Mexico's Policy Reforms in Energy Sector ; Caution and Recommendations to Avoid Possible Pitfalls

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Memorandum for the President of Mexico, Enrique Peña Nieto

From : Siva Surya Teja Thotakura

Advisor

Subject : Mexico's policy reforms in energy sector ; Caution and recommendations to

avoid possible pitfalls

Dear Mr. President,

In light of the recent reforms in making the energy sector more open for foreign investment, I, in the role of an advisor, would like to caution against some possible pitfalls in making these reforms profitable for the country and give some recommendations to ensure high probability of success. The main problems in these policy reforms can be segmented into social and economic contexts.

Social Risks: One of the key problems in opening up oil fields and reserves to international companies is the possible over exploitation and its long term environmental impacts. Throughout the history and recent examples from the neighboring countries like Columbia, we have seen countries running out of reserves rapidly and also adversely impacting the environment. The perceived monopoly of the foreign companies in local regions unsettle the common public and also makes the environmental agencies paranoid. Also, from the foreign investors perspective, given the history where our government have nationalized their assets, we need to build our credibility with strong laws and minimum government intervention.

Also, given the sensitivity of the sectors - oil fields and natural reserves - it should be noted that any loopholes in the reforms creates a situation where our reserves will be exploited and will be in trouble when we are running out of reserves in the future.

While there are risks, there are opportunities in these reforms where it creates more jobs for our people and also efficient use of our currently unexplored reserves.

Economic Risks: The nature of these energy sector reforms is an outcome of our reduced production over the years, ineffectiveness in state owned enterprises and lack of funds for technological advancement. We are at a stage where we are dependent on foreign investment to make use of our unexplored resources, create more jobs and most importantly create competitiveness in the market - in terms of prices, technological advances and efficiency. This will bring to question the possible excessive dependency on foreign investment in our policies and thus giving more authority away to outsiders which may undermine our welfare policies.

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Without a proper control mechanism, the risk is high that we may see increased exports, though may be beneficial, also turns our resources as plowing fields for foreign markets. Also, the energy sector reforms must go hand in hand with electricity market changes or else we may face constraints in efficiently make use of the economic benefits.

Like in social context, we have good opportunities to bolster the investments in our markets, create a competitive market and encourage innovative business practices.