The Wealth of a Nation: Mexico's Efforts to Attract Foreign Investment in the Energy Sector

• Author: Alexander Cochran
• Position: Alex Cochran is a 2018 J.D. candidate at SMU Dedman School of Law. I would like to thank my editors for their assistance during this process and dedicate this article to Professors George Martinez and C. Paul Rogers for their wise counsel during my time in law school.
• Pages: 613-640

The Wealth of a Nation: Mexico’s Efforts to

Attract Foreign Investment in

the Energy Sector

A

LEXANDER

C

OCHRAN

*

I. Introduction

In December of 2013, a radical development occurred in the history of the

Republic of Mexico. This occurrence was the amendment of the Mexican

constitution to allow for the participation of foreign entities and investors in

the country’s energy industry. Such a change was especially startling, given

what transpired in the country’s not so distant past. In 1938, the Mexican

government famously nationalized the oil industry and expropriated the

assets of the foreign concerns that had been engaged in the extraction of

hydrocarbons from the oil rich areas of the country. The nationalization

also resulted in the birth of a state-owned oil company that had the exclusive

right to explore for subterranean deposits of fossil fuels, to extract such

substances, and to refine them into fuel. The events of 1938 were perceived

as an assertion of Mexico’s sovereignty and were celebrated with patriotic

fervor on March 18th of each year. However, the amendments that once

again allowed for the involvement of foreign entities were not a random

manifestation, rather it was the recognition that the energy industry had

grown stagnant and had failed to modernize. The President, Enrique Pena

Nieto, was among reform minded individuals who recognized that change of

this magnitude was necessary in order for Mexico to be able to fully utilize

its abundant supply of hydrocarbons. This comment will delve into the legal

means and mechanisms by which Mexico intends to woo foreign investment

to aid in the efforts to modernize the nation’s energy industry as well as

touch on changes that have already taken effect.

II. A Brief History of Oil in Mexico

While a true discussion of oil in Mexico would necessarily begin in the

eons before dinosaurs roamed the earth, this section will not recount a brief

history of geologic time. Instead, it will focus on the events that transpired

between the discovery of petroleum in Mexico, and the events that led to the

nationalization of Mexico’s oil industry and the expropriation of the assets of

foreign oil concerns by the Mexican federal government in 1938. Though

* Alex Cochran is a 2018 J.D. candidate at SMU Dedman School of Law. I would like to

thank my editors for their assistance during this process and dedicate this article to Professors

George Martinez and C. Paul Rogers for their wise counsel during my time in law school.

THE YEAR IN REVIEW

AN ANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW

614 THE INTERNATIONAL LAWYER [VOL. 50, NO. 3

the development of the nascent Mexican oil industry in the 20th Century

could arguably be characterized as an example of economic imperialism as

practiced by the Europeans and the United States of America, such a

characterization would not take into account the practical realities of what

occurred during this time period. As discussed herein, the development of

energy production in Mexico played a considerable and essential role in the

modernization of the Mexican state. Furthermore, the conflict between the

foreigner oil producers and the Mexican labor unions that resulted in the

nationalization of the Mexican oil industry took place not in a vacuum, but

rather was of global significance when it occurred. However, the events of

1938 have left a distinct impression in the collective Mexican psyche. In

order to better understand the future possibilities of the energy industry in

Mexico, one must first understand the events that transpired in the not so

distant past.

A. T

HE

O

RIGINS OF THE

O

IL

I

NDUSTRY IN

M

EXICO

In the early 1900’s, during the long presidency of Porfirio Diaz, oil was

first discovered in commercial quantities in Mexico.

1

Diaz was a strongman

who silenced political opposition, but who also sought to modernize the

Mexican state.

2

Since the development of the economy and infrastructure

were part of his goals, Diaz sought to induce foreign oil producers to

develop an oil industry in Mexico.

3

At that time, the only private companies

that possessed the ability to produce oil in commercial quantities were from

the United States and Great Britain.

4

To encourage these foreign entities to

invest in developing the industry in Mexico, Diaz changed Mexican law,

primarily doing away with property and mining law based upon old Spanish

law codes.

5

The new laws emulated those of Texas, which afforded a fee

simple landowner exclusive ownership of any sub-soil hydrocarbons.

6

Additionally, the tax system was changed to favor foreign investment in the

oil industry.

7

Ultimately, Standard Oil of the United States and Mexican

Eagle Petroleum, originally a British concern sold to Royal Dutch Shell,

would become the dominant oil producers in Mexico during the early 20th

Century.

8

These foreign entities built the nation’s oil industry from the

ground up.

9

1. Mitchell Gray, Mexico’s Oil Expropriation: The U.S. Wanted Diaz Gone,

O

ILPRO

, oilpro

.com/post/12324/mexico-oil-expropriation-us-wanted-diaz-gone (last visited Aug. 20, 2017).

2. Mitchell Gray, Mexico’s 1938 Oil Expropriation,

O

ILPRO

, oilpro.com/post/12235/mexico-

1938-oil-expropriation (last visited Aug. 20, 2017).

3. Id.

4. Id.

5. Gray, supra note 1.

6. Id.

7. Id.

8. Gray, supra note 2.

9. Id.

THE YEAR IN REVIEW

AN ANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW