochemicalproducts ingeneral.GiventhatMexicos

consumptionofhydrocarbonshasbeen increasingas the countryhas industrialized,a larger

fractionofoilproduction isallocated for internaluse.Consequently, theexportofoil isalso

fallingatafastrate(SENER2007).Infact,ifMexicofailstoacquirethetechnologynecessaryfor

newdiscoveries,itwillbecomeanetoilimporterwithintenyears(MedlockandSoligo2011).

6AccordingtoPemexfiguresconsultedatwww.ri.pemex.com/files/dcpe/petro/eprohidro_esp.pdf.


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In addition, the pace of new discoveries is no longer enough to replace the exploitation of

existing reserves. Pemexs replacement ratio is lower thanmost other oil companies in the

world (de laCalle2007).Asa consequence, theoil reserves thatMexico can countonhave

declined year after year.The total reserveswere62.1billionbarrels in1995,but theyhave

decreasedto43.1billion in2010.Basedonthosefigures,PresidentCaldernfamouslystated

thatMexicos

existing

reserves

could

only

last

nine

more

years.7

Suchdecline ismainlyaconsequenceofnewgeologicalconstraints.Theeasy reserves tobe

foundandexploitedarebecoming rare.And theareas thatareknownor suspected tohave

largereservesaredifficulttoexploreandexploit.Muchoil issuspectedtoexist intheGulfof

Mexico, buried under 1,500meters ofwater. But those reserves are hard to reach as they

requiremoderntechnologyfordeepwaterexploration.CurrentlytheMexicanStatelacksboth

thetechnology

and

the

expertise

to

explore

beyond

the

shallow

waters

where

it

knows

how

to

operate (Fuentes Berain 2008). Furthermore, aswe discuss in detail later, the current legal

frameworkhampersPemexsabilitytopartnerwithserviceprovidersthathavesuchexpertise

and technology. TheMexican regulation is one of themost restrictive in theworld, and it

precludesanyjointventurewithotheroilcompanies(Grunstein2011b).

Inadditiontothesegeologicalchallenges,Pemex facesanumberorstructuralproblems.The

companysoperation

is

far

from

efficient.

Pemex

has

apowerful

union

that

exerts

much

influence in thecompanysmanagement.Employeesarenearly impossible to layoff,and the

unionservesasgatekeeperfornewhiring(de laCalle2007).Anothersourceof inefficiency is

the degree of clientelism that pervades the company. Many of its economic activities are

captured by interest groups and rent seekers of different sorts. Corruption is especially

commonintransportationandotherdownstreamactivities(Elizondo2011).

Ontop

of

its

internal

problems,

Pemex

is

burdened

by

an

excessive

bureaucratic

oversight.

Nearlyallfinancialdecisions,largeandsmall,needtobeofficiallyapprovedbytheSecretaryof

Treasury.8Thisincludesalldecisionsaboutinvestmentanddebt.TheSecretaryofTreasuryalso

7Strictlyspeaking,Caldernsremarkappliesonlytoprovedreserves.Ifweaddtheprobableandpossiblereserves,

Mexicohasenoughoiluntiltheyear2035(Alberro2007).

8InterviewwithanofficialinthedepartmentofFinanceandTreasuryofPemex(FinanciamientosyTesorera).


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imposesa large tax levyon thecompany.Royaltiesand sales taxes tend todepletePemexs

revenuesleavinglittlescopeforreinvestmentandrecapitalization.

There is a consensus among experts that changes are needed in Pemex. But there are

drasticallydifferentviewsonwhatthosechangesshouldbe.Ideologytendstoplayabigrolein

thetypes

of

reforms

that

different

stakeholders

are

willing

to

support.

Those

differences

need

tobereckonedwithifanychangeistohappen.Inparticular,anysignificantreformwillentail

changesinthelaw.ThosechangeswillneedapprovalfromCongressandthereforewillrequire

negotiations between the Executive and the Legislative branches, as well as between the

differentpoliticalparties.Reformerswillalsohavetoconfronthighlymobilizedgroupswhose

interestsareaffected.

Forthose

reasons,

we

claim

that

any

solution

to

Pemexs

situation

is

ultimately

political.

Our

analysisofthepoliticalprocessofenergyreformstartswithabriefoverviewoftherulesand

institutions governing lawmaking inMexico. Subsequently,we proceed to analyze themain

actorsandthemainissuesbehindtheoilindustryinMexico.

Legislativerulesandinstitutions

Congressional gridlock is one of the major obstacles for any structural reform in Mexico,

especiallyenergy reform.TheExecutive isvery limited inwhat itcanaccomplishon itsown.

Changing the regulatory framework requires passing new legislation through Congress.

Regardingtheoil industry,thestatuesthatneedmodificationarewellknown.Some reforms

requiremodifyingordinarylaws;otherreformsrequireamendingtheConstitution. Eitherway,

difficultnegotiationsandmajorconcessionsareneeded.

HenceitisworthunderstandinghowlawsaremadeinMexico.Thissectiondescribessomeof

the relevantrulesand institutionsgoverningthis legislativeprocess. Inmanyregards,Mexico

has an electoral systemmodeled on themost advanceddemocracies such as theAmerican

presidential system. Inparticular, the government isdivided in three independentbranches:


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Executive, Legislative and Judicial. In other regards, however, Mexico is still a developing

democracyvulnerabletoabuseandmalfunction.

Formostofthetwentiethcentury,Mexicoexperiencedahegemonicperiodwhereoneparty,

the Party of the Institutional Revolution (PRI), dominated all aspects of politics. Even then,

reformminded

executives

found

it

difficult

to

open

up

Pemex.

Presidents

still

had

to

negotiate

with internal factionswithin theparty, such as thePemexunion andotherPRImembersof

nationalistideologies(foradetailedsurveyofthosereformattempts,seeElizondo2011).With

democratization in the 1990s, the oneparty rule was eventually replaced by competitive

elections. At that point, political parties became assertive players in Mexican politics, and

CongressbecameacentralinstitutioninMexicosgovernance.

Thelegislative

branch

has

two

chambers:

the

Senate

(i.e.

the

Upper

House)

and

the

Chamber

of

Deputies (i.e. the LowerHouse). Senators are elected for sixyear termswhileDeputies are

elected for threeyear terms. Importantly, legislators are not allowed to seek reelection in

consecutiveterms.Hence,theymustfindadifferentappointmentattheendofeachterm.This

implies that Senators and Deputies are highly dependent on their parties for subsequent

promotions.Thisnoreelectionruleisoneofthesourcesoftheexceptionaldisciplinethatparty

leaderscanexertontheirdelegatesinCongress.

Legislative bills can be initiated by Congress or the Executive, but either way, any new

legislation needs to be approved in both chambers. Negotiations about Pemex and the oil

industryhaveusuallybeenoriginatedbytwokindsof initiatives: fiscalandbudget initiatives,

andenergyinitiatives.Bothtypesofnegotiationswillbeanalyzedinthispaper.

ChangestoanordinarylawrequireasimplemajorityinCongress,namely50%ofthevotescast.

Incontrast,

changes

to

the

Constitution

require

asupermajority

of

votes

in

Congress,

namely

twothirdsofthevotesineachchamberplustheapprovalofamajorityofstatelegislatures.9It

followsthatchangingtheConstitution ismoredifficultthanchangingordinary laws.Thatfact

mustbetakenintoaccountbythosewhowishtoinitiateanenergyreform.

9Article135oftheMexicanConstitution.


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Theoil industry is regulated atboth levels.At theConstitutional level,a strictownershipof

petroleumandothernaturalresourcesisgrantedtotheState.10

Attheordinarylawlevel,the

statutes accompanying the Constitution establish the States monopoly in every oilrelated

activity.11

Reformers need to choose their goals carefully: a legal battle to change the

Constitution would presumably be more meaningful, but would be tougher than changing

ordinarylaws.12

In

2008,

President

Caldern

chose

the

latter:

he

explicitly

ruled

out

any

Constitutionalamendments,andthereforetheinitiativehesenttoCongresspertainedonlyto

statutorylaws(RivaPalacio2009).Indeed,hecalculatedthiswastheonlykindofreformthat

couldgetpassthemajorpoliticalpartiesinCongress(Farfnetal.2009).

