‘Groundbreaking’ Mexico energy overhaul would end Pemex monopoly

HOUSTON — Mexico’s energy sector has been largely sealed off from foreign investment for the better part of a century, but historic legislation, proposed over the weekend, may change that.

After months of negotiating behind closed doors, the Senate issued a 295-page reform proposal that goes much further than most had expected in opening Mexico’s oil and gas fields to international investment.

“It is groundbreaking,” said Gabriel Salinas, an attorney with Mayer Brown, who has followed the reform debates closely. “It provides what companies will need to go down there and develop Mexico’s resources. I think the bill has everything that Mexico needs to have a competitive energy sector, like that of Brazil or Colombia.”

The proposed constitutional amendment would break the decades-old monopoly that Mexico’s national company, Petroleos Mexicanos, or Pemex, has enjoyed, requiring it for the first time to compete potentially with other companies for projects.

“It’s the biggest change you could imagine,” said Steve Otillar, a Houston-based partner specializing in the emerging market energy sector for Akin Gump, an international law firm. “The government and Pemex have historically been joined at the hip — they are a designated monopoly in the constitution, and that is one of the key things that is being changed.”

Sharing rewards: Services companies stand to profit if Pemex makes changes

An earlier proposal by President Enrique Peña Nieto would have allowed companies to receive cash payments, called profit sharing contracts, in exchange for participation. But this proposal goes much further, allowing companies the option to share in the actual oil production, or to contract independently of Pemex.

“It seems that the notion of profit sharing has been dropped,” said George Baker, publisher of Mexico Energy Intelligence. “What they are now talking about is that the government is looking for the flexibility to have contracting terms and conditions that make sense, given the geology and the nature of the risk and the technology required.”

The proposal comes after multiple rounds of failed energy reform proposals. Many credit the stagnant economy for propelling the majority party, the Institutional Revolutionary Party, or PRI, into working with the conservative National Action Party, or PAN, to craft the proposal.

Many are speculating that the new rules, if passed, will transform Mexico’s economy.

“I can’t understate how important this is — this is the beginning of the reformation of the entire energy sector in Mexico,” Otillar said. “It will help Mexico enjoy the energy renaissance taking place in the United States and modernize its economy on the back of energy reform.”

Both Congress and state legislatures are expected to vote on the proposal by Sunday, when Congress begins a winter recess that lasts until February.

Because the PRI and PAN parties have the needed two-thirds majority votes to amend the constitution, the proposal is expected to pass.

“I am very optimistic,” former President Vicente Fox said, explaining that the broad political support is likely to ensure its success.

If the proposal is passed, lawmakers then will begin to craft accompanying legislation to implement the constitutional amendments.

Falling behind: Pemex exec says Mexico needs technology to boost oil output

While the proposal clearly states that the Mexican government retains ownership of the oil until it is produced, opponents to the proposal say it will open the door to privatization of Mexico’s energy resources. Since its nationalization of the oil sector in 1938, Mexico has defined much of its national identity on control of its natural resources, and the demonstrations organized by the leftist Democratic Revolution Party over the past several months reflect this debate.

The proposal also falls short of expressly permitting international oil and gas companies to book expected oil production as reserves in their financial statements, which had been specifically banned under a 1958 law. Reserves, which reflect a company’s future expected production, are one of the most important Wall Street measurements for assessing values. The ability to book reserves is critical for considering investment in Mexico.

The real test of the legislation will be in the hoped-for investments it attracts from international operators, who have broadly hinted that if reform happens, they will come.

“The industry as a whole has always sought to define a role in Mexico,” Lee Tillman, CEO of Houston-based Marathon Oil Corp. said in August. “It is a tremendous hydrocarbon province. Should we see reform, just like any hydrocarbon resource, there will be ready suitors there to take a hard look at Mexico as an opportunity.”


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