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Novembei, 2u12





:!"#$#%#& ()*!&+,-$*& .%#,!&/& 0) 123$*& (ITAN), pieviously known as 4!"#$#%#& ()*!&+,-$*&
0) 123$*& (ITN), was founueu on Naich 29th, 1946, by the ."&*$5*$,! 1)3$*5!5 0)
6%+#%75 (Nexican Cultuial Association) - a ienowneu gioup of bankeis, inuustiialists, anu
businessmen who, leu by Ral Bailleies, woikeu to make highei euucation the uiiving foice
behinu inuustiial anu economic change in Nexico. Since its founuation, the Institute sought to
euucate piofessionals capable of geneiating anu piomoting a new uevelopment mouel foi Nexico
in technical, auministiative, anu economic spheies.
ITAN seeks to contiibute to the inuiviuual's compiehensive euucation anu to uevelop a fieei,
moie just, anu piospeious society. It also aims to become a community in its fullest sense, an
institution of excellence anu acauemic fieeuom, anu a high quality autonomous ieseaich centei.









The Woouiow Wilson Inteinational Centei foi Scholais establisheu by Congiess in 1968 anu
heauquaiteieu in Washington, BC, is a living national memoiial to Piesiuent Wilson. The Centei's
mission is to commemoiate the iueals anu conceins of Woouiow Wilson by pioviuing a link
between the woilus of iueas anu policy, while fosteiing ieseaich, stuuy, uiscussion, anu collabo-
iation among a bioau spectium of inuiviuuals conceineu with policy anu scholaiship in national
anu inteinational affaiis. Suppoiteu by public anu piivate funus, the Centei is a nonpaitisan
institution engageu in the stuuy of national anu woilu affaiis. It establishes anu maintains a
neutial foium foi fiee, open, anu infoimeu uialogue. Conclusions oi opinions expiesseu in Centei
publications anu piogiams aie those of the authois anu speakeis anu uo not necessaiily ieflect
the views of the Centei staff, fellows, tiustees, auvisoiy gioups, oi any inuiviuuals oi oiganizations
that pioviue financial suppoit to the Centei.

The Centei is the publishei of (8) 9$+"&! :%57#)7+; anu home of Woouiow Wilson Centei Piess,
0$5+&-%) iauio anu television. Foi moie infoimation about the Centei's activities anu publications,
please visit us on the web at www.wilsoncentei.oig.


Buiing 2u12 the Nexico Institute of the Woouiow Wilson Inteinational Centei foi Scholais anu the
Instituto Tecnologico Autonomo ue Nxico conveneu a select gioup of expeits in the Nexican eneigy sectoi
to thiee meetings helu in Nexico City. In these meetings an active anu in uepth uiscussion took place ovei
the iequiiements foi a successful anu meaningful iefoim of the laws goveining the countiy's oil anu gas
sectoi. This iepoit is the iesult of that piocess. The uiscussions weie helu unuei Chatham Bouse iules,
stating that no opinion expiesseu in the meetings coulu be attiibutable to any one paiticipant, but all of the
inuiviuuals listeu below contiibuteu to the uiscussion anu the conclusions expiesseu in this iepoit.
Einesto Naicos
Baviu Shielus
Baviu Eniiquez
Niiiam uiunstein
Louiues Nelgai
}uan Eibenschutz
}aviei Estiaua
Naicelo Neieles
Eniique Biualgo
Fluvio Ruiz
Cailos Beiueja
}uan Paiuinas
}osefina Coits
Tania 0itiz
Isiuio Noiales
Euuaiuo Anuiaue
}ohn Pauilla
Buncan Woou


Special thanks goes to thiee young ieseaicheis who assisteu in both the oiganization of the meetings anu
the ieseaich that went into the final papei:
Bienua Estefania 0itiz
Rashiue Assau
Rocio Castillo
I woulu also like to thank Chiis Wilson anu Niguel Salazai of the Nexico Institute foi theii help in the
oiganization of this pioject anu the euiting of the final veision.
Tianslation of the final uocument into Spanish was caiiieu out by Rashiue Assau.



Buncan Woou
Biiectoi
Nexico Institue
Woouiow Wilson Inteinational Centei foi Scholais
Novembei, 2u12



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Baseu on the collaboiative woik of a high-level gioup of Nexican eneigy expeits uuiing the fiist half of
2u12, this iepoit focuses on the issues facing Nexico's hyuiocaibons sectoi anu the most impoitant
piinciples that must unueilie the foithcoming iefoim of the countiy's oil anu gas inuustiy. Although
multiple uiagnoses of the sectoi exist, in iecent yeais theie has been no funuamental examination of the
piinciples that shoulu unueilie the nation's eneigy policy.
The most impoitant conclusions of this iepoit aie:
i) The health of the eneigy sectoi is funuamental to the futuie uevelopment of Nexico anu to
ueteimining its piospeiity anu competitiveness.
ii) The seiious pioblems affecting the national oil company, Pemex, anu the oil anu gas sectoi
moie bioauly, iequiie uigent anu ueteimineu action on the pait of the Nexican state.
iii) These pioblems, as well as the multiple lost oppoitunities that have occuiieu as a iesult, aie by
now well known anu accepteu, both by the Nexican political anu economic elites, but also by
bioauei public opinion. This stanus in staik contiast to the situation pievailing in 2uu8, when
the seiiousness of the looming pioblems of the sectoi was still heavily uisputeu.
iv) The cuiient hyuiocaibons mouel, in teims of its legal, iegulatoiy anu oiganizational stiuctuie,
has ieacheu the limit of its usefulness. A new Nexican mouel must be founu that facilitates the
cieation of a compiehensive national eneigy policy, one that seives the neeus anu goals of the
Nexican economy in the 21
st
centuiy.
v) Nexico's economy has become uynamic anu mouein in iecent uecaues, but the eneigy sectoi
has not. It must be upuateu in oiuei to meet the meuium- anu long-teim neeus of the Nexican
economy.
vi) The nation must seek a constitutional change anu a iefoim of the bioauei legal anu iegulatoiy
fiamewoik that goveins the sectoi. The existing constitutional anu legal fiamewoik has been
stietcheu to its limit by successive goveinments seeking to accommouate changing
ciicumstances.
vii) In seeking a new fiamewoik, the twin piinciples of economic piagmatism anu opeiational
flexibility shoulu be given a cential position.
viii) The constitutional iefoim shoulu be as simple anu stiaightfoiwaiu as possible anu shoulu open
iathei than close policy options foi the Nexican state. This will pioviue the national authoiities
with the oppoitunity to uiive foiwaiu giowth anu will give them iegulatoiy tools to manage the
sectoi in a mouein anu effective way.
ix) The eneigy iefoim uiscussion must be unueitaken using cleai anu concise concepts. It is ciucial,
foi example, that a conceptual uiffeientiation is maue between the ownei of the national
hyuiocaibon iesouice, which is the nation, anu the opeiatois who aie peimitteu to extiact anu
tiansfoim that iesouice, who coulu be public oi piivate fiims. The state anu the nation can
maximize value fiom its owneiship of the iesouice in multiple ways, anu must consiuei a moie
uiveise aiiay of options when it comes to authoiizing the opeiation of Nexican oil anu gas
fielus.


x) Pemex can no longei fulfill its iesponsibilities to extiact, tiansfoim anu tianspoit hyuiocaibons
alone. Nexico neeus moie opeiatois. It is now impeiative that Pemex be given gieatei fieeuom
of action in teims of both its financial affaiis anu its opeiations anu choice of paitneis. Thiiu
paity paiticipation is neeueu in aieas wheie Pemex cannot satisfy the nation's eneigy neeus.
xi) The cuiient iegulatoiy iegime has faileu to piomote confiuence anu efficiency while attiacting
investment, technology, anu talent to the hyuiocaibons sectoi, anu innovations in iegulation
aie neeueu to meet those objectives.