Mexico has three main political parties: the National Action Party (PAN), the Party of the

Democratic Revolution (PRD), and the Party of the Institutional Revolution (PRI). In general

terms,the

PAN

is

viewed

as

right

of

center,

the

PRD

is

viewed

as

left

of

center,

and

the

PRI

claimstoholdthemiddleground.Wedescribetheideologiesandpreferencesofthoseparties

inmoredetaillater,especiallyinregardstooilissues.

Those threepartiesare strong,welldefined,andhierarchical.Theyhave largememberships

andlargebasesofsupport.TheytendtobeexceptionallydisciplinedinCongress,suchthatall

the legislatorsnearlyalwaysvotetheparty line.(Thepastsixyearshavebeentheexception,

wherethe

vote

of

PRD

legislators

has

been

divided

on

some

issues.)

In

the

past

two

decades,

all

three parties have held solid shares of seats in Congress. The following figures depict the

configurationoftheLegislaturesfollowingthe2006presidentialelectionandthe2009midterm

election.

10Forexample,Article27oftheMexicanConstitutionstatesthathydrocarbonsareownedbytheNation,andsuch

ownership is not transferable (inalienable), does not lapse (imprescriptible), and is not subject t seizure

(inembargable).

11Forexample,anordinary lawstatesthatonlytheNation isallowedtoexploithydrocarbonsandcarryoutthe

activitiesofapetroleum industry (Article2of theLeyReglamentariadelArtculo27ConstitucionalenelRamoPetrolero).

12Somefundamentalregulationcanalsooccurat lower levelsofthe lawaswell.Anexample isArticle62ofthe

rulebookaccompanyingthePemexlawthataccompaniesArticle27oftheConstitution.Thattechnicalstatuteisin

chargeofdefiningthetermsofthecontractstoserviceproviders,whichisoneofthemostcontroversialissuesin

Mexicanpolitics(Grunstein2011a).


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Figure1

PartiesshareofseatsintheLXLegislature,20062009*

ChamberofDeputies Senate

*

Source:

Secretara

de

Gobernacin,

Sistema

de

Informacin

Legislativa

http://sil.gobernacion.gob.mx/portal

Figure2

PartiesshareofseatsintheLXILegislature,20092012*

ChamberofDeputies Senate

*Source:SecretaradeGobernacin,SistemadeInformacinLegislativa

http://sil.gobernacion.gob.mx/portal


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Aswecantellfromthosefigures,usuallynopartyhasmorethanfiftypercentoftheseats in

Congress.We can also see that any coalitionof twoof the threemajorparties can reach a

majority of votes, and can thus change ordinary laws.However, all threemajor parties are

neededtoreachthesupermajorityneededtochangetheConstitution.

Suchbeing

the

institutional

context,

now

we

analyze

the

content

of

possible

energy

reforms.

What are the main issues that parties can be expected to bargain over in Congressional

negotiations?

Issuedimensions

The topic of oil production is complex, with countless implications and ramifications. Its

regulation is also complex. The Mexican law has literally hundreds of statutes and clauses

relating toPemexand theenergy sector.When it comes to fundamental reforms,however,

only a few key issueswill tend to come to the forefront of discussions. We are aiming to

identifywhatthosekeyissuesare.

This iscertainlythecase inthepublicdebate:ofthenumerous facetsoftheoil industry,the

publicdebatehas tended to focusmostlyona fewhotbuttons.Wehaveobserved that the

media, forexample,tendstocommentonthosetopicsthatcreatethemostpassion,suchas

theprivatizationofPemex,while ignoring those topics thatare less sensational, suchas the

developmentofgreenenergy.Politicalparties,for ideologicalandpracticalreasons,alsotend

totakestrongpositionsononlycertaintopicsbutnotothers.Likewise,ordinarycitizenstendto

form anopiniononbroadproblems, such as corruption, rather than forming anopinionon

detailedminutiae,suchasspecificextractiontechnologies.Sowecanexpectthepublicdebate

tocenteraroundahandfulofhottopics.Forempiricalaccuracyitisthuspertinenttoidentify

theissuesthataremostsalientinthepublicdebate.

Wearealsointerestedinpointingouttheissuesthataremostdivisiveamongpoliticalactors.

Upon studying past energy reforms, it is apparent that politicians spendmost of their time

debatingafewstickingpoints.Forexample,theCongressionalnegotiationstoreformPemexin


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2008weredominatedbyargumentsoverrisksharingcontracts,managerialflexibility,andfiscal

autonomy.Webelievethispatterncanbegeneralized:futurenegotiationscanbeexpectedto

centeraroundahandfulofissuesthatacutelyseparatetheideologicalpositionsofthedifferent

parties. Inordertounderstandpastandfuturenegotiations, it isworth indicatingwhatthose

coreissuescouldbe.

Forthispaperwehave identifiedthreesuch issues.Tobeprecise,wepostulatethatmostof

thecontentiouspointsofenergyreforminMexicocanbeorganizedinthreebroaddimensions.

Thosedimensions are the following: (1)Thedegree towhichprivate capital can and should

participate in exploration and other economic activities of Pemex. We call that dimension

PrivateInvestment.(2)ThedegreeofbenefitsandinfluencegrantedtoPemexemployeesandtheirunion.We call thatdimension LaborAccountability.And (3), the amountof taxes androyalties

that

should

be

levied

on

Pemex

to

finance

government

activities.

We

call

that

dimensionFiscalAutonomy.Thosethreetopicsaresummarized inTable1.Theyhavecreatedthemosttensionamongpoliticalactors inpastnegotiationstoreformPemex,andwebelieve

theywillcapturemostoftheactioninanyfuturenegotiationaswell.

Table1

ThethreemainissuesofenergyreforminMexico

PrivateInvestment The degree to which private capital can and should participate inexplorationandothereconomicactivitiesofPemex.

LaborAccountability ThedegreeofbenefitsandinfluencegrantedtoPemexemployeesandtheirunion.

FiscalAutonomyTheamountof income thatPemex shouldbeallowed tokeep rather

thanbeingtransferredtothegovernment.Also,thefreedomgranted

toPemextoacquiredebtandallocateitsfunds.

Wenowdescribethosethreeimportanttopicsinmoredetail.


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Privateinvestment

ThemostsensitiveissueisthedegreeofprivateparticipationinPemexactivities.Itisalsoone

of the issues that create the most confusion. In Mexico, the issue is often believed to be

dichotomous:whetherprivatecapitalshouldbeallowedorbanned.Inreality,however,thereis

awide

range

of

possibilities

for

the

involvement

of

private

capital

(Benton

2010).

As

we

show

below,theinvolvementofprivateinvestmentinacountrysoilindustryisactuallyamatterof

degree.

Thereisadditionalconfusionabouttherealintentionsofreformers.Often,theyareaccusedof

intending to privatize Pemex. For instance, opponents of the 2008 reform claimed that

PresidentCaldernsinitiativewasaimingatsellingthestateoilcompany(LangstonandPrez

2009).A

cursory

reading

of

Calderns

initiative,

however,

reveals

that

nothing

about

selling

the

companywas included. In reality, only a trivial number of pundits are proposing an allout

privatizationofthefirm.Eventheanalystswhowishtoliberalizetheoilsector,suchasAlberro

(2007) and de la Calle (2007), tend to agree that Pemex should remain a statemanaged

companyandthatMexicanoilshouldremainundercontrolofthegovernment.Sowehavenot

foundtheprivatizationofPemextobeoneoftheprincipalissuesinCongressionalnegotiations.

Rather,the

key

issue

is

whether

private

capital

should

be

allowed

to

partner

with

Pemex.

