Mexico is in the process of overhauling its energy sector with reforms that would bring outside investment for the first time in decades. Since President Peña Nieto took power in 2012, the reform effort has already overcome one of the biggest hurdles, the need to change the constitution.  

And this past week, the energy reforms moved into a major new stage – the so called “Round Zero”, in which state oil company Pemex negotiates with regulators over which oil fields it will be able to keep before the sector is opened to new investors. To manage this process, the National Hydrocarbons Commission (CNH) has been expanded and strengthened, and developments are being closely monitored by outside experts.

But there is already controversy and scandal, testing the President’s mettle for reform. 

Mexico is in the process of overhauling its energy sector with reforms that would bring outside investment for the first time in decades. Since President Peña Nieto took power in 2012, the reform effort has already overcome one of the biggest hurdles, the need to change the constitution.  

And this past week, the energy reforms moved into a major new stage – the so called “Round Zero”, in which state oil company Pemex negotiates with regulators over which oil fields it will be able to keep before the sector is opened to new investors. To manage this process, the National Hydrocarbons Commission (CNH) has been expanded and strengthened, and developments are being closely monitored by outside experts.

But there is already controversy and scandal, testing the President’s mettle for reform. Most recently, the highly publicized Oceanografía fraud case has raised concerns about corruption and transparency in Mexico’s energy sector. Oceanografía, a Pemex contractor, appears to have falsified hundreds of millions of dollars worth of loans, and Mexico’s Attorney General has attributed the fraud to a possible money laundering scheme.

Blowups like this demonstrate, more than anything, that Mexico cannot waste any more time in opening and modernizing the sector, which has been closed to private investment for over seven decades. Rather than allowing scandal to slow the process, President Peña Nieto must double down on his leadership and continue to push reforms forward. A government that swiftly and effectively deals with the mistakes of the past will go far in boosting investor confidence – at a time when such confidence is what Mexico needs the most.

The positive impact of such an opening on Mexico’s broader economy should not be underestimated. According to the Mexican government’s figures, by 2018, these reforms could boost Mexico’s $1.2 trillion GDP by more than one percent, create over one-half million permanent jobs, and increase oil production by at least 20 percent – making Mexico the world’s sixth largest producer. Moreover, analysts at JP Morgan Chase have estimated that, in the medium term, the reform could trigger a $20 billion increase in annual foreign direct investment.

Despite these encouraging economic forecasts, the political process has not been smooth, with strong opposition in Mexico’s Congress coming from the leftist PRD party. The political landscape was particularly complicated because legislation alone was not sufficient to enact these reforms; they also required a change to Mexico’s Constitution. But even in the face of these political hurdles, the administration of President Enrique Peña Nieto was able to garner the necessary state-level approvals for the Constitutional modification.

This new Constitutional framework, while not offering energy concessions, does provide investors new vehicles for investment, which include service, profit-sharing, and production contracts, as well as a new licensing regime. This robust range of opportunities contrasts starkly with the previous 75 years, in which the private sector was totally locked out of Mexico’s oil and gas sector.

The question now is: will the reforms be implemented successfully? Investors know changing the Constitution is no silver bullet. Only successful implementation will attract private sector investors to this promising new energy market. After the heated, politicized debates that dominated the legislative proceedings, the legal and regulatory framework – the nuts and bolts of the reform – still need to be negotiated.  Hinging on effective implementation are the tangible benefits that are to be shared by Mexicans.

Greater participation by the international markets will be key to improving Mexico’s energy sector. Before making financial commitments, the international investment community will want to understand  how to navigate these new waters. This will hardly be an automatic process, and it will be crucial for the government to guide the process by first establishing fair and transparent rules that foster foreign interest and investment.

Successfully managing the implementation process will require strong leadership from Peña Nieto and his administration, especially in the context of the current social tensions. Despite the PRI party’s governing coalition, the danger remains that the process of implementation would inflame protests and further foment unrest, and either slow the reforms or lead to terms that are unappealing for potential investors.

Even more importantly, the Mexican government must do a better job of reaching out to the international community while reassuring its citizens that the main benefits of reform are and will be theirs to enjoy. This process begins with effectively laying the groundwork for the media to ensure that the full story is told.

Then, much deeper engagement with the policy and business communities of Mexico and the United States must take place – and at a speed that for Mexico will be breakneck.  But, if the reform is going to be implemented successfully, Peña Nieto´s administration must seize control of the public narrative, outlining how the reforms will strengthen investment ties with Mexico’s most important neighbors.

In other words, Mexico´s government must embrace the opportunity to advocate for and explain both the reforms and the opportunities they will create for the economy. Doing so with detail and transparency will send a very strong signal to markets and investors that the government is committed to transforming the energy sector and to creating tangible benefits for its citizens.

Given the uncertainty of the implementation and Mexico’s ambivalent relationship with foreign investors, many in the international community are, for the moment, taking a wait and see approach to this new energy era. But, as the implementation deadline approaches, it will become increasingly clear whether the government has the skill to implement the reforms it fought so hard to enact.

It is up to President Peña Nieto and his team to demonstrate the leadership necessary to bring Mexico into the 21st century. The challenges are great, but the opportunities are much greater.