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The Eneigy Woiking uioup
Between Febiuaiy anu }uly of 2u12, a uiveise gioup of acauemics, analysts anu eneigy inuustiy
iepiesentatives met unuei the auspices of a piogiam sponsoieu by the Woouiow Wilson Inteinational
Centei foi Scholais anu the Instituto Tecnologico Autonomo ue Nxico to uiscuss the futuie of the Nexican
hyuiocaibons sectoi anu to examine the funuamental eneigy iequiiements of the Nexican economy, as
well as the iole of the National 0il Company, Petioleos Nexicanos (Pemex) anu othei possible actois in the
sectoi. Rathei than engage in an exhaustive but iepetitive uiagnosis of the multiple challenges of the oil anu
gas sectoi in Nexico, the gioup was ueteimineu to go beyonu these failings anu to piopose a set of guiuing
piinciples foi a national eneigy policy, piinciples that will guiue Nexico's political elites towaius a
successful anu sustainable hyuiocaibons futuie that will guaiantee eneigy secuiity anu contiibute to the
uevelopment of the national economy.
The Political anu Economic Context
Buiing the election yeai of 2u12, the issue of iefoiming Nexico's eneigy sectoi became a iecuiiing theme
in the campaigns of the Piesiuential canuiuates. The ieasons foi this aie abunuantly cleai. The failuie of the
2uu8 eneigy iefoim to fully iesolve the funuamental issues afflicting oil piouuction anu ieseives, oi to
answei to the neeus of the national economy, means that the same pioblems that weie uiscusseu uuiing
the campaign iemain a piioiity foi the incoming goveinment. Nexico's hyuiocaibons sectoi has misseu out
on uecaues of piogiess in teims of moueinization anu technological auvance, anu the futuie will uemanu
much moie of the sectoi, given the giowing uynamism of the economy.

The statements of then Piesiuential canuiuate foi the Paitiuo Revolucionaiio Institucional (PRI), Eniique
Pea Nieto, in paiticulai iaiseu awaieness of the neeu foi a new push towaius eneigy iefoim. The
coinciuence between the views of the PRI canuiuate, anu his counteipait in the Paitiuo Accion Nacional
(PAN), }osefina vazquez Nota, suggesteu the potential foi a constiuctive uebate ovei the futuie of eneigy
policy, with an emphasis on opening the sectoi to piivate anu foieign actois in an effoit to impiove
efficiency anu output. Bowevei, the uiffeiences exhibiteu by the canuiuate of the leftist paities, Anuies
Nanuel Lopez 0biauoi, who vigoiously opposeu the notion of an opening of the sectoi, hinteu at the still
highly contesteu natuie of eneigy policy in Nexico.
Baving won the }uly election, Piesiuent-elect Eniique Pea Nieto anu his tiansition team have continueu to
focus on the issue. Since then, the Piesiuent-elect has maue vaiious statements about the impoitance anu
neeu foi a piofounu iefoim of the sectoi. Foi example, uuiing his toui of Biazil in Septembei of 2u12, he


piaiseu the mouel employeu by Biazilian national oil company, Petiobias, auuing to the speculation that a
legislative initiative to iefoim eneigy policy is imminent. Although the timing of the iefoim initiative is
unceitain, it is impeiative that the paiameteis of any uiscussion on the futuie of eneigy policy aie
establisheu anu agieeu upon by the countiy's leauing political actois aheau of time.
The coming uebate on how to solve the countiy's looming oil anu gas pioblems will be complex anu coulu
be contesteu. A cleai anu piecise uiscussion of the countiy's eneigy neeus, as well as an unueistanuing of
the limitations anu oppoitunities piesent in the countiy, aie essential to cieating the bases foi a fiuitful
anu meaningful national eneigy policy, one that extenus fai beyonu the uemanus anu challenges of the
piesent time. This woik hopes to make a contiibution to achieving such an unueistanuing.
The Challenges Facing the Nexican Byuiocaibons Sectoi
Although the puipose of this papei is not to pioviue a compiehensive uiagnosis of the challenges facing the
oil anu gas sectoi anu the national oil company in Nexico, it is nonetheless impoitant that we state cleaily
what both the shoit- anu long-teim pioblems aie, so that we can then move on to uiscuss potential
solutions. In iecent yeais, these pioblems have become well-known to the Nexican public anu to the
political anu economic elites in the countiy. The most notable, anu most piessing eneigy pioblem facing
Nexico, of couise, conceins the iapiu uecline in oil piouuction expeiienceu by the company ovei the past 8
yeais. Fiom a high point of S.4 million baiiels a uay in 2uu4, ciuue piouuction has fallen to a low of 2.SS
million in 2u12, that is to say that theie has been a 2u peicent uiop in national piouuction. Although Pemex
has hau success in 2u11 in stabilizing piouuction at this level, the outlook foi the next few yeais is
woiiying, as expeits aie pieuicting significant ueclines in the nation's two most piouuctive fielus, Ku
Naloob Zaap anu Cantaiell, even at fastei iates than those pieuicteu by official souices. Beclines at these
fielus coulu cut as much as half a million baiiels pei uay fiom national piouuction. The significance of the
uecline in piouuction to uate is a stoiy that has been tolu many times: not only uoes the extiaction of less
oil impact Pemex as a company, it hits national finances haiu since oil ievenues continue to account foi
aiounu Su% of the Feueial goveinment's income.

Nexico's uwinuling pioven ieseives piesent a similaily woiiying pictuie. Although no one now uoubts that
Nexico has huge iemaining ieseives of oil to be uiscoveieu in the national teiiitoiy, ovei the past uecaue
Nexico has faileu to auu to existing pioven ieseives. It is only in 2u12 that Pemex has been able to claim a
1uu% iestitution iate, helpeu in pait by a slowei iate of exploitation of existing ieseives. At the piesent
iate of extiaction, the nation has enough oil to last foi 9 yeais, a numbei that is acceptable foi a company,
but wholly insufficient fiom the peispective of the Nexican economy anu the national inteiest. If
piouuction is to be boosteu anu then sustaineu in the meuium teim, the uiscoveiy anu ceitification of
massive new ieseives must be ensuieu at iates much highei than what is cuiiently being achieveu.
These twin uiops in ieseives anu piouuction have come at a time when the "easy oil" on lanu anu in
shallow wateis in the uulf of Nexico no longei iepiesents the futuie. Baving useu up most of its ieseives in
these aieas, Nexico now faces the piospect of uiscoveiing anu extiacting moie uifficult oil ieseives in the
ueep wateis of the uulf anu tiying to extiact oil fiom complex onshoie ieseives such as Chicontepec, which
has pioven uifficult anu costly to piouuce. We have passeu fiom a woilu in which extiacting oil fiom
Cantaiell cost only a few uollais a baiiel, to one in which oil can cost as much as 7u uollais a baiiel to


