3 Questions: Lourdes Melgar on Mexico’s energy reform
Lourdes Melgar SM ’88 PhD ’92, the Robert Wilhelm Fellow at the Center of International Studies at MIT and Mexico’s former deputy secretary of energy for hydrocarbons, recently delivered a talk at the MIT Energy Initiative (MITEI) outlining Mexico’s historic energy reform. An architect of the design and implementation of the reform, Melgar discussed the need for energy reform, the role of private investors, and the remaining challenges for Mexico moving forward. In a conversation with MITEI, she reflects on these main themes from her talk.
Q: Why was Mexico in need of energy reform, and how did the reform increase Mexico's energy security while also mitigating climate change?
A: Since 2004, Mexico’s oil production had been declining, going from a peak of 3.4 million barrels a day (mmbd) to 2.3 mmbd in less than a decade. In spite of significant increase in investment in exploration and production, the downturn continued. In addition, Mexico’s dependency on imports of natural gas and refined products grew to levels that seriously threatened energy security. Electricity rates with subsidies were, on average, 25 percent higher than in the United States, hurting Mexico’s competitiveness. The country was not fully exploiting its renewable energy potential, despite the wide availability of sources and its legal commitments to energy transition and climate change mitigation.
Mexico needed an overhaul of its energy model to reverse these tendencies, strengthen energy security, and lead the country on the path to a lower-carbon economy. The Reforma Energetica (Energy Reform) established a new institutional arrangement based on the principles of open-market competition, rule of law, sustainability, and transparency. The reform transforms the upstream, allowing contracts that are awarded through a bidding process to private participants in addition to the national oil company, Petroleos Mexicanos (PEMEX), which, after receiving its entitlements, has to compete on equal footing with other companies to increase its acreage. In the mid- and downstream, as well as in the electricity sector, competitive energy markets are established. In the power sector, clean energy certificates are mandated, thus boosting the deployment of clean energies.
As the implementation of the reform advances, energy security will increase, and climate change goals are more likely to be met.
Q: What role do private investors play in Mexico's energy reform?
A: The energy reform does away with a model based on state monopolies and establishes a system where PEMEX and the national utility company, Comisión Federal de Electricidad (CFE), become state productive enterprises that have to compete in the market under the same rules of the game as private participants.
The reform strengthened the independence and transparency of regulators, in order to grant certainty to investors. Attracting private investors is key to increasing efficiency, production, and energy security. In addition to reversing the decline in oil and gas production, boosting competitive natural gas and fuels markets, Mexico needs to add 62 megawatts to its power system by 2029, grow its transmission and pipelines, and enhance its distribution infrastructure. Private and public resources are required to meet the demands of investment of the energy sector.
Private sector participation will be key to the success of the energy reform as it allocates fresh resources to infrastructure development, brings about competition and efficiency, and promotes technological and managerial best practices.
Q: What are the biggest remaining challenges for Mexico as it consolidates its new energy model?
A: Mexico has been able to implement an all-encompassing energy reform in record time. In order to consolidate the new model, it is essential to maintain a technical approach to the implementation, the independence of regulators, and high levels of transparency and accountability. Wider public understanding and acceptance of the reform is also needed. This will come about as the benefits of the reform trickle down to the communities where projects are developed and to society in general.
The strengthening of PEMEX and CFE are central to the success of the reform, as are the creation of value chains of supply, social licensing of the projects, and an effective security of supply policy. In a changing economic and international environment, all of these objectives require continuous work and commitment.