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Soldiers keep guard a gas facility of Pemex in Reynosa, Sept. 18, 2012.

Daniel Becerril/Reuters

Pemex, Mexico's state oil giant, can go far with modest reforms. President-elect Enrique Pena Nieto is eyeing other Latin American countries for lessons on revamping the energy business – most recently Brazil. Mexican law bars private investment in pumping and refining oil, but allows petrochemicals deals. Cutting the heavy taxes that hold Pemex back is another option.

The company is the world's fourth largest oil producer. The 2.6 million barrels of crude a day it pumped last year was higher than Chevron's output. But Pemex has fallen badly behind. Mexico's constitution has barred private investment in oil for more than 70 years. And the government milks its oily cash cow. The company surrendered 56 per cent of sales in taxes last year, and lawmakers can adjust that tax bill annually. It lost $6.5-billion (U.S.) in 2011, and has a heavy debt load.

Mr. Pena Nieto has the political will to make changes after he takes office in December, but some may be tricky. Foreign investment in the oil business would require a constitutional change, which in turn would need a nod from three-quarters of federal lawmakers plus the agreement of a majority of Mexico's 32 state legislatures. Although not impossible, the Institutional Revolutionary Party may not immediately get the needed support.

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Taxes are an easier target. Cutting Pemex's burden would only require a congressional majority, which Mr. Pena Nieto's PRI could manage after roping in some smaller parties. That could transform the company's finances and free up cash to fund its five-year, $114-billion investment plan.

Perhaps more significantly, Pemex is not constitutionally constrained in natural gas transport and petrochemicals. Its chemicals business has $8.5-billion in assets, roughly $2-billion more than Mexichem, the country's largest publicly listed company in the sector with an $8.8-billion market cap. Mexichem is a more sophisticated operation, and that's a valuation Pemex could only aspire to for its unit. But it gives some idea of the opportunity. Oil remains the elephant in the room. Pemex lacks the expertise to develop roughly 15 billion barrels of proven, probable and possible oil reserves in the Gulf of Mexico. Foreign majors could help, if only they were permitted. Even Venezuela's PDVSA, heavily under President Hugo Chavez's sway, has foreign partners. Though still imperfect, the Brazilian example is the better one for Mr. Pena Nieto to follow long-term.

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