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Mexico’s new President throws cold water on energy reform

So much for a honeymoon period. Right off the bat, Mexico's new President is cooling hopes for reform of the country's energy sector. A day after taking office on Saturday, Enrique Pena Nieto signed a pact with the three main Mexican political parties, committing them to reforms. That's good, but the deal limits the needed liberalization of the energy business.

The "Pacto por Mexico," as the agreement is known, promises to strengthen education, improve local government finances and promote more competition in the telecommunications sector. Many items on the list point in the right direction. For example, reform of telecoms – dominated for now by Carlos Slim, the world's richest man – is overdue.

But the pact's energy agenda falls short of the big changes that are needed. It promises more competition in refining, petrochemicals and energy transportation. But all this is to be accomplished "without privatizing Pemex installations." The company is constitutionally barred from selling oil exploration and production ventures to foreign investors, but it's not so constrained in areas like natural gas transport and petrochemicals. Those might have provided fruitful experiments in partial privatization, but that now seems to be off the table.

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That's a pity, because Pemex needs a makeover. Its crude production of 2.6 million barrels a day is 25 per cent less than eight years ago. Heavy taxes that fund 40 per cent of the government's budget leave little room for investment, and Pemex has had to borrow to fund the capital expenditures it does still make.

To be fair, the pact does broadly refer to attracting investment into the energy sector. But the key words "private" and "foreign" are missing. And it would now be a big step for Mr. Pena Nieto to take on the constitutional reform needed to open Pemex's core oil operations to private players.

Rather, the new President's energy plan appears to rely on cutting the 60 per cent or more of sales that Pemex pays in taxes. Emilio Lozoya, the company's new boss, is an economist, financier and lawyer, not an oilman. And the President's new oil minister is more politician than energy expert. Lower taxes would ease Pemex's burden, but only major reform can reinvigorate its business. Just days into Mr. Pena Nieto's term, that already looks a long way off.

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