Mexican Senate approves changes to oil industry

Henry Romero/Reuters - Sen. Dolores Padierna of Mexico’s Party of the Democratic Revolution speaks to the media before a debate on an energy reform bill in the Senate in Mexico City on Dec. 10.

MEXICO CITY — Mexican lawmakers on Wednesday moved a step closer to overhauling the nation’s energy sector, approving constitutional amendments that would reorganize the hidebound state oil monopoly, Pemex, and potentially open up vast pools of oil and natural gas to foreign companies for the first time in 75 years.

By a margin of 95 to 28, senators backed the broad outlines of legislation to allow private investment into the country’s oil industry — although without the type of unfettered access that major foreign companies wanted — which analysts predict could move Mexico into the top ranks of world oil producers in coming years.

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The vote represented a major victory for President Enrique Peña Nieto, who has wagered his first-year political capital on transforming a state oil industry that pays for a third of the federal budget but has suffered from declining production, corruption and mismanagement. The ultimate ambitions of the reform are no less than remaking the face of Mexico: Officials say a more competitive energy sector would boost economic growth, lower electricity costs and accelerate Mexico’s journey toward being a developed nation with a broad middle class.

“This reform will allow Mexico to take better advantage of its resources to grow economically and create jobs in the next few years,” Peña Nieto told his Twitter followers following the vote, assuring that “our energy resources and oil profits will continue to be the property of all Mexicans.”

The legislation would allow foreign oil companies a variety of partnering arrangements with Pemex, including profit and production-sharing arrangements that have been illegal for decades. Though Pemex would retain control over Mexico’s underground hydrocarbons, it would issue licenses to foreign firms allowing them to drill and reap the benefits of what they produce.

Foreign companies wishing to drill on Mexican soil or in the deep waters of the Gulf of Mexico would still not be granted concessions to do so. For the Exxon Mobils and Chevrons of the world, concessions are important because they allow them to raise money from investors by putting on their books that they have ownership rights to a certain amount of oil.

Still, the legislation went further than many analysts expected, and beyond Peña Nieto’s original proposal, in allowing broad latitude for partnerships with foreign firms.

“We’re definitely excited about the final proposal,” said Gabriel Lozano, chief economist in Mexico for JP Morgan. “It’s more investor-friendly than was previously thought, and offers contracts that are flexible enough to appeal to national and international investors.”

Lozano added that Mexican insistence on licenses — instead of concessions — was mostly symbolic, and in practice there would be little difference to foreign energy companies. He also predicted firms would find creative accounting methods to get around Mexico’s restrictions on “booking reserves” by allowing them to show projected income from production-sharing deals with Pemex.

Getting outside help has become critical for Mexico’s energy development, since Pemex output has fallen by a quarter since 2004, and the company lacks the technology and expertise to reach the country’s tougher-to-access deposits of oil and gas. Mexico ranks as the world’s ninth-largest oil producer, but proponents of the bill say output will rise substantially if the country taps into deep-water wells in the Gulf of Mexico.

Mexican oil reform has been on the table for years, but had been opposed during decades of rule by Peña Nieto’s own party, the Institutional Revolutionary Party (PRI). This time around, his party adopted the banner of the opposition, and allied with the National Action Party to build the two-thirds support of the congress necessary to modify the constitution.

After a 20-hour debate, the Senate approved changes to three articles of the constitution. The legislation also would create a sovereign fund to manage oil revenues, and remove the five representatives of Pemex’s labor union, which has faced allegations of corruption, from the company’s board of directors. Analysts expect the legislation will pass Mexico’s lower chamber and receive approval from the state governors, as a majority of them come from the president’s ruling party.

Still to come would be more detailed secondary legislation spelling out the details of private involvement in the oil sector and the changes to Pemex.

Even with final approval, the bill’s impact would likely be years off. To start pumping oil from the deep waters of the Gulf of Mexico, for example, could take five to ten years of planning and building the infrastructure for such technically complex drilling.

U.S. and British oil companies were once powerful in Mexico, but they were kicked out in 1938 when President Lázaro Cárdenas nationalized the country’s hydro­carbons and established one of the world’s most restrictive models for outside participation.

His son, Cuauhtémoc Cár­denas, the leftist former mayor of Mexico City, has led protests against the energy overhaul, calling it a “privatization” move that will once more open the door to foreign — especially American — domination. The public debate about oil in Mexico is inextricably linked with notions of nationalism and fears that foreigners would exploit the country’s underground riches for themselves.

“Mexicans have it ingrained in their brains that oil companies come and leave nothing behind but holes in the ground,” said Miriam Grunstein, an oil specialist at CIDE, a public research university in Mexico City. “They take away resources and do environmental damage. We haven’t seen them perform in our land.”

Senators from the leftist Democratic Revolution Party unfurled massive banners on the Senate floor debate calling supporters of the energy bill “traitors.” Some public opinion polls have shown a majority of Mexicans oppose opening up the oil sector to outsiders, and so opponents plan to continue protests and want to hold a national referendum on the issue.

But the reform movement gained ground this year in part because the industry has suffered so much in recent years. The contrasts with the United States are stark. Giant gas fields straddling the border have turned into a boom in production in Texas, for example, but not on the Mexican side, which imports gas from the United States. The same dynamic is occurring in the gulf, where firms are drawing oil from the American waters but not, so far, from the Mexican ones.

In 2012, Mexico's oil exports to the United States dropped below 1 million barrels for the first time in 20 years, and far below the 2004 peak of 1.5 million barrels, according to the U.S. Energy Information Administration.

 
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