For

example, a large part of the debate during the 2008 reform revolved around the types of

contractsthatPemexshouldbeallowedtocelebratewithitsprivatepartners.Thequestionis

the amount of incentives that should be granted to service providers.13

The reformers

contemplate risksharing and productionsharing contractswith otherNOCs and IOCs. They

believethatpermittingjointventureswouldgivePemexaccesstothetechnologyandexpertise

it currently lacks fordrilling indeepwater.On theotherhand, thenationalistsbelieve such

incentivesgo

too

far

because

they

give

too

much

control

to

non

sovereign

entities.

They

fear

thiswouldputenergysecurityatrisk(Mares2011).

Another sticky point is whether other firms should be allowed to compete with Pemex in

Mexicanterritory.Forexample,somepolicymakersclaimthatprivatefirmsshouldbeallowed

13ForalistofthepossibletypesofincentivecontractsseeGrunstein2010.


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tobuildandoperaterefineries.14

Otherssuggestthatforeignoilcompaniesshouldbeallowed

toextractMexicanoil.15

Anotherproposalistoallowdifferentbrandsofgasolinetobesoldin

Mexico.16

Inallcases,astrongerEnergyRegulatoryCommissionwouldneedtobedesignedin

preparation forexternalcompetition.17

Suchexternalcompetition, it isbelieved,would force

Pemextobecomemoreefficient.18

Butthetraditionalviewistoconsidersuchliberalizationto

beunconstitutional.19

Traditionalists

are

also

weary

that

sharing

the

market

with

other

producerswoulddiluteMexicossovereignty.20

Table2

Privateinvestmentdimension

Thisdimensionmayinclude:

Intermsof

partnering:

Paying a bonus to service providers if production exceeds the goal; ifdeadlines

are

met;

if

there

is

some

transfer

of

technology.

Tyingpaymentsforservicestointernationalprices;toaggregateproduction;totheprofitabilityofthewell;totheoverallvalueoftheproject.

Granting rights topartnersoverproduction;over income from sales;overreserves.

Intermsof

competing:

Allowing other firms to build and operate refineries; handle gas andpetrochemicals;extractMexicanoil;givemaintenancetopipelines.

Allowingmorecompetitionintransportation,storageanddistribution. Breaking the monopoly in the transformation and marketing of

hydrocarbons.

AuthorizingnonPemexgasstations. Liftingtradebarriersinenergygoods(i.e.allowingmoreimports). Strengtheningregulatoryagencies.

14Alberro(2007)

15delaCalle(2007)

16Elizondo(2011)

17Ballinas(2011)

18HartleyandMedlock(2011)

19RivaPalacio(2009)

20FuentesBerain(2008)


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In sum,what really divides political actors is the degree towhich private capital should be

allowed topartnerandcompetewithPemex. InTable2abovewe listsomeof theelementsthatwouldincreasetheoverallparticipationofprivatecapitalintheMexicanoilindustry.The

more of those elements are included in the law, the farther we will be moving along the

dimensionthat

we

have

called

PrivateInvestment.

Laboraccountability

There isawideconsensusthatthepowerfulunionofPemexworkers isholdingthecompany

back.Theworkersthemselvesarenotnecessarilytheculprits.ThereismuchrespectforPemex

engineers,whogetfrequentlypraisedbyanalystsonbothsidesofthepoliticalspectrum.And

Mexicanshave

much

sympathy

for

oil

workers,

many

of

whom

risk

their

lives

to

get

us

our

daily

supplyofpetrochemicalproducts.

But the union is a corporatist structure that exerts an unwarranted influence on Pemex.21

Consequently,workersintheoilindustryareamongthemostuntouchableinthepublicsector.

Inparticular,theirlaborcontractsareexceptionallyrigid.Itisvirtuallyimpossibletofirethem,

evenwhentheirpositionsbecome redundant. It isalsohard toconvincethem to transferto

newgeographical

locations.

So,

when

awell

dries

out,

the

employees

remain

in

place.22

Accordingtosomecalculations,abouteleventhousandemployees(meaningeightpercentof

thestaff)arebeingpaidtodonoworkatall(Elizondo2011).Suchrigiditiesareclearlyacause

of inefficiency inPemexoperations.For instance,according tode laCalle (2007),these labor

arrangementsarecausingeveryrefineryinMexicotolosemoney.

Work benefits are also a problem. Pensions and social security are relatively large in

comparisonwith

the

rest

of

the

public

sector

and

even

the

private

sector.

The

generous

pensionsarebecomingaparticularconcern since theyareunfunded.They representa large

debtforthecompany.Thelackoffundingforcurrentandfuturepensionsisaggravatedbythe

21TheunionsnameisSindicatonicodeTrabajadoresPetroleros.

22InterviewwithanofficialinthedepartmentofFinanceandTreasuryofPemex(FinanciamientosyTesorera).


15/41

fact that the staff isaging: theaverageageofPemexworkers is55,older than thenational

average(delaCalle2007).

Theunionhas createdother typesof inefficiencies. It serves as gatekeeper fornewhiring,

whichhas led tomany instancesofabuseand corruption.Forexample, it isknown that the

unionsells

new

positions

in

Pemex

for

lucrative

bribes

charged

on

incoming

employees.

So,

if

there isajobopening, thepositionmightnotgo to themostqualifiedcandidate,but itwill

probablygoinsteadtosomeonewhoiswellconnectedwithaunionleaderandispreparedto

pay a large fee. Many positions are effectively hereditary, as the union ensures they are

smoothlytransferredfromfathertoson.

Reformerswould likeworkerstobemoreaccountable.Theywould like laborcontractstobe

moreflexible

and

agile,

and

the

unions

behavior

to

be

more

transparent

and

cooperative.

In

general terms, policymakers would like the union to take more responsibility for the

modernizationofPemex.Ontheotherhand,thecurrentworkersbenefitfromthestatusquo.

HencethetacitgoalsofthePemexunionaretopreserveitsexistingprerogatives,expandthe

numberofunionizedworkers,andincreaseitsinfluenceinthecompanysdecisions.

Table3

Laboraccountability

dimension


Moreflexiblelaborcontracts. Eliminatingcorruptioninhiring. Ensuringamoretransparentanddemocraticselectionofunionleaders. Renegotiatingtheoutstandingpensions. DecreasingtheunionsinfluenceintheBoardofDirectors.

InTable3abovewelistsomeoftheelementsthatwouldincreasetheoverallaccountabilityof

thePemexuniontothegovernmentandtotheMexicanpeople.Themoreofthoseelements

areincludedinthelaw,thefartherwewillbemovingalongthedimensionthatwehavecalled

LaborAccountability.


16/41

Fiscalautonomy

Theamountof taxesand royalties leviedonPemex isalso frequentlymentionedasamajor

problemforthecompany.Accordingtosomecalculations,thetaxburdenonPemexcurrently

amounts to 72% (Starr 2007). This does not leave much money for exploration and other

investmentsthat

Pemex

needs

to

make.

Moreover,

Pemexs

budget

is

quite

unpredictable

as

it

needs tobe renegotiatedeveryyear.TheChamberofDeputies is inchargeofapproving the

spending of all public entities, including Pemex. This makes the Deputies the de facto

shareholdersofthecompany. Italso forcesthedirectorofPemex to lobbyCongress fornew

fundsyearinandyearout.23

Thereforeitisnotsurprisingthatmanypoliticianshavecalledforareductionofthetaxburden

onPemex.

The

ideological

affiliation

of

such

politicians

is

not

necessarily

predictable,

however.

Weclaimthat ideologyplaysasecondaryroleonthepositionthatpoliticalactorswilltakeon

thisissue.Whatwillmattermost,webelieve,iswhetherapoliticianbelongstotheincumbent

partyholdingoffice,orwhetherheisintheopposition.24

Ononehand,incumbentsneedresourcestorunthegovernmentandcarryouttheirprojects.

As such, they will strive to maximize the governments income, and they will resist any

significantreduction

on

Pemexs

taxes

which

have

fed

the

government

for

decades.