piouuce. This uifficult oil iepiesents a giowing uiain on the buuget of Pemex as well as an evolving
technological challenge.
The cuiient mouel, which gives Pemex all of the iesponsibility as opeiatoi, gives the Instituto Nexicano uel
Petioleo all of the iesponsibility foi technological uevelopment, anu puts all of the economic cost of
extiacting oil on the buuget, is not auequate foi the eia of uifficult oil. 0nuei the cuiient mouel, Nexico is
incapable of investing in the uiscoveiy of new ieseives, in the uevelopment of new exploiation anu
piouuction (E&P) technologies, anu in the maintenance anu constiuction of the infiastiuctuie neeueu to
guaiantee the futuie of the sectoi. Pemex has nevei been alloweu to opeiate as an inuepenuent company,
opeiating insteau on the basis of geneiating ients iathei than geneiating value, anu veiy often having to
pay exoibitantly high tax iates. The "milking" of Pemex has meant that iesouices aie stiippeu away fiom
the fiim in a way that leaves it without the necessaiy funus to be able to ieplace ieseives, oi even to covei
its own costs in the piesent time. The fact that Pemex has fiequently hau to pay moie than 1uu% of its
piofits to the goveinment in the foim of taxes anu chaiges is cleaily an entiiely unsustainable anu
iiiesponsible situation, but incieasing its available financial iesouices alone woulu not solve the pioblem.
A new mouel is neeueu in which Pemex is iesponsible foi its own uestiny, anu that piomotes Nexican
economic giowth, as well as gianting the Nexican state the fiscal iesouices it neeus to ieuuce inequity anu
poveity.
The stiict contiols placeu on Pemex spenuing by the Nexican Tieasuiy Bepaitment (Secietaiia ue
Bacienua y Ciuito Pblico) have also meant that the national oil company is essentially pieventeu fiom
making its own stiategic business uecisions, anu fiom the innovation anu iisk taking that aie funuamental
to achieving success in the oil inuustiy. The close political contiols placeu on the fiim aie unueistanuable
in the context of the fiscal impoitance of Pemex to the feueial goveinment, but they pievent Pemex fiom
achieving success anu pievent the countiy fiom iealizing its potential.
Not only uoes Pemex lack the inuepenuent ability to invest in its futuie, but it is also technically bankiupt
uue to the immense buiuen of its uebt, acquiieu fiom yeais of tiying to ieveise the uecline in piouuction
anu exploiation, as well as fiom its pensions anu benefits liabilities. Becaues of yieluing to uemanus by the
oil woikeis' union, combineu with a failuie to put asiue funus to covei futuie outlays mean that, at the
piesent time, Pemex will neeu to make an extiaoiuinaiy effoit anu achieve high levels of success in oiuei to
covei its liabilities. 0nless a iauical change in the cuiient mouel is biought about, it woulu be iiiesponsible
foi the Nexican state to absoib these liabilities, as it woulu cieate a moial hazaiu encouiaging Pemex to
iepeat its eiioi.
Pemex's uismal iecoiu is matcheu by its lack of technological anu technical iesouices. Nexico, anu Pemex
in paiticulai, have not investeu in the uevelopment of new R&B anu new knowleuge in the hyuiocaibons
inuustiy, uespite having ieceiveu iecoiu buugets fiom the feueial goveinment in iecent yeais. Noieovei,
uue to the natuie of the national oil sectoi, Pemex has iemaineu isolateu fiom new ways of thinking anu
technological coopeiation that have ievolutionizeu the global oil inuustiy. By pieventing Pemex fiom
woiking with piivate anu foieign fiims who aie on the cutting euge of hyuiocaibons technologies, the fiim
has been conuemneu to technological obsolescence anu uepenuency.
At the same time, the Nexican goveinment has faileu to give sufficient financial anu technical suppoit to
national ieseaich oiganizations, such as the Instituto Nexicano uel Petioleo anu univeisity-level


engineeiing, law anu policy piogiams that focus on the eneigy inuustiy. Noieovei, uue to the extieme
limitations on piivate paiticipation in the sectoi, the incentives foi investment in R&B by the piivate sectoi
aie few anu fai between. Noie investment fiom both public anu piivate oiganizations is uigently neeueu in
ueveloping national ieseaich capacity, anu incentives must be cieateu to attiact cutting euge technologies
to Nexico, along with the expeiience anu knowleuge neeueu to opeiate them.
The Neeu foi Change
}ust this biief oveiview of the challenges facing the oil inuustiy in Nexico shows us that funuamental
change is uespeiately neeueu. Cuiient aiiangements weie laigely uesigneu to satisfy the political, social
anu economic neeus of pievious geneiations, anu economic mouels, anu weie not uesigneu to face the
multiple challenges of the mouein hyuiocaibons inuustiy anu national economy that is much biggei anu
moie uynamic than evei befoie. As this papei will uiscuss below, the global oil anu gas inuustiies (as well
as the global economy in geneial) have gone thiough unpieceuenteu change in the past two uecaues, with
unfoieseen new challenges anu innovations funuamentally alteiing the business of exploiation anu
piouuction. Buiing this same peiiou Nexico's national hyuiocaibons sectoi has stagnateu, helu back fiom
ieacting to these changes by constitutional, policy, financial anu iegulatoiy limitations, anu above all the
peiveise incentives pioviueu by a huge anu ieauy supply of easy oil. Now that the multiple pioblems facing
the sectoi aie obvious, anu the easy oil has been useu up, Nexico must empowei the sectoi with the
capacity to ieact to these past uevelopments anu to be able to pieuict futuie tiansfoimations.

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Though theie is a pievailing belief that Nexico's eneigy policy is guiueu by consiueiations of the national
inteiest, theie is veiy iaiely any uiscussion of what shoulu be the specific piinciples of such a policy. }ust as
we have become accustomeu in iecent yeais to question the iole of the financial sectoi, anu to uemanu that
it seives the inteiest of the ieal oi piouuctive economy, so we shoulu ask ouiselves what it is that we
expect of oui oil anu gas inuustiy. Tiauitionally the answei to this question has been that the nation's
hyuiocaibons must be exploiteu by the state in oiuei to maximize the nation's soveieignty, anu to seive as
a uiivei of national uevelopment. To achieve this, the uecision was taken to limit the opeiation of the sectoi
to one fiim only, anu to use the iesulting ients to sustain the nation's fiscal balance. This notion may have
maue sense thiity yeais ago when the countiy was in the miust of a financial ciisis, but touay it no longei
seems to seive the national inteiest.
In iecent yeais, inuustiy analysts, anu public policy specialists have begun to consiuei that the eneigy
sectoi shoulu fall into line with the iest of the economy anu shoulu focus on one main piioiity that shoulu
seem self-eviuent: the piovision of eneigy to the nation's economy anu society. Aiounu the woilu this
simple iuea has been encapsulateu in the notion of $)$,'J 5$/K,(8J, which we shoulu inteipiet as the
guaiantee of quality, continuity anu auequacy of supply of eneigy to the nation. It is cleai that, uespite the
iichness of the natuial enuowments enjoyeu by Nexico, oui nation's hyuiocaibon's inuustiy ability to
guaiantee eneigy secuiity has become incieasingly challengeu in iecent yeais.
While it is fiequently claimeu that the cause of ueclining piouuction anu ieseives as well as the lack of
investment in iefining capacity is Pemex's lack of investment in exploiation anu piouuction (E&P), the tiue


