Mexico proposes plan to overhaul oil, gas industry


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 Mexico.

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 flags.

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 produce.

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 itself.

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 capital?"

Chevron, for one, said the company would welcome any decision by the Mexican people and government that provided new investment possibilities.

"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 ago.

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 changes.

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 Brazil.

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 stop it.

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

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