As

illustratedby thePANadministrations, the incumbents impulse to resist tax reductions cuts

acrossideologicallineages.

Ontheotherhand,oppositionpartieshavemorefreedomtoadvocatefortaxreductions,asit

isnottheirprogramthatneedsresourcesforimplementationintheimmediatefuture.Hence,

theywillhavemore freedom to takepopularpositions, such as reducing the taxburdenon

23InterviewwithoilexpertfromCIDE.

24ForasimilarargumentseeFarfnetal.(2010,pp.313314).Theyclaimthat:Ladependenciahistricade los

ingresosfiscalessobreloshidrocarburosexplica,engranmedida,laoposicinacualquiercambioqueimpliquela

prdidadedichosrecursosporparte()delpresidenteenturno,independientementedesuperfilideolgico.()

La problemtica fiscal trasciende incluso las posturas ideolgicas sobre el tema. () Es decir,mientras que el

gobierno estableca las bases para incrementar la recaudacin, la oposicin () trataba de asegurarmayores

recursosparaPetrleosMexicanos.


17/41

Pemexandgivingitmoreautonomytomakespendingdecisions.Suchwasthecaseduringthe

2008 energy reform, where the PRD and the PRI argued to increase the companys fiscal

autonomy, especially its ability to acquire debt. To the incumbents chagrin, they also

advocatedforareducedoversightfromtheTreasuryDepartmenttomakePemexmoreagile.

Table4

Fiscalautonomydimension


Reducingroyalties,valueaddedtaxesandotherleviesontheoilindustry. GrantingPemexmoreautonomyinspendingandinvestmentdecisions. ReducingthebureaucraticoversightfromtheTreasuryDepartment. Raisingthecompanysdebtceiling.

InTable4abovewelistsomeoftheelementsthatwouldlightenthefiscalloadonPemex.The

more of those elements are included in the law, the farther we will be moving along the

dimensionthatwehavecalledFiscalAutonomy.

Athreedimensionalframework

Takentogether,

those

three

issues

can

serve

as

aconceptual

framework

to

analyze

energy

reforms inMexico.We refer to each of those topics as an issuedimension or a policy

dimensionbecause theyneatlyseparate thepositionsofdifferentpoliticalactorsasdistinct

points inacontinuous line.Wesuggestthatthisthreedimensionalframeworkcanserveasa

starting point to begin understanding and predicting the outcomes of negotiations among

politicalactorsregardingtheoilindustry.

Webelieve

that

other

subtleties

and

ramifications

of

this

political

process

can

be

incorporated

tothisinitialframeworkinfutureanalyses.Webrieflymentionnowsomeoftheissuesthat,in

spiteofbeinggermane,willplaya secondary role in the conceptual framework thatwe are

offering.


18/41

Otherissues

Thereareofcoursemanyissuesthatwouldbeimportanttoincludeinacomprehensiveenergy

reform.Forexample, thecrucialquestionsof finding renewable sourcesofenergyaswellas

minimizing the environmental damage of Pemex activities were mentioned in 2008.

Unfortunately,however,

they

only

played

asecondary

role

in

the

debates

and

were

not

even

partoftheoriginalinitiativediscussedinCongress.

Someoftheotherissuesthatmayariseinfuturenegotiationsincludethefollowing:

1. Movingtowardssustainability.2. Wrappinguptheplantoissuecitizenbonds.3. Reducingclientelismandcorruptionindownstreamactivities,suchastransportation.4. Ensuringamoretransparentprocessofgrantingservicecontracts.5. Ensuring the managerial autonomy of Pemex with respect to Congress and political

parties.

Note thatourgoalwas to identify the issues thathave liedat thecoreofpast reforms,and

distinguish them from other issues that, in spite of their importance, have actually taken a

backseatinCongressionalnegotiations.Aswementionedbefore,webelievethatthreeissues

tendto

capture

all

the

attention,

while

other

issues

tend

to

take

abackseat.

We

now

identify

themainpoliticalactorsandthepositionstheycanbeexpectedtotakeonthoseissues.

Themainactorsandtheirpolicypositions

The next step in understanding the reform process is to identify the actors that are most

influential.PoliticsinMexicoaredominatedbyafewindividualsandorganizationswhoactas

themainpowerbrokerswhen itcomes topassingnew legislation inCongress.Ourgoal is to

identifythemanddescribetheirpreferencesonthemaindimensionsofenergyreform.

A legal initiative of the magnitude of an energy reform needs to be spearheaded by a

determined leader.ThePresidentofthecountrytypicallyprovidessuch leadership.Suchwas


19/41

the caseofPresidentCaldernwhodesignedand introducedan initiative inCongress.Once

received, it isuptothemajorpoliticalpartiestodecidewhethertoapprove,rejectoramend

thePresidentsinitiative.Aswementionedearlier,Mexicohasthreelargepartiesthatcontrol

Congress:thePAN,thePRDandthePRI.Giventhepivotal influencetheyhave inpassingany

reform,thosearethefourmainagentstoconsider,assummarizedinthenexttable.

Table5

ThemainpoliticalactorsinCongressionalnegotiations

ThePresident ThePAN ThePRD ThePRI

There are of course several other actors that have, or try to have, some influence. But for

several reasons (institutional and political) they have not exerted an influence of the same

magnitudeasthefirstgroup.Theyinclude:

1. ThePemexunion2. ThesmallerpartiesrepresentedinCongress:PVEM,PT,Convergencia,PANAL3. Academics,intellectualsandthemedia4. Publicopinion5. Internationaloilcompaniesandinternationalpublicopinion

Wenowanalyzethemainactorsandtheirpositionsonthemainissues.

TheExecutivebranchandthePresident

For the foreseeable future, thePresidentofMexicowillbe issued fromone the three large

parties,thePAN,thePRDorthePRI.Heorshemightnothavefullcontrolthatparty,however.

ThePresidentislikelytobecloselyidentifiedwithacertainfactionwithinhisorherparty,but

might differ from the ideological positions of other internal party factions. Thus, to garner

support for a government initiative, the President always needs to engage in some internal

negotiationsinadditiontotheexternalnegotiationswiththeotherparties.


20/41

Consequently,intermsofpolicypreferences,wewillassumethatthePresidentisrepresented

inCongressbyoneofthedominantfactionswithinhisorherparty,butotherlegislatorsinthe

samepartymightrepresentdifferentfactions.Wedescribesuchfactionsforeachpartybelow.

ThePANIn general terms, the PAN is a centerright party with a long tradition of advocating

economically liberal policies. For most of the twentieth century, the PAN was the most

prominentoppositiontothehegemonicPRI.Afterdemocraticreformsinthe1990sthatleveled

theplayingfieldinelections,thePANroutedthePRIbywinningthe2000electionwithVicente

Foxas itscandidate.ThePANwon thepresidencyagain in the subsequentelectionof2006.

Thusit

currently

holds

power

with

President

Felipe

Caldern

until

2012.

We

should

note

that

Mexico does not allow the reelection of presidents, which implies that all administrations,

includingthecurrentone,canonlylastforoneterm.

Ofallthemajorparties,thePAN isusuallythe leastdivided.Factionsexist,butdifferencesof

opinionhave tended tobe resolved internally such thataunified front canbepresented in

congressionalnegotiations.Thiswaspatentwhilepreparingtheenergyreformof2008.Tobe

sure,it

was

reported

that

some

divisions

existed

within

the

PAN

and

the

government.

More

specifically, there was an entrepreneurial faction who wanted more liberalization than

PresidentCaldernconsideredprudent to fight forat thatpoint in time.On theotherhand,

therewasanotherfactioncalledthehumanistswhosharedthemorepragmaticstrategyof

thePresident.Ultimately,however,allfactionsralliedbehindtheExecutivesinitiative.

On the issue of private investment, the PAN has insisted on the need to partner with big

transnationalcompanies

to

carry

out

deepwater

exploration

and

other

upstream

activities

for

which Pemex lacks expertise. For that purpose, it advocates for more flexible contracts

containingeconomic incentives toserviceproviders.Moreover,consistentwith its traditional

marketfriendly ideology, the PAN would also prefer to delegate to the private sector the

constructionofrefineries,ducts,storage,andotherdownstreamactivities.