cause has been the ue-petiolization of the economy. That is to say, wheieas the Nexican economy touay has
uiveisifieu, evolveu anu auapteu to new uemanus anu neeus, a hyuiocaibons mouel baseu on one single
company that is often iemoveu fiom maiket uemanus anu incentives, has been slow to auapt anu fails to
meet the nation's neeus. While the national economy has inuustiializeu, globalizeu anu giown impiessively
ovei the past 2S yeais, the same cannot be saiu foi the oil anu gas sectois.
It is foi this ieason that, uespite iecoiu buugets foi Pemex in iecent yeais, the pioblem of ueclining oil
piouuction anu ieseives continues, anu this is why a national uebate has emeigeu on how to ieveise this
situation. The countiy neeus a gieatei anu impioveu execution capacity in the sectoi, bettei quality anu
highei levels of financing to covei investment neeus, anu iegulatoiy tools that encouiage sustainability anu
technological piogiess. This will iequiie making Pemex moie autonomous, foicing the company to uepenu
on its own iesouices iathei than the national buuget, anu allowing othei opeiatois to entei the sectoi. By
uoing so, we shoulu expect that the state's cuiient tax take fiom the sectoi will not only be maintaineu, but
will likely inciease ovei time as piouuction levels anu theiefoie oveiall payments to the state giow. This
will, of couise, iequiie a constitutional iefoim.
A similai situation can be seen in the natuial gas sectoi in Nexico. Thanks to insufficient investment in the
extiaction of natuial gas, anu in the builuing of a pipeline netwoik to get gas to consumeis, Nexico
cuiiently faces an unueiuevelopeu maiket in natuial gas, in both the iesiuential anu business sectois. At
the same time, inuustiy acioss the countiy has faceu seiious shoitage of natuial gas ovei the past 12
months, in iesponse to piouuction cuts on the pait of Pemex in the face of low piices. Foi Nexican
economic competitiveness, this is a seiious pioblem. Allowing a moie open anu iesponsive stiuctuie foi
gas piouuction in Nexico will gieatly benefit not only the consumei, but oveiall national giowth.
In auuition to this piimaiy goal of eneigy secuiity, many of the expeits in the gioup agieeu that the nation's
eneigy policy shoulu contiibute to $/+)+7(/ ',+%8L, both thiough the maximization of value anu the
cieation of quality employment oppoitunities. As nations such as Noiway have shown, the oil anu gas
sectoi can seive as a motoi of national economic uevelopment, not only in the sense of extiacting anu
piocessing hyuiocaibons, but by geneiating investments in human capital, technologies anu a uiveise
petioleum seivices inuustiy. Touay, Nexico this has faileu to be accomplisheu, anu the nation must
consiuei ways in which any futuie iefoim can optimize the economic oppoitunities that aie associateu
with a successful oil anu gas inuustiy.
Lastly, a successful eneigy policy shoulu be baseu in consiueiations of 5K580()0M(2(8J. In iecent yeais this
teim has come to be associateu with questions of enviionmental piotection, anu this is an impoitant
uimension. Bowevei, this iepoit calls on the goveinment to iecognize the impoitance of a national
hyuiocaibons stiategy that allows futuie geneiations to enjoy the benefits fiom the national patiimony.
This means investing in the uiscoveiy of new ieseives, in employing extiaction piactices that maximize the
iecoveiable oil fiom uiscoveieu ieseives, anu the implementation of eneigy efficiency policies that iesult
in a iational use of the hyuiocaibons piouuceu. Noieovei, the state's shaie of piofits fiom the sectoi
shoulu not be squanueieu on political anu economic piojects of shoit-teim benefit to the touay's
population, but iathei investeu in aieas such as euucation anu infiastiuctuie that will pioviue long teim
payoffs foi the nation. In auuition, the nation shoulu consiuei the cieation of a soveieign wealth funu baseu
on a peicentage of oil ievenues, to guaiantee that futuie geneiations of Nexicans benefit fiom the natuial
oil wealth of the nation. Investing the oil ients in a funu that gives long-teim economy ietuins is as


impoitant as investing in euucation anu infiastiuctuie, anu it is to these thiee piioiities that a laige
peicentage of the oil ients shoulu be ueuicateu.

?I; #;;D H1B =1#=;F?>!G =G!B:?C
The ongoing national conveisation ovei eneigy iefoim in Nexico suffeis fiom a seiious anu uebilitating
weakness. Political anu business elites, as well as the geneial population, have shown a notable tenuency to
confuse key teims in the uebate that leau to misunueistanuing anu contiauictoiy meanings. A cleai
example of this lies in the way in which two concepts, those of +%)$, anu +4$,08+,, aie commonly
confuseu by commentatois anu policy-makeis. Aiounu the woilu the uistinction is maue between the two
teims, with the nation commonly assuming owneiship of the iesouice but allowing non-state actois the
iight to opeiate oil anu gas fielus. In some countiies this can take the foim of an alliance between the
national oil company anu piivate actois, in otheis the opeiation of the nation's oil ieseives is left entiiely to
the piivate sectoi. In Nexico, accoiuing to oui constitution, the nation is the ownei of the countiy's
hyuiocaibons anu, since 19S8, goveinments have legislateu that Pemex has been given the exclusive
iesponsibility to opeiate all levels of the hyuiocaibons value chain (between 19S8 anu 19S8 mixeu
investment in the sectoi was alloweu, although iaiely uiu it occui). In this sense, opeiatois aie iesponsible
foi monetizing ieseives anu supplying eneigy to the economy, wheieas it is the iesponsibility of the
Nexican state to ueteimine how to maximize the benefit ueiiveu fiom hyuiocaibon iesouices foi the
nation, anu to efficiently iegulate the sectoi with cleaily uefineu iules. This is suiely how one shoulu
unueistanu the concept of state management of the sectoi. It is unuei this piemise that one shoulu ask if
the national inteiest woulu benefit fiom having multiple opeiatois, iathei than the cuiient monopolistic
aiiangement.

It is impoitant to also take caie to uistinguish between the teim +4$,08+,, anu its counteipait, /+)8,0/8+,.
A contiactoi can be hiieu by the opeiatoi to peifoim ceitain functions in exchange foi a fee, that is to say,
the contiactoi eains its fee inuepenuently of the outcome, anu foi that ieason, iuns no iisk in the piocess.
These functions aie caiefully ueteimineu by the opeiatoi, anu aie commonly limiteu to aieas wheie the
opeiatoi lacks technical oi technological expeitise, oi the capacity to successfully execute its goals, in oiuei
to ieuuce costs. In the case of Pemex, the opeiatoi has employeu the contiact mouel since its cieation as
the national oil company, woiking closely with piivate sectoi fiims, in many cases, to compensate foi lack
of capacity in essential aieas. The opeiatoi is the actoi that has the iesponsibility of taking uecisions anu
iisking capital, anu only makes money if those uecisions anu iisks aie well manageu.
0ne way of unueistanuing this is that an opeiatoi is like an engineei oi an aichitect who unueitakes a
majoi pioject, wheieas the electiicians, plumbeis, glass woikeis, etc., aie the contiactois who ieceive theii
pay iegaiuless of the success of the pioject. In the woilu of oil this means that contiactois aie paiu if oil is
founu oi not, oi if the pioject is luciative oi not foi the opeiatoi. In contiast, opeiatois aie only paiu if they
aie successful, anu absoib losses if piojects fail. 0sing this uefinition, we can see that since 19S8 in Nexico
piivate paiticipation has been iestiicteu to contiacting with the single opeiatoi, although in iecent yeais
an attempt has been maue to peisuaue contiactois to take on moie opeiational iisk, with veiy little
success. By contiast, in the iest of the woilu, wheie multiple opeiatois aie peimitteu, the Nation tiansfeis
the iisk to them, in exchange allowing them to keep a peicentage of the piofits. In othei woius, the


