The United States has a strong economic interest in ensuring energy security, bolstering exports, and reducing barriers to U.S. trade and investment. The United States also has a national security and an economic interest in ensuring that Mexico, a key ally and top trade partner with which the United States shares a nearly 2,000 mile border, is economically vibrant and politically stable. U.S.-Mexico energy trade and cooperation plays an important role in achieving those goals. Energy cooperation has become a priority of bilateral economic cooperation under the U.S.-Mexico High Level Economic Dialogue as well as a focus of trilateral research, planning, and coordination among the energy secretaries of the United States, Canada, and Mexico. U.S. policymakers are closely monitoring the implementation of the December 2013 constitutional reforms and August 2014 implementing laws that, among other things, allow Mexico's Petroleos Mexicanos (Pemex) to partner with international companies and other industry entrants to boost Mexican production. Hailed by many analysts as the most significant economic reform undertaken by Mexico since its entrance into the North American Free Trade Agreement (NAFTA) in 1994, the energy reforms are expected to boost investment, growth, and eventually oil and gas production in the country. The reforms also opened Mexico's electricity sector to private generators, although that is not addressed in this report. If power sector reforms can help reduce Mexico's high electricity costs, then Mexico's manufacturing sector—a dynamic sector that is highly integrated with U.S. industry—should become more competitive. There is a danger, however, that the Mexican government may have oversold the benefits of the reforms. Investors initially appeared to have maintained interest in Mexico's energy sector despite declines in oil prices, but the results of Mexico's first round of public bidding announced in July 2015 proved disappointing. At a House hearing held on July 23, 2015, witnesses cited the limited size and production potential of the blocks offered, the high minimum bid required, and investors' concerns about corruption and insecurity as possible reasons for the lack of interest in the tender. Mexico has sought to assuage those concerns prior to the September 30 bidding round that will include nine large shallow-water production blocks. This report provides an overview of Pemex and the content and prospects for Mexico's energy reforms, before discussing specific issues facing Mexico's oil and gas industry. It then examines the U.S.-Mexico energy relationship through the lenses of trade and energy cooperation. It concludes by suggesting several oversight issues for Congress related to what the enactment of energy reform might portend for Mexico's economic development, the U.S. energy matrix, and bilateral or North American energy cooperation. Foreign investment in Mexico's oil industry has had a tumultuous history. After oil was discovered in Mexico at the turn of the 20 th century, foreign investors—primarily from Britain and the United States—played a significant role in helping the country become the world's second-largest oil producer by the early 1920s. However, political unrest during and after Mexico's bloody revolution (1910-1920) and the country's 1917 constitution, which established national ownership of all hydrocarbons resources, caused investment in Mexico's oil and natural gas sectors to gradually decline. By the 1930s, reduced foreign investment had resulted in dramatic declines in production levels, and fraught relations between U.S. oil companies and successive post-revolutionary presidents had damaged U.S.-Mexican relations. Tensions culminated in President Lázaro Cárdenas' historic 1938 decision to abandon efforts to mediate a bitter labor dispute between Mexican oil workers and foreign companies and instead follow through on his threat to expropriate all U.S. and other foreign oil assets in Mexico. Upon its creation in 1938, Pemex became a symbol of national pride and a rallying point around which Cárdenas and what became the Institutional Revolutionary Party (PRI)—the party of President Enrique Peña Nieto—united a disparate Mexican society against foreign intervention. Oil remains deeply tied to Mexican nationalism. Nevertheless, Pemex continued to pursue service contracts with some U.S. oil companies until the practice was definitively outlawed by a 1958 regulatory law implementing Article 27 of the constitution. From then on, Pemex retained a monopoly over Mexico's oil and natural gas sector and the Mexican Finance Ministry kept tight control over the company's finances and management. In 2013, 75 years after its founding, Pemex found itself facing significant challenges. Pemex had its heyday in the late 1970s following the discovery of the huge shallow water Cantarell oil field, but the company's long-term performance had been hindered by a number of factors. For years, Pemex sustained itself on the revenue produced from its relatively easy-to-exploit shallow water fields without investing the capital necessary to replace those reserves with new fields or even maintain its infrastructure. Pemex had a high percentage of losses, low worker productivity, and facilities that are