21/41

Ontheissueoflaboraccountability,thePANhasavoidedmakingexplicitstatements inpublic

as itwishes toavoidadirect confrontationwith theunion.Butwecan infer that Panistas

sharetheviewofmanytechnocratsthatPemexwouldbebetteroffiftheunionwasweakened.

Accordingtothisview,thestronggripthatunionleadershaveonthecompanyisblockingthe

liberalizationoftheoilsectorandispreventingthemodernizationofPemex.Consequently,the

unionshould

be

forced

to

sit

at

the

negotiating

table

to

make

serious

concessions.

It

should

be

noted,however, that in spiteofsuchviewsbothPresidentFoxandPresidentCaldernwere

unwilling to oppose the union during their own administrations out of fear of a possible

retaliation. In futureenergy reforms,we can speculate that thePanistaswill continue tobe

unwillingtopushthis issuebythemselves:onlya largecoalitionofpartnersthat includesthe

PRIislikelytoconvincethePANtofinallychallengetheunionsinterests.

Onthe

issue

of

fiscal

autonomy,

the

PAN

has

had

mixed

motivations.

On

one

hand,

its

entrepreneurial instinctswouldnormallybeto lower the taxburdenonPemexallowing itto

operate as a rational firm. On the other hand, the PAN has been running the federal

governmentsince2000,thusneedingtoraisefiscalfundstocarryoutitsprogram.Intheend,

itsideologicalviewsweredwarfedbytheverypragmaticdesiretohavefiscalfundsthroughout

theadministration.SuchwasthecasethroughouttheCaldernadministrationwherethefirst

SecretaryoftheTreasury,AgustnCarstens,endeavoredtoquellthesustainedpressure from

oppositionparties

to

give

more

funds

to

Pemex.

Future

positions

on

the

fiscal

issues

will

dependonwhetherthepartyisintheoppositionoristheincumbent.

ThePRD

ThePRDwasbornoutofabroadallianceof leftwingpartiesthatranged from leftofcenter

dissidentsofthePRIallthewaytosmallercommunistparties.Asaresult,itgenerallysupports

sociallyliberal

issues,

and

it

advocates

distributive

policies

in

favor

of

the

most

vulnerable

groupsinthepopulation.Ithasneverwonapresidentialelectionbutcameveryclosein2006

whenitlostbyarazorthinmargin.

Currently,thePRD isdeeplydivided intwodominantfactions.Thefirstone isofficiallycalled

NuevaIzquierda,butismostcommonlyknownastheChuchos.Thisfactioncommandsmostofthebureaucraticpositions inthePRD, includingthe lasttwoChairmenoftheparty. Italso


22/41

commands the loyaltyofmost PRD legislators inCongress. TheChuchos are considered the

moderate factionwithin theparty. Indeed, theyhavebeen themostwilling toengagewith

PresidentCaldernandnegotiatewithotherparties.

On theotherhand, the seconddominant factionhasexplicitly ruledoutany communication

withthe

government.

This

faction

is

loyal

to

Andrs

Manuel

Lpez

Obrador

(AMLO).

He

was

the

PRDcandidateinthe2006election,butheneveracceptedhisdefeat.Sincetheelection,AMLO

hasusedhisinfluencetodissuadethePRDandotherleftwingpartiesfromcooperatinginany

waywith theCaldern administration.His faction ismore radical than theChuchosboth in

termsofideologyandtactics(LangstonandPrez2009).AMLOonlyhasaminorityofloyalists

inCongress,buthewieldsconsiderable influenceonallPRDpoliticiansgivenhistremendous

popularitywiththeleftwingbaseofvoters.

Ontheissueofprivateinvestment,thePRDhasespousedthenationalisticviewthatoilshould

exclusivelybeexploitedbytheState.Inaway,thePRDisincompetitionwiththePRItobethe

mostpatrioticdefenderofstrategicresources.Formostofthetwentiethcenturytherewasbe

nodoubtthatsuchnationalisticbannerswerepoliticallyownedbythePRI,especiallygiventhat

itwasaPRIpresident,LzaroCrdenas,whoinitiallynationalizedtheoilindustryfromforeign

firms.Butnowadays,ownershipofthenationalisticbannerisverymuchindoubtwiththePRD

risingas

the

fiercest

defender

of

national

sovereignty.

This

is

especially

true

of

AMLOs

faction

who organizing massive street demonstrations to stop the 2008 energy reforms. Even

symbolically,thePRDhasclaimsoverthehistoricnationalizationoftheoil industrygiventhat

LzaroCrdenasprodigalson,Cuauhtmoc,isthefounderandmoralleaderoftheparty.

Consequently, the PRDs position is that private firms should not be allowed in strategic

activities such as transportation, storage and transformation of hydrocarbons. Moreover,

contractswith

service

providers

should

not

have

any

privatizing

undertones.

In

particular,

contracts should not be tied to the price, quantity or quality of the oil extracted. Service

providersshouldnotbeallowedtospeculatewiththerentfromoil,andtheyshouldcertainly

notbeallowedtoaddMexicanreservestotheirbooks.Andmostcrucially,Pemexshouldnever

sellsharesofstock,orbeotherwiseprivatized.ThePRDpositioncanbesummarized inafew

words:Nochanges to theConstitution.Somedifferenceofopinionexistsamong its factions,

however.While theAMLO faction isunwilling to consideranychanges toordinary laws, the


23/41

Chuchos factionhasbeenwilling to support somedegreeof incentives to contractors (Starr

2007).

On the issueof labor accountability, thePRDsposition is fairly subtle.Given itsprogressive

nature,thePRDisnaturallyproworker.Butthatdoesnotmeanitwillbeprounioninthecase

ofPemex.

The

union

has

atainted

reputation,

which

contradicts

the

PRDs

desire

for

more

transparency.Inaddition,theselectionofunionleadersisnotentirelydemocratic,whichfeeds

thePRDsdemandsformoreaccountability.Importantly,theunionremainshighlyloyaltothe

PRIsoitisunlikelythatitwillchangeallegiancetothePRDoranyotherpartyintheshortrun.

HencewebelievethePRDislikelytosupportaninitiativetodecreasethepoweroftheunion.

An indicationofsuchwillingnessoccurred in2008already:duringCongressionalnegotiations,

thePRDpartneredwiththePANtoproposeareductioninthenumberofunionmembersinthe

AdministrativeBoard

of

Pemex.

(The

proposal

was

eventually

brought

down

by

the

PRI.)

RegardingthefiscalburdenonPemex,thePRDhas longarguedthat itshouldbedramatically

reduced.As amatter of fact, such is themain solution it is hasproposed to rescue the oil

industry.InresponsetothecrisisinproductionthatPemexisgoingthrough,thePRDsproposal

is to increasepublic investment.Morepublic funds shouldbedevoted toexploration.More

spendingshouldalsobedevotedtoscientificresearchofthekindcarriedoutbythe InstitutoMexicanodelPetrleo.Pemexhascompetentenoughengineersandscientists;whatitneedsistokeepa larger shareof its income rather thanpaying suchhigh royalties. Inaddition to its

ideology, the PRD also has political incentives to advocate a lower tax burden: First, it is a

popularissuewithvoters.Andsecond,thePRDisanoppositionpartyand,aswearguedabove,

oppositionpartieshavefewerincentivestoprotectgovernmentrevenues.

ThePRI

ThePRI is theparty issued from theMexican revolution. It governedMexico formore than

seventy years, since 1929until 2000.That year, the PRI lostpower to thePANs candidate,

VicenteFox.Itfailedagaintogainpowerin2006,whenitcameadistantthirdbehindthePAN

andthePRD.However,thePRIhasgarneredsignificantmomentumsince2006.Ascanbeseen

inFigures1and2, itdidextremelywell inthe2009midtermelections, increasing itsshareof


24/41

theLowerHouse from21%to48%.ThePRI iscurrently thebestpositionedpartytowinthe

2012presidentialelection.