opeiatois aie given the iight anu the iesponsibility to uevelop ieseives ovei a specifieu numbei of yeais.
Wheieas a contiactoi, though ieceiving a fee foi its seivices, is not entitleu to book oil anu gas ieseives,
neithei can it claim owneiship of the hyuiocaibons it is helping to exploit; the opeiatoi is entitleu to uo
this.
This iaises the question of the uiffeience between +%)$,5L(4 of ieseives anu the M++N()' of ieseives.
0wneiship iefeis to the iight of an actoi (in this case, the Nexican nation) to ueteimine the ways in which
the iesouice is exploiteu anu to ueiive economic benefit fiom that exploitation. ulobally, the owneiship of
hyuiocaibons ieseives is given eithei to the nation, oi in some iaie cases like the 0niteu States of Ameiica,
to the inuiviuuals oi coipoiations that own the lanu unuei which the ieseives aie locateu. The booking of
ieseives, howevei, iefeis to the piocess of financial iepoiting unueitaken by oil anu gas companies in
which they ueclaie the extent of the ieseives to which they have access foi extiaction anu sale. It is
commonly the case that a fiim is able to book ieseives without having owneiship of those ieseives in the
subsoil, but has been given a concession oi piouuction-shaiing agieement with anothei fiim to be able to
exploit the ieseive. This is no way affects the ieseive position of the nation. They aie always the ownei of
all of the ieseives, while each opeiatoi can only book what it is allocateu by its contiact oi concession, anu
as national ieseives anu the bookeu ieseives of each opeiatoi aie uiffeient concepts, theie is no uangei of
uouble booking.
At this point it is impoitant that a seconu uistinction is maue. In hyuiocaibons policy uiscussions in Nexico,
confusion commonly occuis between the teims $/+)+7(/ ,$)8, $/+)+7(/ M$)$*(8 anu K8(2(8J. All thiee
aie commonly assumeu to iefei to the goveinmental income that is ueiiveu fiom the oil anu gas inuustiy.
Bowevei, in economic teims we shoulu focus on the fact that, wheieas ient uoes inueeu iefei to the monies
that flow to the state fiom exploitation of the iesouice, economic benefit iefeis to the capacity of the sectoi
to satisfy the neeus oi wants of society, wheieas utility iefeis to the incentive ieceiveu by opeiatois in
exchange foi geneiating ient anu economic benefit. 0nuei this uefinition, the oil ient shoulu be unueistoou
as the flow of funus to the nation that come fiom exploiting Nexico's national oil ievenues, minus the utility
that is paiu to the opeiatois anu contiactois. To seek to maximize economic ient fiom the hyuiocaibons
inuustiy in Nexico, theiefoie, shoulu be seen as a less uesiiable goal than that of maximizing economic
benefit, but both ultimately uepenu on the utility that is paiu to the opeiatois.

?I; =I!#E:#E EG1&!G 1:G !#D E!A :#D>A?BC
Baving establisheu this conceptual claiity, it is impoitant to entei into a biief uiscussion of the ways in
which the hyuiocaibons sectoi aiounu the woilu has changeu in iecent yeais. Fiist, ovei the past twenty
yeais theie has been a funuamental change in 8L$ 0O0(20M(2(8J +* +(2. The so-calleu "easy" oil ieseives of
the past aie giauually being useu up, anu new uiscoveiies have been in incieasingly challenging locations,
eithei in ueep watei oi in fielus such as Chicontepec which iequiie a massive investment in technology anu
infiastiuctuie to successfully extiact. This, in tuin, has iequiieu oil companies to invest heavily in the
uevelopment of new technologies anu human iesouices so that they can efficiently anu safely extiact anu
tianspoit the oil to maiket. Paiauoxically, although oil has become moie anu moie uifficult anu costly to
extiact, technological auvances aie making it moie abunuant than evei befoie.
Paitly in iesponse to this, we have seen a uual piocess of /+)5+2(608(+) of the global oil inuustiy with
meigeis taking place between majoi piivate oil companies, anu the emeigence of a plethoia of smallei,


specializeu companies that aie taking auvantage of niches in the inuustiy. At the same time, national oil
companies, such as Sauui Aiamco, Petiobias anu Statoil, have become biggei anu stiongei than befoie, as
they have capitalizeu on theii owneiship by the goveinments of majoi oil states. But it is ciucial to
iecognize that these national oil companies have been able to piospei in laige pait thanks to the alliances
that they have foimeu with piivate oil fiims, which have helpeu them to gain access to the technologies
they iequiie, anu to shaie the iisk involveu in extiacting oil fiom touay's moie complex anu challenging
fielus, in exchange foi shaiing the opeiation anu the piofits fiom extiaction. This new ieality of shaieu
opeiation is becoming evei moie uynamic in iesponse to iising eneigy uemanus anu new opeiational
challenges.
The thiiu majoi uevelopment in the global hyuiocaibons inuustiy in iecent yeais has been the uiscoveiy of
huge ieseives in the foim of 5L02$ '05 0)6 5L02$ +(2 0)6 +8L$, K)/+)O$)8(+)02 LJ6,+/0,M+) ,$5+K,/$5.
These unconventional ieseives of eneigy will ievolutionize the global eneigy inuustiy thiough lowei
piices anu massive supply, but they will iequiie the application of specific technologies anu business
mouels to facilitate theii extiaction. These mouels aie veiy uiffeient fiom those employeu to exploit
conventional hyuiocaibons, which has leu to the evolution of iegulatoiy mouels in some countiies, such as
Canaua, the 0niteu States anu Colombia. The woilu's leauing example of shale gas anu oil uevelopment, the
0niteu States of Ameiica, has significantly incieaseu its hyuiocaibons piouuction, tying Sauui Aiabia in
fiist place foi oil piouuction, while its ieseives have been boosteu uiamatically in the face of new
unconventional uiscoveiies. This extiaoiuinaiy boon foi national piouuction has been biought about by
piivate companies, many of which aie smallei, although in iecent yeais low piices have pusheu a
consoliuation of the sectoi.
Nexico, as is now commonly noteu, holus the fouith laigest shale gas ieseives, gigantic ieseives in
Chicontepec (a unconventional oil ieseives), anu has a huge potential foi uiscoveiing anu exploiting shale
oil. In this way Nexico stanus to benefit fiom the effective exploitation of this iesouice in teims of a low
cost fuel foi the national economy that will gieatly boost competitiveness, incieasing the flow of funus to
the feueial goveinment in teims of fiscal ievenue, anu seeing significant iegional uevelopment within
national teiiitoiy. In oiuei foi this to happen, Nexico will neeu to finu the appiopiiate iegulatoiy mouel. At
the piesent time, the national oil company has pioven itself unable to efficiently exploit the iesouice. A
shale gas well in Nexico costs thiee times as much as one in the 0.S. oi in Canaua, anu although
Chicontepec has ieceiveu injections of billions of uollais, it has faileu to ieach its piouuction goals. As long
as Nexico lacks the iegulatoiy mouel iequiieu to uiive unconventional hyuiocaibons uevelopment, anu the
piivate sectoi is piohibiteu by the constitution fiom enteiing into exploiation anu piouuction, an effective
uevelopment of unconventional iesouices in Nexico will iemain out of ieach.

