By ADAM WILLIAMS, ERIC MARTIN and NACHA CATTAN
Mexico will end 75 years of government control of its vast
oil reserves after Congress approved the nations most
significant economic reform since the North American Free
The bill secured the required two-thirds majority in a
353-134 vote in Mexico Citys lower house on Thursday
after challenges to articles were rejected. Before becoming
law, the proposal must be ratified by state assemblies, the
majority of which are controlled by the party alliance
backing the reform.
The bill will change Mexicos charter to allow companies
such as ExxonMobil and Chevron to develop the largest
unexplored crude area after the Arctic Circle. Supporters say
the overhaul could propel Mexico into the top five crude
exporting countries, while opponents say it will funnel
resource wealth to foreign investors.
Its an extraordinary moment, Tony Garza, a
former US ambassador to Mexico under President George W. Bush
and an adviser at law firm White & Case LLP in Mexico
City, said by phone. Theres potential to attract
additional investment into shale and ultra-deep waters so
that those resources can be exploited in a way thats
ultimately good for the country.
Producers will be offered production-sharing contracts or
licenses where they get to own the pumped oil and will be
allowed to log crude reserves for accounting purposes. The
reform could increase foreign investment by as much as $15
billion annually and boost potential economic growth by half
a percentage point, JPMorgan Chase & Co. said in a Nov.
The passage comes one year after President Enrique Pena Nieto
took office and returned his Institutional Revolutionary
Party, or PRI, to power after a 12-year hiatus.
The 47-year-old leader has called the oil overhaul the
cornerstone of his administration, following approval of an
education bill to make teachers more accountable for
performance, a law to spur increased telecommunications
competition and a program to jump-start bank lending.
Since joining a free-trade agreement with the US and Canada
in 1994, Mexico has become one of the worlds most open
trading economies. Even so, many industries are still
dominated by single groups, such as billionaire Carlos
Slims America Movil SAB in mobile-phone service and
Comision Federal de Electricidad, or CFE, in electricity.
In October, Congress passed a tax overhaul to reduce the
governments dependence on revenue from Petroleos
Mexicanos, the state-owned producer known as Pemex. Proceeds
now fund about a third of Mexicos federal budget.
Its the biggest perceived opening of the Mexican
economy since Nafta, theres no question, James
Jones, the US ambassador to Mexico when Nafta took effect,
said in reference to the energy bill.
The energy overhaul probably will be ratified by a majority
of Mexicos 31 states early next year, with the first
contracts based on its model ready by the end of 2014,
Alexis Milo, chief economist at Deutsche Bank Securities
Inc. in Mexico City, wrote in a research note.
The overhaul will increase the availability of energy
for Mexicans, at more affordable prices, and increase oil and
natural gas production, Eloy Cantu, a PRI lawmaker,
said during the bills debate. It will generate
greater economic growth that will lead to job creation,
Before todays final passage, the bill received approval
in general terms in a 354-134 lower-house vote late yesterday
and was passed by the Senate two days ago.
The proposal was supported by the PRI, the National Action
Party and the Green Party. The Democratic Revolution Party,
or PRD, and smaller allied parties say Mexico should hold a
voter referendum on whether to allow private investment in
the energy industry and that the debate should have first
gone through lower house committees.
PRD lawmakers and allies forced yesterdays legislative
session into a cramped alternate auditorium at the lower
house complex in Mexico City after seizing control of the
main legislative chamber in a bid to prevent the bill from
Youre traitors to your country, Ricardo
Monreal, a Citizens Movement lawmaker who opposes the
bill, shouted at rival legislators after they assembled at
the alternate location.
Antonio Garcia, a PRD lawmaker, stripped down to his
underwear during a speech before the lower house today to
symbolize the bill stripping the nation of its wealth. Manlio
Fabio Beltrones, leader of the PRI in the lower house, said
the PRDs seizure of the chamber was undemocratic and
that lawmakers had a right to skip the committee stage and
proceed to a full house debate.
Its robbery, Ricardo Monreal Avila from
Movimiento Ciudadano said after the vote. There are
going to be serious operational problems. Indigenous
communities and places chosen by foreign companies for
extraction wont allow them on their property.
Mexico is the worlds ninth-largest oil producer,
according to the US Energy Information Administration, and
possesses the biggest unexplored crude area after the Arctic
Circle. Industry analysts and the bills authors say the
overhaul will reverse eight years of oil output declines for
Pemex and increase production to as much as 4 million bpd by
With reform there will undoubtedly be a spurt of
production growth as Mexico is a very rich hydrocarbon
area both onshore and
offshore, Ed Morse, the New York-based head of
commodities research at Citigroup Inc., said in a phone
interview. Realistically, it could double the amount of
oil that Mexico produces.
Mexicos oil production has fallen 25 percent to 2.5
million bpd from a high of 3.3 million in 2004, according to
data from Pemex. Should Mexican output reach 4 million bpd by
2025, it could surpass Canada to become the worlds
fifth-largest producer, given current production levels.
Natural gas production would almost double to as much as 10.4
billion cubic feet by 2025 from current output of 5.7 billion
feet, according to the bill. The initiative could push Mexico
to become one of the top-five crude exporting countries in
the world and a natural gas exporter, Morse said.
Pena Nietos government forecasts the initiative will
attract investment and spur production that will boost
Mexicos annual gross domestic product growth by 1
percentage point by 2018. The Finance Ministry project
s the economy will expand
1.3% this year, down from 3.9% in each of the past two years
and the least since the 2009 recession.
The bill also removes all five representatives of the Pemex
workers union from the companys board. Under the
new legislation, Pemexs board will be trimmed to 10
from 15. It will consist of five government members,
including the energy minister as board president, and five
Easing restrictions that have barred the largest
international oil explorers from drilling in Mexico for
three- quarters of a century will help Pemex revive output
and crack vast shale formations, said Brian Youngberg, a St.
Louis-based analyst at Edward Jones & Co., who covers oil
producers including Chevron and Occidental Petroleum Corp.
Opening the oil industry to foreign drillers may unleash a
wave of exploration equaling Iraq in recent years, Youngberg
said. Mexicos deep-water prospects in the Gulf of
Mexico would be attractive to Exxon and Chevron, while shale
tracts would probably lure EOG Resources Inc. and
ConocoPhillips, he said in a telephone interview on Dec. 9.
Enticing foreign investment should jump-start
production and get it moving back in the right
direction, he said.
Oil at all stages of production, refining
and distribution has been
the legal property of the Mexican people since 1938, when
then-President Lazaro Cardenas seized fields from US and
British companies and changed the nations charter. The
expropriation is celebrated every March 18 and trumpeted as a
point of pride in schoolchildrens textbooks. Cardenas
was from Pena Nietos PRI party, which ruled Mexico
uninterruptedly for seven decades until 2000.
The issue of oil is embedded in the Mexican soul, in
the Mexican tradition, in Mexican history, said Jorge
Chabat, a political scientist at the Center for Economic
Research and Teaching, a Mexico City-based university.
Passing the overhaul through Congress was the mother of
all battles for the Mexican government, and the most
important success of the Pena Nieto administration so
far, he said in a phone interview.
Oil production has stagnated partly because energy
didnt get the competitive impulse from Nafta that other
industries did, said Duncan Wood, director of the Mexico
Institute at the Woodrow Wilson International Center for
Scholars in Washington.
What this reform does is it now exposes the Mexican
energy sector to national and international
competition, said Wood. It marks a fundamental
paradigm shift in the mentality of the energy sector. Now we
get beyond 1938.