in significant need of repair; 37 people were killed in January 2013 after an explosion occurred at one of the company's offices in Mexico City. In part because of the Mexican government's heavy tax demands, Pemex had operated at a loss since 1998 and significantly increased its debt burden. Until recently, the government had also prevented the company from reinvesting its profits into maintenance and new exploration. Pemex's pension liabilities, negotiated by the company's powerful and, for some observers, corrupt workers union, had become an unsustainable drain on its finances. Each year, Pemex had been losing hundreds of millions of dollars due to criminal groups illegally tapping into its pipelines. Pemex's inability to partner with other companies arguably inhibited it from benefitting from new expertise and techniques, particularly in deep water drilling and hydraulic fracturing (fracking). President Enrique Peña Nieto of the nationalistic PRI assumed the Mexican presidency on December 1, 2012, after 12 years of rule by the conservative National Action Party (PAN). Even though Peña Nieto hailed from the PRI, the party that had nationalized the oil industry and watered down previous PAN-led reform efforts, he campaigned on an economic platform that prioritized allowing Pemex to form joint ventures with private companies. At his inauguration, President Peña Nieto announced a reformist agenda aimed at bolstering Mexico's competitiveness that included energy sector reform. In order to implement his agenda, President Peña Nieto and leaders of the PRI concluded a "Pact for Mexico" agreement with the PAN and the leftist Party of the Democratic Revolution (PRD) that facilitated the passage of financial, education, telecommunications, and fiscal reforms. Many of those reforms required constitutional changes. As with the other constitutional reforms enacted in 2013, the energy reforms that Peña Nieto proposed in August of that year required a two-thirds vote in the Mexican Congress and approval by a majority of the country's 32 state legislatures. As discussed below, a PRI-PAN alliance enabled the December 2013 approval of constitutional reforms on energy, but led the PRD to leave the Pact for Mexico. The Peña Nieto Administration's August 2013 energy reform proposal would have removed hydrocarbons from the list of strategic sectors that can only be developed by the government and allowed Pemex to form "profit-sharing" partnerships with international companies in exploration and production. The reform would also have allowed Pemex to sign agreements with private companies for transporting oil and gas, refining, and producing petrochemicals. In secondary legislation, the President pledged to introduce reforms to give the company budget autonomy, improve its transparency, and change its fiscal structure, among other measures. The PAN put forward deeper reforms than the PRI that would permit private concessions in upstream and downstream operations and production-sharing agreements between Pemex and private companies. Former PAN President Felipe Calderón tried to enact far-reaching energy reforms in 2008, but his proposal was watered down by the PRI-led Congress. The PAN also sought to establish a strong regulatory body and a sovereign wealth fund to support social needs. Some PAN legislators reportedly conditioned their support for energy reforms on the PRI backing political reforms, which were also approved in December 2013. The PRD vigorously opposed allowing private involvement in Pemex. Instead the PRD proposal focused on reforming the company while simultaneously granting it greater budget autonomy and a less onerous tax burden. Past and present PRD party leaders joined forces to oppose the PRI and PAN versions of energy reform. In the end, the reforms approved by the Mexican Congress and a majority of state legislatures and then signed into law by President Peña Nieto on December 20, 2013, bore most in common with the PAN proposal, but contain elements of all three parties' energy reform propositions. Key elements of the reforms include Maintaining state ownership of subsoil hydrocarbons resources, but allowing companies to take ownership of those resources once they are extracted and to book reserves for accounting purposes; Creating four types of contracts for exploration and production: service contracts (companies are paid for activities done on behalf of the state), profit-sharing contracts, production sharing contracts, and licenses (enabling a company to obtain ownership of the oil or gas at the wellhead after it has paid taxes); Opening refining, transport, storage, natural gas processing, and petrochemicals sectors to private investment; Transforming Pemex into a productive state enterprise with an autonomous budget and a board of directors that does not include union representatives; Strengthening four federal entities with regulatory roles in the hydrocarbons industry (the Ministries of Energy and Finance, the National Hydrocarbons Commission or CNH, and the Energy Regulatory Commission) and creating a National Agency for Industrial Safety and Environmental Protection; and Establishing a sovereign wealth fund, the Mexican Petroleum Fund for Stabilization and Development, to be managed by the Central Bank.