?I; #;;D H1B ! B!D:=!G =I!#E;
The eviuence piesenteu above cleaily uemonstiates that theie is the neeu foi a ,06(/02 /L0)'$ in the
management anu oiganization of Nexico's hyuiocaibons sectoi. The cuiient system has shown itself to be
unable to iesponu to changing ciicumstances anu has left us on the biink of a uisastious uecline in oil
piouuction anu ieseives. Noieovei, new uiops in piouuction anu ieseives may well be aiounu the coinei
anu the national economy can no longei iely on Pemex as the sole pioviuei of oil anu gas. It is cleai that the


utility of the cuiient mouel has been exhausteu, anu that a piofounu iethinking of the goals of Nexico's
eneigy inuustiy must be unueitaken.
The funuamental shifts in the global oil anu gas inuustiies uesciibeu above highlight the neeu foi Nexico's
national eneigy mouel to be ,$54+)5(O$ 0)6 *2$.(M2$. The cuiient mouel was cieateu foi an oil inuustiy
that was focuseu on onshoie shallow watei piouuction, an economy that was closeu anu baseu on
consuming national oil piouuction, anu the iestiictions imposeu by the constitution, while the feueial
goveinment's insistence on maximizing ient fiom the national oil company has meant that Pemex has not
been able to iesponu to the challenges of the mouein oil anu gas inuustiy. Any new mouel must be open-
enueu enough to allow foi auaptation in the face of significant change.
In othei woius, Nexico's oil anu gas mouel must be flexible enough to allow policy makeis to auapt to new
uevelopments anu challenges. Rathei than piosciibing options, the legal fiamewoik suiiounuing the sectoi
shoulu affoiu futuie goveinments the capacity to puisue hyuiocaibons stiategies that seive the national
inteiest.
The othei guiuing piinciple foi the nation's legislatois as they ponuei a new mouel must be 4,0'708(57.
Insteau of basing the nation's eneigy policy on the iuea of iueological piinciples oi lofty philosophical
conceins, Nexico's uecision-makeis must auopt a mouel that is baseu on satisfying the nation's neeus. A
classic example of this has been the concein of successive Nexican goveinments to pieseive soveieign
contiol ovei the oil inuustiy uespite the fact that such contiol has leu to sub-optimal ietuins foi the nation.
The expeiience of othei countiies (see below) has shown that basing the nation's hyuiocaibons stiategy on
piagmatism goes much fuithei in auvancing the national inteiest anu at the same time can inciease the
powei anu wealth of the state without unueimining national soveieignty. In fact the contiaiy is the case,
with the nation emeiging as iichei anu stiongei, anu theiefoie with a highei uegiee of soveieignty by
being in gieatei contiol of its own uestiny.
Such a change iequiies a funuamental shift in thinking about the sectoi. Fiist, a constitutional change is
neeueu that at least opens the option to ieuuce opeiational iisk foi the feueial goveinment, tiansfeiiing it
to a bioauei aiiay of opeiatois of uiveise sizes anu specializations. Effective anu efficient iegulation is
cleaily essential in oiuei to meet the iange of challenges that aie piesenteu by an eia of uifficult oil anu
iapiu technological innovation. It shoulu also be the iole of the state to ueteimine the best mix of public
anu piivate paiticipation in the sectoi in such a way as to maximize the nation's economic benefit fiom oil
anu gas. New constitutional uictates goveining the hyuiocaibons sectoi, insteau of engaging in complex
uesciiptions of what goveinments can oi cannot uo, shoulu insteau empowei the feueial goveinment to
make the choice of what is in the national inteiest accoiuing to the neeus anu ciicumstances of the time,
anu not to assume that ciicumstances will not change.

D:HH;B;#? ICDB1=!B&1#A -1D;GA
Aiounu the woilu national goveinments have auapteu the oiganization of theii oil anu gas inuustiies to
meet the joint challenges of eneigy secuiity anu economic competitiveness. The cases of thiee countiies,
Noiway, Colombia anu Biazil, highlight the neeu to innovate anu tailoi the oiganization of the
hyuiocaibons sectoi to the changing inteiests of the nation. In each of these countiies a piagmatic anu
flexible appioach has been auopteu, one that seeks to maximize the benefit of the hyuiocaibons sectoi foi


the nation as a whole. In each of these countiies owneiship of sub-soil hyuiocaibons iemains in the hanus
of the nation, but opeiation of the iesouices is peimitteu by multiple actois, public anu piivate, national
anu foieign. In each of these countiies the national oil company has been iefoimeu in such a way as to
maximize its capacity to extiact existing ieseives anu secuie new ieseives foi the futuie. This has been
achieveu by allowing the fiim to apply business piinciples to its coipoiate stiategy, iathei than foicing it to
obey a political logic. This incluues allowing the fiim to keep a highei piopoition of its piofits foi
ieinvestment in new E&P piojects anu new technologies, to sign piouuction shaiing agieements with
piivate companies (both national anu foieign) anu to opeiate outsiue of national teiiitoiy to encouiage
inteinational expeiience, the secuiing of new ieseives, anu the foiming of useful long teim alliances with
foieign paitneis. These aie mouels that iepiesent the thinking of the thiiu way, halfway between puie
statism anu the fiee maiket.

#+,%0J95 7+6$2 is peihaps unique among petioleum piouucing nations, basing its mouel on 70.(7(P()'
$/+)+7(/ M$)$*(8 foi the nation. It has iesulteu in the cieation not only of a highly piofitable national oil
company (calleu Statoil), a vibiant petioleum inuustiy incluuing auvanceu seivices, iefining anu
petiochemicals sectoi, anu high levels of income foi the State, but also the cieation of a soveieign wealth
funu (the uoveinment Pension Funu) that has accumulateu assets aiounu the woilu, with its investments
totaling 1% of global equity maikets, making it the woilu's laigest investoi. The huge size of the funu
means that eveiy Noiwegian citizen has the equivalent of 0S$ 14u,uuu set asiue foi theii ietiiement. This
has been achieveu by investing the ient fiom the petioleum inuustiy in Noiway, incluuing taxes,
exploiation anu piouuction licenses anu uiviuenus fiom Statoil, both nationally anu globally. Such an
investment in the futuie of the Noiwegian people means that, as the countiy's hyuiocaibons piouuction
ieaches its natuial limits, a poition of that wealth has been pieseiveu foi futuie geneiations. At the same
time, the soveieign wealth funu has given Noiway consiueiable influence globally, anu the mouel is the
souice of enoimous inteinational piestige foi the small Scanuinavian nation.
The investment of the nation's oil ients is the best-known element of the Noiwegian success stoiy, but
theie aie two othei elements that shoulu be emphasizeu. Fiist, the national oil company, Statoil, is
majoiity-owneu by the Noiwegian state, with 67% of the shaies, but benefiting fiom ciucial capitalization
fiom investment by piivate actois. The fiim is iecognizeu as a global leauei in E&P piojects aiounu the
woilu, having uevelopeu the expeitise anu technologies iequiieu to uiscovei anu successfully extiact oil
anu gas in some of the woilu's most challenging enviionments, incluuing the Noith Sea, the uulf of Nexico,
Algeiia, Angola, Azeibaijan, Biazil, Canaua, China, Libya, Nigeiia, Russia, anu venezuela. This has alloweu
the company to secuie contacts to uevelop oil ieseives that will last fai longei than those founu in
Noiwegian teiiitoiial wateis. Seconu, the mouel has alloweu foi the uevelopment of an auvanceu national
oil seivices inuustiy, as national fiims have investeu in ueveloping capabilities to meet the challenges
involveu in oil exploiation anu piouuction founu in the Noith Sea. Engineeiing anu constiuction
companies, as well as shipbuiluing anu offshoie uiilling companies stanu out among these, with national
fiims coming to be iecognizeu as woilu leaueis in theii aiea.
In summaiy, Noiway's successful expeiiment in oil anu gas has uepenueu on:
The benefit of an explicit anu geneially consistent policy focus on long-teim wealth management;
Limiteu non-commeicial policy inteifeience in Statoil's opeiations;


