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On December 20, 2013, Mexican President Enrique Peña Nieto signed into law landmark energy reforms that will open up Mexico’s oil and gas sector to private investment.  Mexico has been closed-off to such investment since the sector was nationalized in 1938 and Petróleos Mexicanos (PEMEX) has operated as a state-owned monopoly since that time.  Among the goals of the reform are to attract foreign capital and technological expertise to reverse declining oil production, operate PEMEX on a for-profit basis, and also to overhaul the electricity industry.

Financial markets have reacted positively.  Standard & Poor’s raised its sovereign long-term foreign currency credit rating to BBB-plus in response to the reforms.  Investors are feeling positive about the long-term prospects for the Mexican energy sector, understanding it will be at least a year before private investment begins to flow into the sector.

Selling the reforms at home is another matter. Expropriation of foreign energy resources was the last major act of the Mexican Revolution and the event is celebrated annually on March 18 as a day of national dignity.  Although PEMEX’s declining competitiveness is well known, allowing foreigners to return to the Mexican energy sector closes another chapter in Mexico’s hard-fought economic independence.

One of the important elements of the new reforms is the prospect for Mexico to establish a sovereign wealth fund that would serve as a vehicle for long-term savings of revenue from the oil and gas sector.  The existence of such a fund is a critical component to support long-term prosperity from the development of energy resources and stands to serve the interests of all Mexicans.

The new fund, the “Mexican Petroleum Fund for Stabilization and Development” will be modeled on Norway’s sovereign wealth fund for petroleum revenues (which is actually two separate funds managed by the Norwegian government: the Pension Fund Global and the Pension Fund Norway).  The Norwegian fund is the world’s largest sovereign wealth fund and perhaps the best example of the benefits of prudent and long-term management of resource revenues anywhere in the world. The fund currently owns over one percent of all listed stocks in the world.

Three key dimensions of the Norwegian fund that Mexican legislators should aim to emulate are:

  • A fund for the people – The citizens of Norway have benefitted from the establishment of a transparent, long-term savings fund for petroleum revenues.  Petroleum accounts for 30 percent of the government’s revenues and supports public spending in the areas of education, health, and social services and as a result, Norway ranks first on the UN’s Human Development Index.
  • Transparency – The performance of the Norwegian fund is reported on a regular basis and the Ministry of Finance accounts for the management of the fund through an annual report to the Storting (Norwegian Parliament) and in the National budget.
  • Responsible investments – Ethical guidelines for the fund were introduced in 2004 and are upheld by a Council on Ethics.  As a result of the guidelines, the fund does not invest in companies that produce nuclear weapons and cluster bombs, for example. 

For the Mexican oil fund, like other key aspects of the energy reform bill, the hard work lies ahead.  The secondary legislation that will follow in the months to come will fill in the gaps and provide the details.  The major difference between Mexico and Norway, however, is that Mexico is a developing country characterized by income inequality and institutional and governance challenges.  Ensuring that funds are channeled to a fund that is effectively and transparently managed will be a major challenge.  But, if successful, the fund will reassure the public that the reforms are upholding the interests of the Mexican people and not pandering to foreign investors.

Jeffrey Phillips

jphillips@dawsonstrat.com