AlargepartofthePRIsrenewedpopularityisduetothemediatingroleithastakenduringthe

Caldernadministration. Ideologically ithaspresented itselfas themoderatepartybetween

therightist

PAN

and

the

leftist

PRD.

It

has

also

rejoiced

in

the

role

of

ultimate

power

broker

in

a

politicalambiencethathasbeenextremelypolarized.

The PRI membership covers a wide political spectrum. So it is no surprise that ideological

divisionsexistwithin its largestructure.Twofactionshaveemergedasthemost influential in

discussingtheoilindustry.Onefactionconsistsofthetechnocratswithintheparty.It isoften

referred to as the neoliberal faction for its associationwith economicstrained presidents

CarlosSalinas

and

Ernesto

Zedillo.

This

faction

is

ideologically

close

to

the

PAN,

and

is

willing

to

considerapartial liberalizationoftheoil industry.Duringtalkstoreformtheenergysector in

2008,FranciscoLabastidawasthetechnocratsspokesmanwithinthePRI.

Themembersoftheotherfactioncallthemselvesthenationalists.Theyopposeanyreform

that has privatizingundertones. They are quick to recall that itwas a PRIpresident, Lzaro

Crdenas,whonationalized theoil industryback in1938. Indeed, thePRIhasastrongclaim

overthe

symbolism

surrounding

the

Mexican

oil:

Pemex

in

particular,

which

has

become

symbol ofMexican sovereignty in the struggle to overcome foreign imperialism, is strongly

identifiedwiththatparty.HencemanytraditionalPristas,suchasCarlosRojasandManuel

Bartlett, spokepublicly against thePAN initiativeof 2008, and tacitly sidedwith thePRD in

tryingtoblockit.

Ontheissueofprivateinvestment,thePRIspositionisfurthercomplicatedbytheclosetiesit

haswith

service

providers.

The

PRI

is

known

to

have

aclientelistic

relationship

with

trucking

companies transporting gasoline and gas LP, as well as other entrenched service providers

(Elizondo 2011). For that reason, in 2008 the PRI opposed the clauses that would have

increased transparency in contracting. They also opposed the private management of

transport,storage,distributionandotherdownstreamactivitiesthatarecurrentlyinthehands

ofrentseekers.


25/41

Ontheissueoflaboraccountability,thePRIisthemostopposedpoliticalpartyinCongressto

changingthestatusquo.ThePRIhasaverycloselinktothePemexunion,whichwasfounded

in1935withsupportofPresidentLzaroCrdenas.Asothertradeunions,thePemexunionhas

historicallyhadarelationshipofmutualsupportwiththePRI.During itsperiod inpower,the

PRI gave ample autonomy to trade unions tomanage their fundswithout oversight, and it

ensuredthat

union

leaders

were

recurrently

reelected.

In

exchange,

the

party

has

enjoyed

the

tradeunionspoliticalandeconomic supportduringelections.Ablatantexampleoccurred in

2000whenthePemexunionchanneledmassiveamountsoffundstothepresidentialcampaign

ofthePRIscandidate,FranciscoLabastida.Those illegalcontributionsareestimated inexcess

of160milliondollars.25

Insum,thePRIservesastheunionsallyinCongress,andwilltendto

opposeanymeasureaffectingtheunionsinterests.Infact,suchwasaprerequisitetosupport

thePANslegislativeinitiativein2008:thePRIrequestedthatlaborprivilegesbekeptoutofthe

negotiations(Farfn

et

al.).

On the issueof fiscal autonomy, the PRIhas advocated for lower taxeson theoil industry,

especiallywhile ithasbeen in theopposition. For instance,duringdiscussions for the fiscal

reformof2007wherePresidentCaldernwanted tocreatenewcorporate taxesand income

taxes,thePRIconditioneditssupportonreducingthetaxburdenonPemex.Initially,President

Caldernwasresistanttomakingsuchtaxcutsonthecompany,butheeventuallyyieldedashe

knewhe

needed

to

PRI

to

pass

his

fiscal

reform

(Castellanos

et

al.

2009).

If

the

PRI

wins

the

presidency inthefuture,however, itmightchange itspositionand itmightstopadvocatinga

further autonomy of Pemex. The conjecture in this paper is that incumbency will trump

ideology,suchthatanyincumbentpartywilltendtoopposealargereductioninroyalties.

Congressionalnegotiations

We are now in a position to analyze the negotiation process: how can we expect energy

reformstounfoldintheMexicanCongress?Sofar,wehavedescribedtheplayersandtherules

of thegame, that is, thepoliticalagentsand the legislative institutions.Given this setup,we

nowdescribethetypeofcoalitionsthatneedtobemadeinordertoachieveareform.

25LaJornada,RogelioMontemayorSeguy,exdirectordePemex:Cronologadelcaso,FridayNovember3,2004.


26/41

Wedosobyconstructingsomeusefulgraphsdepictingthepoliticalpartiesandtheirpositions

on different issues. Such graphs will serve as visual aids to help us identify the types of

coalitions that could be formed, and the typesof outcomes that each coalition could bring

about.Thistypeofgraphicalanalysisofcoalitionmakingiscommoninspatialvotingtheory,

whichis

arecent

branch

of

political

science.

Before proceeding, however, we need to distinguish two different types of Congressional

negotiations that relate toPemex.As it turnsout, there are two separate typesof agendas

where issues about Pemex canbe included.One typeof agendaencompasses the issuesof

privateinvestmentandlaboraccountability.Thesetoflawsregulatingthosetwoissuescanbe

discussed together,particularly inthecontextofacomprehensiveenergy reformsuchas theone

of

2008.

A

second

type

of

agenda

encompasses

fiscal

and

budgetary

issues,

which

is

where

Pemexsfiscalautonomywouldbediscussed.Suchdiscussionswouldtypicallytakeplaceinthe

contextofafiscal reformofthekindthatPresidentCaldern initiated in2007,orduring theannualbudgetnegotiationsthatmusttakeplaceattheendofeachyear.Giventhatthosetwotypesofagendasarefairlyindependentofeachother,wewillstudythemseparately.Wenow

proceedtoanalyzetheminturn.

Coalitionsforprivateinvestmentandlaboraccountability

Westartbyanalyzingthenegotiationsregardingprivate investmentand laboraccountability.

They tend to occur in the context of an energy bill, meaning a bill exclusively and

comprehensively about theoil industry.Anexample is the initiative introducedbyPresident

Caldern in April 2008, which was discussed throughout the summer until it was voted in

Octoberofthatyear,andmadeintolawonNovember28.26

Ourgoalistoconstructagraphthatwilldepictthepositionsofallpartiesonthetwoissuesat

hand.Westartby interpretingeach issueasacontinuous linewhereeachpointrepresentsa

differentlevelonthat issue.Inpoliticalsciencejargon,suchlinesarecalleddimensions.Given

26SeeFarfnetal.(2010)foradetailednarrativeofthosenegotiations.


27/41

thatwehavetwoissuesprivateinvestmentandlaboraccountabilitywewillbeconstructing

agraphwithtwodimensions.27

Inthatbidimensionalgraphwewillplaceeachpoliticalactor

accordingtoitspreferences.Wewillalsoplacethestatusquoaccordingtothecurrentsituation

ofPemexandoilindustry.

Figure3depicts

this

policy

space:

the

horizontal

axis

corresponds

to

the

level

of

private

investmentintheeconomicsactivitiesofPemex,andtheverticalaxiscorrespondstothelevel

ofaccountabilityofthePemexlaborunion.Inthatspacewehaveplacedsiximportantpolitical

groups according to the levels of private investment and labor accountability that they are

expectedtoadvocatefor.Thosesixgroupsaretheleftwingfactionandtherightwingfaction

ofthethreemajorparties,thePAN,thePRD,andthePRI,aswedescribedinaprevioussection

above.We labeled those factions PANLeft, PANRight, PRDLeft, PRDRight, PRILeft, and PRIRight. The

figurehas

aseventh

point

corresponding

to

the

status

quo

of

the

oil

industry

in

Mexico.

