Local Content and Energy Reform In Mexico Dr. Tony Payan

Purposes of national content policies Extending the benefits of opening the energy sector to more Mexican companies and citizens Stimulating national economic growth Help small and medium size companies grow Achieve technology transfers Policy by law 25% of assets (2015) going up later to 35% of assets (2025)

Flexibilization of what counts as national content Preliminary Issues Flexibilization of what counts as national content How serious is Mexico on this? What is the ratio of local content or local participation? There are signals that there is a willingness to look the other way From zero where there is little national expertise (deep-water) to higher in off- and onshore project Unclear whether there will be credits for national content from venture to venture, particularly in large integrated projects Exceptions and postponements (later projects at higher rates) can be made? Will higher percentages upstream count for downstream investments?

Preliminary Issues It is not clear what will count as national, given the integration of supply chains Local registration Local ownership Local workforce Local value added Joint venture

Presumably, 50,000 Mexican companies that can participate, but not all along the value chain Goods Services Expertise But there the industry is not well integrated and it will take a long time to read each other’s signals

Corruption (business by politicians) is a real danger Of these 50,000 companies, it is not clear that the Mexican government knows who is who and who does what Corruption (business by politicians) is a real danger Politicians will offer themselves to do business It is not clear how this will operate in joint ventures with PEMEX Easier to meet, however It is not clear how this data will be collected, although SE can develop formulas for it

Do national content rules violate FTAs? Are they discriminatory? The North American Free Trade Agreement clearly states that none of the signatories can “impose or enforce requirements or enforce commitments or undertakings in relation to the establishment, acquisition, expansion, management, conduct or operation of an intervention by an investor or by a party or a country not part of its territory to [...] reach a given level or percentage of national content.”

It is not clear how violators will be sanctioned or appeals be made Many supply chains in Mexico are obscured Exported goods contain 40% American content