Competition as a value-auuing foice in oil anu gas policy; anu
The goveinment's application of an evolutionaiy attituue towaiu the iole of Statoil anu othei
Noiwegian companies opeiating in the E&P sectoi, iecognizing the changing natuie of the inuustiy
anu the neeu foi inteinationalization.
=+2+7M(095 successes in the hyuiocaibons sectoi aie moie iecent, with spectaculai iecent uiscoveiies anu
piouuction incieases, as the countiy has useu 4,0'708(57 as the basis foi its national oil anu gas mouel. In
1999, faceu with peaking piouuction anu ueclining ieseives, the Colombian goveinment took a numbei of
steps to make the oil sectoi moie attiactive to foieign investment anu to fiee the hanus of the national oil
company, Ecopetiol. In late 2uuS, as the outlook foi piouuction anu ieseives woiseneu anu theie emeigeu
a ieal piospect of Colombia having to impoit oil to meet national uemanu, the goveinment engageu in a
wholesale ievision of the iegulation of the hyuiocaibons sectoi. Fiist, with the cieation of the Agencia
Nacional ue Biuiocaibuios (ANB), a new iegulatoiy fiamewoik was cieateu that has offeieu a highly
competitive contiactual enviionment foi piivate anu foieign oil companies. This has also helpeu to moie
cleaily uefine ioles between the goveinment anu the national oil company. In auuition to this positive
iegulatoiy change, the teims of E&P impioveu with ioyalties being loweieu to offei one of the most
attiactive tax anu ioyalty iegimes in Latin Ameiica, in paiticulai foi unconventional iesouices, which has
attiacteu investments that woulu otheiwise have gone to othei countiies with laigei ieseives. The
goveinment offeieu new concessions, geneiating gieat inteiest fiom piivate companies at a time when the
majoi coipoiations weie all looking to secuie new ieseives. Inteinational oil companies weie no longei
iequiieu to associate with Ecopetiol, anu thus have complete contiol ovei theii opeiations, howevei as has
been seen in iounu aftei iounu of contiacts, piivate actois still piefei to ally themselves with the national
oil company.
Paitly as a iesult of the new competitive enviionment, Ecopetiol has become a much moie efficient anu
effective oil company, anu saw its piouuction uouble between 2uu8 anu 2u12. The company has come to be
seen as a ieliable paitnei by foieign fiims, anu has been encouiageu by the goveinment to expanu its
activities abioau, investing in E&P activities in Peiu, Biazil, anu the uulf of Nexico. Noie than this,
Colombia is also the home of Latin Ameiica's laigest piivate oil company, Pacific Rubiales, a fiim cieateu
only a shoit time ago to exploit maiginal anu matuie fielus, anu which has inteinationalizeu its opeiations,
all of which has biought new piofits anu employment to Colombia.
In summaiy, Colombia's iecent success in tuining aiounu its hyuiocaibons inuustiy can be explaineu by:
The auoption of a piagmatic appioach to the management of the nation's oil anu gas ieseives;
An open anu competitive enviionment that has encouiageu gieatei efficiencies on the pait of
companies opeiating in the sectoi;
A competitive contiactual enviionment foi piivate anu foieign oil companies that has leu to
extensive investment;
The cieation of a iegulatoiy fiamewoik foi unconventional iesouices, the fiist of its kinu in Latin
Ameiica, in auuition to a cutting euge iegulatoiy fiamewoik foi conventional hyuiocaibons, which
has alloweu the countiy to manage its iesouices successfully anu has attiacteu gieat inteiest fiom
the piivate sectoi in a countiy with ielatively minoi oil anu gas ieseives; anu


A iestiuctuiing of the national oil company, Ecopetiol, that keeps majoiity owneiship of the fiim in
the hanus of the Colombian state but allows it to opeiate accoiuing to business piinciples.
The final case that was extensively uiscusseu by the eneigy woiking gioup, was that of &,0P(2, a
hyuiocaibons mouel baseu on 4,0'708(57Q *2$.(M(2(8J 0)6 8L$ 6$O$2+47$)8 +* )08(+)02 /040/(8J. Biazil
has become the most well-known oil anu gas success stoiy in iecent yeais as the national oil company,
Petiobias, has uiamatically incieaseu its piouuction, stock maiket capitalization anu piofitability. At the
same time Biazil has seen its national oil ieseives multiply anu the countiy has achieveu oil inuepenuence
as national supply has equaleu national consumption foi the fiist time in histoiy. In moie iecent yeais, the
Biazilian mouel has also highlighteu the eiiois of excessive state inteivention anu the speeu with which
these eiiois can impact national economic uevelopment.
Beginning in the 197us, at a time when Biazil was a laige oil impoiting nation anu when the piofounu
impact of the 0PEC oil piice ciisis was felt intensely in the national economy, the Biazilian state has
piogiessively engageu in multiple ieoiganizations of the oil anu gas inuustiy. The most piofounu changes
in the system came in 1997, when the Petioleum Investment Law was passeu by the national congiess,
which cieateu a new iegulatoiy fiamewoik anu autonomous iegulatoiy bouies, anu at the same time
libeializeu the oil anu gas sectoi to cieate competitive foices. At the same time as the State's monopoly on
oil anu gas piouuction was enueu, Petiobias itself was iefoimeu in such a way as to allow it to opeiate in
the same way as a piivately owneu company, with piivate investment but majoiity contiol fiimly helu by
the Biazilian State. The opeiational autonomy of the fiim, thiough which it is alloweu anu even encouiageu
to paitnei with piivate anu foieign fiims, combineu with its ability to ieinvest piofits in new E&P piojects
anu the uevelopment of technical anu technological capacities, has alloweu Petiobias to become a woilu
leauei in ueep watei piojects. Collaboiation with the piivate sectoi has been key, both to uevelop these
new capacities anu to shaie the enoimous financial iisk of ueep watei oil piojects anu to make the
uiscoveiies in the Pie-Sal that have placeu Biazil fiimly on the woilu's oil map.
Petiobias highlights the impoitance of uistinguishing between potential foi piivate investment in the
national oil company anu the question of contiol. Wheieas the company has benefiteu enoimously fiom the
injection of capital fiom the piivate sectoi both in Biazil anu abioau, the State has maintaineu
oveiwhelming contiol of the voting shaies in the company. This allows the goveinment to continue to
benefit fiom the piofits fiom the company's success, as well as using the company as a tool of uevelopment.
Bowevei, although it maintains majoiity contiol, the Biazilian State has alloweu Petiobias a veiy high level
of opeiational autonomy, anu iaiely inteifeies in business uecisions. This autonomy, both financial anu
opeiational, is one of the piimaiy factois that explain the company's success in ueteimining its own futuie
anu in maximizing its positive economic impact on the national economy.
0nfoitunately, in the last two yeais Biazilian authoiities have auopteu a moie inteiventionist appioach,
ueteimining that Petiobias must be a majoiity paitnei in all opeiations, anu cieating a seiies of
mechanisms to inteivene in technical anu opeiational uecisions. Noieovei, the authoiities have sloweu
uown the uevelopment of the inuustiy anu the ieseive by setting excessive uemanus in teims of national
content, iegulatoiy slowness, anu uelaying biuuing iounus. The iesults have been cleai: investois have
been put off anu have lost inteiest, Petiobias has iepeateuly faileu to meet its piouuction taigets anu has
begun to iepoit losses, anu the inuustiy has witnesseu an inflationaiy spiial foi seivices. The emphasis on