Figure3

Theagendatoincreaseprivateinvestmentandlaboraccountability

Labor

accountability

Privateinvestment

SQ PRILeft

PRDLeft PRDRight

PRIRight

PANRight

PANLeft

27AusefulillustrationofhowprivateinvestmentcanbethoughtofasalineardimensioncomesinBenton(2010,

Table 1). That author created a scale of possible energysector structures, ranging from completely statist to

completelyliberal.


28/41

Thistwodimensionalspaceallowsustostudythepossiblecoalitionsthatcouldbeformedto

implementareform.Whatarethecoalitionsofpartyfactionsthatwouldbewillingandableto

movethestatusquotoadifferentlocation?

Weshouldrecallthatonepartybyitselfwillnothaveenoughvotestochangethelaw(seethe

mostrecent

shares

of

seats

in

Figure

2).

Changing

an

ordinary

law

requires

fifty

percent

of

the

votes inCongress,whichcanonlybeachievedbyat leasttwopartiestogether.Changingthe

Constitutionrequirestwothirdsofthevotes inCongress,whichcanonlybeachievedwithall

threepartiestogether.

Weconsidertwopossiblecoalitions.ThefirstonewouldbeanallianceofthePANandthePRI.

SuchacoalitionisdepictedinFigure4below.Thisalliancewouldbebestsuitedtoliberalizethe

legalrestrictions

on

private

investments

in

the

oil

industry.

The

PAN

along

with

the

technocratic

leadersofthePRIcouldexertenoughpressureonthenationalistfactionofthePRItoaccept

those changes. In fact, that was exactly the coalition that was initially formed in 2008 by

PresidentCaldernandtheleadersthePRI.Together,theyhadagreedonalegislativeagenda

that would allow more flexible service contracts to create partnerships with other oil

companiesandserviceproviders.Suchchanges,theyclaimed,didnotrequirechangestothe

Constitution; theyonly involvedchanges toordinary laws.ThePRIPANcoalitionhadenough

seatsin

Congress

to

pass

the

initiative.


29/41

Figure4

APANPRIcoalition

Labor

accountability

Privateinvestment

SQ PRILeft

PRDLeft PRDRight

PRIRight

PANRight

PANLeft

Intheevent,thePRIPANcoalitiondidnotendurein2008.AsexplainedinLangstonandPrez

(2010),thePRDseizedthetribuneinaraucoussessionintheSenatethatpreventedthevoteto

takeplace.ThisforcedthePANandthePRDtorestartthenegotiations,thistimeincludingthe

PRD.

Sothesecondpossiblecoalitionthatweanalyze isanallianceofthethreemajorparties,the

PAN,thePRIandthePRD.Itisfairtosay,however,thataslongastheradicalwingofthePRDis

dominatedbyAMLO,itwillneveraccepttojoinacoalitionwiththePAN.Sotheonlyrealistic

possibility isto includethemoderatewingofthePRD.Suchacoalition isdepicted inFigure5

below.


30/41

Figure5

APANPRIPRDcoalition

Labor

accountability

Privateinvestment

SQ PRILeft

PRDLeft PRDRight

PRIRight

PANRight

PANLeft

Aswecan tell from comparingFigures4 and5,a threeway coalitionwould lead to amore

modestchangethanatwowaycoalition.That isbecausemorepartiesneedtoagree.This is

whathappenedin2008,whenthePANandthePRIwereforcedtoincludetheChuchosfaction

of the PRD in the negotiations. The ensuing legislationwas awatered down version of the

originalinitiative.

On

the

other

hand,

this

type

of

coalition

is

better

suited

to

move

along

the

laboraccountabilitydimension:by including thePRD, thePANcangainanally forpressuring

thePRIintoweakeningtheunion.Thiswasalsoseenin2008:thePRDandthePANinsistedthat

asetofnew independentmembersof theAdministrativeBoard takecontrolof someof the

responsibilitiesthatunionrepresentativeswouldhave likedtokeepforthemselves(Farfnet

al.2010).

Thisframework

also

allows

us

to

speculate

about

the

exogenous

shocks

that

are

needed

to

changethepartiespreferences in favorofreform. Iftherewasamajorevent in thecountry

that convinced political actors of the need to modify the law, their positions would move

farther indirectionofchange:allpartieswouldstartadvocatingmoreprivate investmentand

more labor accountability. What major events could lead to such a shift in politicians

preferences?Weofferthefollowingpossibilities:


31/41

a) A continueddecline inproduction thatwould lead to a senseofurgency among thepoliticalelite.

b) A shift inpublicopinion in favorof liberalization,perhapsdue toabetterpromotionstrategyonbehalfofthegovernment.

c) AspectacularaccidentthatwouldraisedoubtsabouttheefficacyofPemexemployeesand

engineers.

d) Reachingthethresholdtobecomeanimporterinsteadofanexporterofoil.ThiswouldhaveapowerfulsymboliceffectinthepsycheoftheMexicanpublic.

e) Ahighlypublicizedseriesofcorruptionscandalsthatwouldweakentheunion.f) Adivisionintheunion,perhapsbecausearebelliousfractiongains importanceorwins

aninternalelection.

g) TheUnitedStatesdrilling intheGulfofMexicotoextracttheoil incommonterritory.This

is

already

possible

according

to

the

treaty

of

HoyodeDona,and itwould instilla

senseofurgencyamongthepoliticalclassinMexico.

Anyofthoseexogenousshockswouldhavetheeffectofmovingthepartiespreferenceinfavor

ofreform.ThatchangeisdepictedinFigure6below.

Figure6

Anexternal

shock

that

motivates

reform

Labor

accountability

Privateinvestment

SQ PRILeft

PRDLeft PRDRight

PRIRight

PANRight

PANLeft


32/41

As a consequenceofpartiesbeingmoreopen to change,Congresswouldeventuallypass a

reformwherethestatusquowasmodified.

Coalitionsforfiscalautonomy

Thethirdimportantissueintheoilindustryisthefinancialone.ThefinancesofPemextendto

bediscussedinthecontextofbudgetandfiscalnegotiations.Forexample,duringtheCaldern

administration,thefinancesofPemexwerefirstdiscussedduringthebudgetlawattheendof

2006,and thenagainduring the fiscal reformof2007. In thosenegotiations, the taxationof

Pemex was pitched against all other taxes to determine an overall level of government

revenues.

Severalmeasurescan increase the fiscalautonomyofPemex.Someof thosemeasures,such

allowing the company to acquire more debt, were listed in Table 4. But the most direct

measurewouldbetodecreaseitstaxburden.Aswementionedabove,theroyaltiesandother

leviesonPemexareveryhigh,preventingthecompanytoreinvestitsincomeinresearchand

exploration. So it is no surprise that reducing those taxes is a frequent proposal among

politicianswhowish to savePemex.Accordingly,we focusouranalysisonwhether taxeson

PemexcanbedecreasedastheresultofaCongressionalnegotiation.

Ourgoalnowistoconstructagraphthatwillhelpusvisualizethetypeofdiscussionsthattake

place infiscalandbudgetnegotiations inCongress.Aswedid intheprevioussection,wewill

interpret the possible policy outcomes as a twodimensional space. In this case, the two

dimensions correspond to the following two policy instruments: first, the amount of taxes

leviedonPemex; and second, the amountof allothernonPemex taxes.Eachof those two

policy instrumentswillbe interpretedasa continuous line,wheredifferentpoints represent

different levelsof taxation.Wedo this inFigure7,where thehorizontalaxis represents the

amount taxesand royalties leviedonPemex,and theverticalaxis represents theamountof

taxesfromallothersources.


