By LAURENCE ILIFF and JUAN MONTES
MEXICO CITY -- Mexico moved to end the country's 75-year-old
monopoly on oil and gas production, potentially opening up some
of the world's biggest remaining untapped oil reserves to
private companies and setting the stage for a new energy boom
on the US doorstep.
The government on Monday unveiled a bill to change the
constitution to let it partner with private companies to find
and produce oil and gas in a country that is the third biggest
supplier of crude to the US and has the world's fourth biggest
reserves of shale gas.
State oil monopoly Petroleos Mexicanos (Pemex), the sole
producer of oil and gas in Mexico, now pays foreign companies
to drill wells and provide other services. But that model has
led oil production to plummet in recent years.
Major oil companies that have struggled to find big new oil
fields are likely to find appeal in the relatively familiar
geology and operating conditions of Mexico versus the Arctic or
some politically unstable regions of Africa and the Middle
East, particularly those active on the US side of the Gulf of
The Mexican bill, which is likely to get congressional
approval but could cause a firestorm among nationalistic
politicians and the public, marks a watershed moment for a
country that was in 1938 the first big oil producer to
nationalize its oil industry -- a move followed by other
developing nations in the following decades. Mexico has among
the world's most restrictive energy laws, comparable to
Kuwait's; even Cuba's are more liberal.
"If Mexico passes this bill, and we have peace in the
streets, then the country will make an important leap forward,"
said Enrique Krauze, a prominent Mexican historian.
Mexican officials hope the initiative, the biggest potential
overhaul to the economy since the 1994 North American Free
Trade Agreement, will spur economic growth by attracting
billions of dollars in investment, improve competitiveness by
lowering energy prices for manufacturers, and spotlight Mexico
as a rising power as other big emerging markets struggle.
"This is the first step in creating an energy sector for the
21st Century for Mexico," said President Enrique Pena Nieto,
speaking on live television and surrounded by Mexican
The initiative could fall short of what some oil companies
hoped to see and what most oil-producing nations offer. It
doesn't, for instance, give private oil companies outright
ownership of oil fields via concessions. And Mr. Pena Nieto
said the government won't give oil firms a share of the oil,
but rather the cash equivalent of the oil they find and
Such profit-sharing is similar to arrangements offered in
Ecuador, Iran, Iraq and Malaysia, Mexican officials said, with
Iraq and Malaysia also offering production-sharing. Brazil,
Norway and the US go further, allowing companies to own the oil
Analysts said interest among oil companies will likely
depend on crucial details that will be decided in secondary
laws in the coming months, such as how much in taxes and other
fees the Mexican government wants to charge private firms.
"Could this be very attractive? We're going to need more
details, and until we know that, investors are going to be
asking questions," said Gray Newman, chief economist for Latin
America at Morgan Stanley. Still, Mr. Newman expected Mexico to
offer attractive contracts. "If not, why spend the political
Chevron, for one, said the company would welcome any
decision by the Mexican people and government that provided new
"As with all the investment opportunities we consider around
the world, factors such as economic returns, stability of the
investment climate and sanctity of contract are central to any
decisions we make," Chevron spokesman Kent Robertson said
before the proposal was unveiled.
The stakes are high for Mexico. Under Pemex, as the state
oil firm is known, Mexico's oil production has fallen by one
quarter over the past decade to 2.5 million bpd, and new
resources are more expensive and more difficult to develop. The
decline comes even as Pemex has ramped up annual investment
spending fivefold to roughly $20 billion a year from a decade
Already Mexico imports gasoline and natural gas, spending
half of every dollar it makes on crude oil, according to the
government. Although Mexico has huge gas reserves, Pemex has
only has drilled only three shale gas wells, Mr. Pena Nieto
said, while the US in 2012 alone handed out more than 9,100
permits to drill wells among 170 companies.
Mexico has also failed to tap the deep waters of its side of
the Gulf of Mexico as well as its shale gas and oil, which have
both been a boon to companies operating on the US side. Mexico
estimates it has as much as 87 billion bbl of oil and gas in
deep water and in shale, a similar amount to the oil Brazil
says it expects to find in its huge offshore fields.
"It's probably the largest virgin untapped play that's out
there," said John Padilla, managing director of energy
consulting firm IPD Latin America.
The bill also seeks to liberalize Mexico's electricity
sector by allowing private firms to produce and sell
electricity to consumers. Now, a third of Mexico's electricity
is generated by private firms under a cogeneration plan where
they produce power for themselves and sell the extra to the
state electric utility.
The move would end the monopoly of the Federal Electricity
Commission, potentially lowering electricity prices for
companies and residents.
The bill now goes to Mexico's congress, which will take up
the bill in September, officials said. The conservative
opposition -- the National Action Party that governed Mexico
from 2000 to 2012 -- has said it would support the proposals,
giving Mr. Pena Nieto's Institutional Revolutionary Party the
two-thirds majority it will need to pass the constitutional
Approval would mark a major victory for the president, who
brought back the country's longtime former ruling party, the
PRI, to the presidency last year on a promise to put Mexico
back in the big leagues of global emerging markets, a position
it lost in the past decade with the rise of China and
The real opposition to the proposals could come from the
streets. Already, nationalist firebrand Andres Manuel Lopez
Obrador, who lost the past two presidential votes, has called
the bill "treason" and pledged to mobilize his supporters to
Historians say oil nationalism runs deep in Mexico, having
been hailed as the country's greatest accomplishment for
decades in school textbooks.
Indeed, Mr. Pena Nieto went out of his way to hail former
President Lazaro Cardenas, who expropriated the industry,
stressing that the changes were very similar to the laws when
Mr. Cardenas left office in 1940 -- barring concessions but
allowing risk-sharing contracts.
Limiting the changes to sharing profits rather than oil may
help dampen the reaction on the left, observers say.
Dow Jones Newswires