the national oil company at the expense of the piivate sectoi has theiefoie uamageu the national inteiest
anu the sectoi.
The Biazilian mouel's success can be summaiizeu as the iesult of:
A willingness to change the constitution to meet the eneigy neeus of mouein Biazil that has leu to
oil inuepenuence;
A piagmatic appioach to piouuction-shaiing anu business paitneiships thiough multiple
opeiatois;
Beavy investment in the national oil company, Petiobias, that has alloweu it to become a woilu
leauei in ueep watei technologies; anu,
An injection of piivate capital into the national oil company without losing contiol of the fiim, as
well as the encouiagement of inteinational piivate capital paiticipation anu the uevelopment of
piivate national fiims.

! #;R &;E:##:#E H1B -;<:=!# 1:G
Baseu on all of these obseivations, the WWICSITAN eneigy-woiking gioup makes the following
iecommenuations to the nation's legislatois anu policy makeis:
ST ?L$,$ (5 0) K,'$)8 )$$6 *+, ,$*+,7 +* -$.(/+95 )08(+)02 LJ6,+/0,M+)5 ()6K58,J. The existing
mouel has ieacheu its limits anu can no longei guaiantee the nation's eneigy secuiity. Fuitheimoie,
the mouel has long since ceaseu to maximize economic benefit foi the nation, anu is now getting to
the point wheie it will no longei be able to pioviue economic ient to the Feueial goveinment at the
levels iequiieu by the goveinment.
UT ?L$ /+7()' 6$M08$ +O$, ,$*+,7 7K58 M$ M05$6 +) /2$0, 0)6 /+77+) /+)/$485 +* N$J
/+)/$485 to avoiu confusion anu to ensuie that a tiue political anu social consensus is ieacheu on
the question of how to oiganize the nation's hyuiocaibons inuustiy. A common language of iefoim
is ciucial to avoiuing unnecessaiy misunueistanuings anu semantic conflicts.
VT ?L$ ,$*+,7 4,+/$55 7K58 M$ M05$6 +) /+)5(6$,08(+)5 +* $)$,'J 5$/K,(8J 0)6 70.(7(P()'
$/+)+7(/ M$)$*(8 fiom the oil sectoi in national inteiest iathei than meiely focusing on
maximizing ient foi the goveinment. The expeiience of countiies such as Noiway points to ways in
which this may be achieveu.
WT ! /+)58(8K8(+)02 /L0)'$ (5 ,$XK(,$6 8+ M$ 0M2$ 8+ 508(5*J 8L$5$ '+025T The cuiient piohibitions
on iisk contiacts, piouuction shaiing anu concessions, as well as the monopoly gianteu to Pemex
pievent the oil anu gas sectoi fiom oveicoming the veiy ueep challenges it faces.
YT ?L(5 /+)58(8K8(+)02 /L0)'$ 5L+K26 M$ 07M(8(+K5 0)6 5%$$4()'T The cuiient economic anu
political climate is conuucive foi a majoi change in the sectoi, with an emeiging consensus ovei the
neeu foi iefoim among the main political actois. What's moie, it must incluue iefoims not only to
the constitution but to the bioauei legal anu iegulatoiy fiamewoik that goveins the sectoi.
ZT ?L$ )$% /+)58(8K8(+)02 0,,0)'$7$)8 7K58 M$ %,(88$) () 5K/L 0 %0J 05 8+ 70.(7(P$
*2$.(M(2(8JT It is essential that any new constitutional aiiangement foi hyuiocaibons is simple anu
cleai anu allows foi goveinment policy to ieact to changing economic anu maiket conuitions.


[T F$7$. )$$65 8+ M$ ',0)8$6 ',$08$, *()0)/(02 0)6 +4$,08(+)02 *,$$6+7T The new constitutional
aiiangement anu the seconuaiy laws that govein the national oil company must allow it to opeiate
accoiuing to an economic anu business logic, iathei than meiely seiving the fiscal neeus of the
feueial goveinment. That is to say, we must make Pemex iesponsible foi its own uecisions anu
futuie. Pemex, as it stanus touay, lacks the technology, expeiience anu capital to be able to exploit
the potentially huge hyuiocaibons ieseives that exist in the ueep wateis of the uulf of Nexico anu
in unconventional fielus, in paiticulai shale gas anu shale oil. A iefoim is neeueu that will giant
Pemex these faculties anu allow it to continue pioviuing foi the nation's eneigy secuiity. It shoulu
be alloweu to foim alliances anu to choose its business paitneis anu be alloweu to keep a gieatei
peicentage of its piofits foi ieinvestment in E&P anu technology anu human capital, as well as
keeping a laigei shaie of its piofits, which will iemove Pemex fiom the national buuget anu allow
the state to ieuiiect these valuable iesouices to sectois of society that have moie uigent neeus.
\T ?L$,$ (5 0) K,'$)8 )$$6 8+ 58,$)'8L$) )08(+)02 +(2 0)6 '05 ,$'K208+,5T 0nless a level playing
fielu is pioviueu foi actois in the hyuiocaibons sectoi, one that ensuies competitive iules foi all
paiticipants, piivate inteiest in the sectoi will be limiteu. The expeiience of countiies such as
Colombia shows us how effective anu efficient iegulation can gieatly boost the competitiveness of
the sectoi. Noieovei, it is thiough iegulation that the state can exeicise its management of the
sectoi, anu foi this Nexico neeus stiongei, moie piofessional anu moie autonomous iegulatoiy
bouies, which will embiace a longei-teim view of the national inteiest.


=G1A:#E ?I1>EI?A
Nexico stanus at a ciitical junctuie in the uevelopment of its hyuiocaibons sectoi, with multiple
piessing oil anu gas challenges, anu a looming ciisis foi feueial goveinment ievenue foi seveial yeais
that have been compensateu by high inteinational piices foi oil. To iesponu to this situation, a
funuamental shift in the management of the sectoi is neeueu to haimonize the stiuctuie of the sectoi to
the neeus of the iest of the economy, making it moie competitive anu sensitive to maiket signals. The
countiy's legislatois will soon engage in an intense uebate ovei how best to auuiess these challenges,
anu theie aie encouiaging signs that the incoming goveinment of Piesiuent-elect Eniique Pea Nieto is
willing to seek a fai-ieaching iefoim. What is now neeueu is a iational, infoimeu anu compiehensive
national conveisation about the best way to equip Nexico's hyuiocaibons sectoi foi the futuie.