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Should Mexico's energy overhaul include local content rules?

One of the most contentious aspects of energy reform currently under debate in Mexico is whether or not secondary laws should set specific local content requirements for international oil companies operating in the country. Similar measures have been put in place in other countries, such as Brazil, in an effort to support and develop domestic industry, while other countries, such as Colombia, choose not to use them. Are local content rules a good idea for Mexico to include in its energy reforms? How do local content rules vary across the region, and what have been their consequences for energy sector investment and development? How much do they help local industry, and what are the drawbacks and pitfalls of such requirements? 

R. Kirk Sherr, member of the Energy Advisor board and president of Clearview Strategy Group: "Mexico enjoys numerous advantages that create a solid foundation for the implementation of national content policies including a strong industrial base, deep North American trade ties created by NAFTA, a free-trade agreement with the European Union and proximity to Texas. However, the implementation of national content rules also will coincide with new competition for Pemex and new energy regulatory bodies, leading to complex and unknown outcomes for investors. Thus, a 'light touch' on mandatory national content percentages ultimately may be the best approach. This is particularly true considering that the effectiveness of national content policies internationally has been mixed—and even in Latin America there has been marked difference in national content rules (and results) between country markets like Colombia and Brazil. Thus, Mexico must weigh carefully the cost/benefit of the policies it chooses and the timing of their implementation. Mexico imports tens of billions of dollars (and still growing) in natural gas and refined products per year to meet its demand. Addressing these energy import costs will be another important objective of the energy sector changes, meaning investment must be attracted not only to upstream projects, but also to infrastructure and refining. And all of this is occurring in a worldwide environment where energy investment opportunities are increasing due to new offshore and unconventional developments. Rather than mandating a high percentage of national content, perhaps focusing on other mechanisms to develop the sector—especially related to education, domestic technology centers, and skills development and training—may produce the desired investment results more quickly."

... Other featured commentators on this topic include John D. Padilla, managing director of IPD Latin America; Danielle Valois, partner at Trench, Rossi e Watanabe Advogados in Rio de Janeiro; David Shields, independent energy consultant based in Mexico City and editor of Energía a Debate; and David L. Goldwyn, president of Goldwyn Global Strategies LLC and former U.S. special envoy and coordinator for international energy affairs. MORE


A sister publication of the Dialogue's daily Latin America Advisor, the weekly Energy Advisor captures fresh analysis from business leaders and government officials on the most important developments in oil and gas, biofuels, the power sector, renewable energies, new technologies and the policy debates shaping the future of energy in the Western Hemisphere. Please contact Erik Brand at 952.892.0177952.892.0177 or with questions.



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