Mexican President Felipe Calderon and his National Action Party (PAN) have quietly been preparing the Mexican population for his most controversial reform proposal so far — one that addresses the serious situation at the country's state-owned energy conglomerate, Petróleos Mexicanos (Pemex). During a trip to Mexico's petroleum-rich southeast, Calderon said Jan. 10 that targeted private investments that optimize extraction efforts without diverting Pemex's own funds are highly beneficial to Mexico's energy industry. Calderon's words provide a hint of what lies ahead for Mexican energy policy. But even if Calderon gets the reforms he wants, halting Pemex's long decline probably will have to wait for a future Mexican presidency. The operational and financial situation at Pemex has been in decline for years because of chronic underinvestment and mismanagement. Around one-third of Mexican government revenue comes from Pemex, but the company lost more than $1 billion in the third quarter of 2006 despite record-high oil prices. Mexico's energy minister has said petroleum output is set to fall by a third in the next decade unless immediate action is taken. Mexican politicians, however, have always hesitated to touch the Pemex issue because of its enshrinement in the Mexican Constitution as a state-owned enterprise. Politicians have proved willing to sidestep the constitution when there is no alternative, however. Therefore in 2003 Pemex designed "multiple service contracts" (CSMs) to bring in outside capital and technology in an effort to spark the development of natural gas fields without violating Mexican law. Under the CSM framework, multinationals can bid on natural gas projects that involve being paid fees by Pemex, thus avoiding the appearance of direct participation by private enterprise in the Mexican energy sector. The opposition has been unable to overturn this scheme, which could provide inspiration for the oil sector. The opposition Institutional Revolutionary Party (PRI) has said it will look for ways to increase investment in Pemex without modifying the constitution. The PRI's position on the issue is key, since it is the largest opposition party in Congress, and Calderon's main reform ally. This means the PAN will try to find middle ground with the PRI. Ideally for Calderon, a deal with the PRI will emerge that would allow joint venture agreements and partnerships with foreign energy companies to develop and exploit new oil sources in the Gulf of Mexico, which lie in deeper waters that Pemex's antiquated technology permits can reach. Such a maneuver represents the only way Pemex can avert a drastic decline in revenues — something that also would severely affect the government's cash flows. These joint ventures would allow foreign investors a minority stake in drilling projects, something the government can sell more easily to the segment of electorate reflexively wary of foreigners "taking control" of Mexico's energy assets. This reform inevitably would have to be presented to Congress before Mexico's midterm legislative elections in 2009, before the composition of Congress changes, leaving Calderon with the task of rebuilding alliances. Even if it passes, however, the pending energy reform will represent no panacea for Pemex. The company has a long backlog of problems beyond underinvestment and efficiency issues, and the PRI and PAN are unlikely to agree completely on solutions to those issues. These include what to do with a powerful union that will fight tooth and nail to maintain its privileges. More important, PRI legislators already have admitted that overly aggressive energy reform would in fact hand over the presidency to Calderon's defeated rival for the presidency, Andres Manuel Lopez Obrador. Lopez Obrador already has planned stiff opposition to any proposal allowing private investment. So while reform could yield increased investment and maintain current production capacity, it will not permanently reverse Pemex's decline. For that, more aggressive reform will be needed — but that probably will have to wait for the next administration.