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Mexico nears private oil investment with approval of energy reform bill

12.10.2013  | 

Lawmakers from three Senate committees approved a bill that would allow private companies from ExxonMobil to Chevron to develop fields in the largest unexplored crude area after the Arctic Circle. State-run Petroleos Mexicanos, or Pemex, is seeking to reverse eight years of falling output.



Mexico’s seven-decade state energy monopoly is one step closer to allowing private oil investment after Senate committees voted in principle to approve a bill that allows output sharing and licenses for outside companies.

Lawmakers from three Senate committees approved a bill yesterday that would allow private companies from ExxonMobil to Chevron to develop fields in the largest unexplored crude area after the Arctic Circle as state-owned Petroleos Mexicanos seeks to reverse eight years of falling output. 

The legislation would allow companies to log crude reserves for accounting purposes, which may make it easier to secure project financing.

Senate committee members from President Enrique Pena Nieto’s ruling Institutional Revolutionary Party, or PRI, and the opposition National Action Party, known as PAN, approved the joint bill with a total of 24 votes in favor and nine against. 

Debates were slowed yesterday by protests from the Democratic Revolution Party, or PRD, which opposes the initiative. The party’s senators are expected to try to delay a full-house vote in Senate, which could be held as soon as today, according to PRI Senator David Penchyna.

“We can expect to continue to see some kind of attempts to block things in both the Senate and Congress chambers,” said Jeffrey Weldon, a political scientist at the Mexico Autonomous Technological Institute in Mexico City. “The bill will likely be passed, though the PRD will do its best to keep it from going smoothly.”

US anthem

At one point during committee debate yesterday, PRD Senator Adan Augusto Lopez played a recording of the US national anthem on his mobile phone to protest what his party says will be the delivery of Mexico’s oil resources to US companies. PRD lawmakers argued the proposed overhaul will cause Mexico to lose sovereignty and control of its energy industry.

The joint bill announced by the PRI and PAN on Dec. 7 ended four months of political wrangling following the release of separate energy plans. The government estimates an energy overhaul would lift economic growth 1 percentage point by 2018 and reverse production losses.

“When the constitutional amendment is approved, Congress would then need to pass ordinary legislation spelling out all the policy details,” Pavel Molchanov, an analyst with Raymond James Financial Inc., said in a research note. The policy details will “influence the extent to which foreign investment flows in.”

Pena Nieto, the 47-year-old former governor who returned the PRI party to power a year ago, has called the oil overhaul the cornerstone of his administration.

Two-thirds majority

Senators from the PRI, PAN and allied Green Party have the two-thirds majority needed to pass the bill in both houses and are seeking to amend the nation’s charter to allow private and foreign energy companies to pump oil in Mexico’s $95 billion/year industry for the first time in 75 years.

Similar to the concession model proposed by PAN, licenses would grant broader operational control than the government’s initial profit-sharing model and allow companies to manage oil directly. In production-sharing contracts, companies can register crude reserves as assets for accounting purposes, the bill says. The oil remains state property until it is pumped.

‘More palatable’

“Although licenses will mimic concessions, we believe they could be politically more palatable than concessions as all of the oil reserves belong to the state,” Alberto Ramos, chief Latin American economist for Goldman Sachs, said in a research report. “Licenses are akin to concessions as they allow companies to take control of oil at the well head by paying royalties and taxes to the government.”

The 295-page initiative calls for changes in Articles 25, 27 and 28 of Mexico’s Constitution. It also sets 21 mandates to be fulfilled with secondary regulations to be drafted next year.

Senator Manuel Bartlett, of the Labor Party, said that most of the elements -- if not all -- will be challenged after the vote in principle.

The bill also proposes the creation of a sovereign fund, originally proposed by PAN, which would be used to manage oil profit for long-term investment and savings.

The sovereign fund will be a public trust that will be operated by Mexico’s central bank, which will act as trustee, and receive earnings derived from contracts.

Shale licenses

Licenses will be used principally for shale-gas exploration, according to PAN Senator Jorge Luis Lavalle. Mexico has shale-gas resources of as much as 460 trillion cubic feet, according to data compiled by state oil company Pemex.

While Jorge Luis Preciado, the PAN’s leader in the Senate, says that licenses aren’t the same as concessions, Houston-based energy consultant George Baker said the models are very similar.

“It’s a 180-degree turn for Mexico,” Baker said in a telephone interview on Dec. 7. “I never thought they would do that.”

The bill also will seek to promote alternative energy sources in Mexico through investments, said Senator Ninfa Salinas, whose Green Party forms part of Pena Nieto’s coalition in Congress.

The congressional session ends Dec. 15. Emilio Gamboa, the Senate leader for the PRI, said last month that he expected senators would agree to extend the legislative process through the end of the year if needed to pass constitutional changes to open the energy industry.

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