33/41

Figure7

Theagendatodecreasethefiscalburden

Other

taxes

TaxesonPemex

SQOpposition

2

Opposition

1

Incumbent

We also aim to depict the positions of all three major political parties according to their

preferencesonthosetwodimensions.Weassumethatanincumbentpartywillwanthightaxes

onPemextobeabletocarryout itsprogram. Itwouldalsoliketo increaseothertaxes,given

thatMexicos tax revenue is so small.On the other hand, opposition parties can afford to

advocatefor

larger

tax

cuts,

and

more

so

if

they

do

not

expect

to

win

the

presidency

in

the

short run.Figure7depicts threeparties, labeled Incumbent,Opposition1,andOpposition2.

We assume that the party labeledOpposition 1 will be slightly more cooperativewith the

Incumbentparty,perhapsbecauseitbelievesthatitwillwinthepresidencyinthenearfuture.

Wealso includea fourthpointcorresponding to thecurrent levelof taxation in thecountry,

labeledStatusQuo.

Withthese

graphs

we

can

see

the

types

of

coalitions

that

could

be

formed

to

decrease

the

level

of taxation on Pemex. One possible coalition with a sufficient number of votes would be

betweenthe incumbentpartyandtheclosestoppositionparty.Suchacoalition isdepicted in

Figure8below.


34/41

Figure8

Anincumbentoppositioncoalition

Other

taxes

TaxesonPemex

SQOpposition

2

Opposition

1

Incumbent

Thatscenariooccurredduringthefiscalreformof2007.ThePAN(i.e.theincumbent)proposed

the creation of several new taxes, including a corporate tax (the IETU) and a tax on cash

depositsinbanks(theIDE).ThePRI(i.e.theclosestopposition)agreedtosupportthosetaxes

butrequestedarevisionofPemexsfiscalregime.ThePRD(i.e.thefarthestopposition)wasin

favorofreducingtaxesonPemexbutdecidedtotakeapublicstanceagainstanytaxraiseby

votingagainsttheIETUandtheIDE(Castellanosetal.2010).Thereformpassedwiththevotes

ofthePANandthePRI.

Anotherpossiblescenarioisbroadcoalitionincludingalthemajorparties:theincumbentand

thewholeopposition. Such coalition canbe seen in Figure9below.Because it includes the

threelargeparties,wecallitaconsensuscoalition.


35/41

Figure9

Aconsensuscoalition

Other

taxes

TaxesonPemex

SQOpposition2

Opposition

1

Incumbent

Thatwasthescenarioattheendof2006duringnegotiationstoapprovethefollowingyears

budget.Giventhecontestednatureofthepreviouselection,theCaldernadministrationwas

eagertoshowthatitwasabletobuildconsensus,andthusendeavoredtoincludethePRDas

wellasthePRIinhisfirstmajorpoliticalbargain.Throughcompromiseonallsides,thebudget

wasapprovednearlyunanimouslyandontime.Insistingonalargecoalitioncameatafinancial

cost to the government, however, as the PRD requested to include some subsidies and

pensions for old people in rural areas (Starr 2007). It also included a largerthanexpected

reductiononPemexstaxburdenasrequestedjointlybytheoppositionparties.


36/41

Figure10

AbettertradeoffofPemextaxesforothertaxes

Other

taxes

TaxesonPemex

SQOpposition

2

Opposition

1

Incumbent

We could also ask ourselves what external factors could convince the parties to reduce

Pemexs taxburden.Mexicos government is in a tight fiscal situation: ithas the lowest tax

revenueasapercentageofGDPamongalltheOECDcountries.AnyreductiononPemexslevy

willneed

to

be

compensated

by

other

sources

income.

So,

what

could

make

the

tradeoff

of

Pemextaxesforothertaxesmoreacceptable?Therearetwopossibilities:Eithercreatingnew

taxesbecomesmore feasible,perhaps throughaconsensusamongordinarycitizensand the

politicalelitethatpayingmoretaxesisineveryonesbenefit.Orthereisasuddengeneralized

desire to reduce the burden on Pemex, perhaps because the company is coming close to

bankruptcy. Eitherof those scenarioswould convinceparties to tradeoff some taxation on

Pemexfornewtaxationonotheritems.SuchascenarioisdepictedinFigure10above.


37/41

Discussionandconclusions

The historical nationalization of the oil industry in 1938 is a source of great pride tomany

Mexicans. To date, the stateowned character of the company continues to symbolize the

sovereigntyoftheMexicanStateoverprivategreedandforeign imperialism.Anymentionof

reformarousespassions,bothwith thepoliticaleliteandwithordinarycitizens.Accordingly,

thereismuchideologicalresistancetochangingthecorrespondinglegalframework.Inaddition

toanideologicaloppositiontoreform,therealsoexistsanentrenchedaclassofinterestgroups

whooppose any changes to the statusquo. For those reasons, recent administrationshave

avoided a battle to change the legislation regulating the oil industry. Pemex could be

consideredthethirdrailofMexicanpolitics:ifyoutouchit,youlldie.

Yet, some changes have been achieved in past years. In particular, the administration of

PresidentCaldernwas successful in gettinga fiscal reformand anenergy reformapproved

that has given Pemex some fresh air to operate in the next few years. Such reformswere

criticizedbymanyanalysts,however.Somesaidthereformswenttoofar,whilesomesaidthey

didnotgofarenough.Itisclearthatanychangewillleaveimportantgroupsunhappy,butsuch

is the nature of political negotiations in a democracy: all parties have to compromise. The

questionsare:Whywere some specificcompromises reached in thepast?Andwhatkindof

compromisescanweexpectinthefuture.

Thegoalofthispaperwastodevelopatheoreticalframeworktostudythosequestions.Wedid

so by studying the politics of energy reform in Mexico as they occur in Congressional

negotiations.Webelievethisnewframeworkcanhelpunderstandpastreformssuchasthose

of theCaldernadministration in2007and2008,aswellas future reformssuchas theones

thatwillnecessarilybeattemptedintheperiod20122018.

Ourconceptual frameworkwasbasedon the followingelements: identifying themain issues

regarding Pemex; identifying themainpolitical agents in chargeof reform; and locating the

positionsoftheseagentsonthoseissues.Ouranalysiswasaidedbyaseriesoforiginalgraphs

thathelpedusvisualizethekindofcoalitionsthatareconducivetochange.Weclaimedthat

three issueswill tend todominate thedebate:private investment, labor accountability, and


38/41

fiscalautonomy.Wealsoidentifiedtheagentsthatarepivotalincreatinganewlegislation:the

Chief Executive; the three major parties, namely the PAN, the PRD, and the PRI; and the

internal factionswithineachof thoseparties.Our graphical analysis ledus to conclude that

several possible coalitions could implement changes. A PANPRI coalition is best suited to

create more flexible contracts forjoint explorations with other IOCs or NOCs. If moderate

elementsof

the

PRD

were

included

in

such

acoalition,

the

resulting

contracts

would

be

less

flexiblebutthelaborunioncouldbeforcedtobecomemoreaccountable.Onthefiscalside,a

twoparty coalition between the incumbent and its closest ally would result in a modest

reductiononPemexstaxburdeninexchangefornewtaxesfromothersources.Incontrast,a

threepartycoalitionofallmajorpartieswouldpreventexpandingthetaxbase,butwouldbe

conducivetoalargerreductiononthetaxesleviedonPemex.

Beyondthe

analysis

provided

in

this

paper,

we

think

this

framework

can

be

pushed

further.

In

particular,itcanhelpinthesearchfornegotiationstrategiesthatwouldleadtoreform.Would

ithelp toputother issuesonthetable,suchasenvironmental regulationandcitizenbonds?

Could the smallerparties inCongressbreakagridlockamong the threemajorparties? Ifwe

allowformoreconceptualcomplexity,ourtheoreticalframeworkcouldbeexpandedtoinclude

new dimensions and new parties. Maybe these strategies could smooth out the political

wranglethatneedstotakeplaceinordertomodernizePemexandtheoilindustryinMexico.


39/41

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Documents

Why is Pemex So Hard to Modernize? Analytical Framework Based on Congressional Politics