Mexico Senate proposal: broadly open country’s oil sector to private firms

By Adriana Gomez Licon
Associated Press

MEXICO CITY — A Mexico senate committee on Saturday proposed opening the country’s beleaguered, state-run oil sector to greater private investment.

The Senate proposal would allow the government to grant contracts for exploration and extraction of oil and gas to multinational giants such as Exxon or Chevron, something that is currently prohibited under Mexico’s constitution.

It also says that contracts could be made directly with the state and don’t have to be issued by the state-run oil company, Petroleos Mexicanos, or Pemex, which currently has a monopoly on Mexican oil.

The articles explaining the proposal say it would allow private contractors to book reserves, or list expected benefits in their financial statements, as long as they specify in their contracts that all oil and gas they find in the ground belongs to Mexico. An earlier draft proposed that it be part of the constitutional reform, but it was eliminated in the final draft.

Opponents said it proposes a system that has been proven a “total failure,” while analysts consider it a positive move in opening the door to the private investment Mexico needs to save its oil sector. Mexican oil production has been declining despite increased investment, and Pemex has not had the wherewithal to date to exploit deep-water or shale oil and gas reserves.

“It’s a very good setting of the table,” said George Baker, publisher of the Houston-based newsletter, Mexico Energy Intelligence. “I think they’ve done a good job saying … the lease-holder has commercial rights to production. What we don’t know is if they will have rights to all of the production or part of the production.”

The opposition Democratic Revolution Party, or PRD, said the document would “cancel and annul the nationalization of oil the electricity” and renewed its call for a public referendum on the issue.
“They’re trying to give the industry to foreigners,” said PRD Sen. Dolores Padierna. “The participation of private oil companies has been, if you look at it calmly, a total failure.”

The proposal goes much further than the plan introduced by President Enrique Pena Nieto in August, which only allowed profit-sharing agreements but not arrangements for sharing oil.

The measures in the Senate proposal have been prohibited in the decades since 1938, when then-President Lazaro Cardenas nationalized the oil industry, a symbol that for decades that has been fiercely protected by the constitution from possible profiteering by foreign companies.

It would change three articles of constitution, while Pena Nieto had only proposed to change two.

The proposal still specifies that oil in the ground is the property of the Mexican state. The constitution would continue to prohibit oil concessions, considered the most liberal kind of access by private oil companies.

The proposal was hashed out by Pena Nieto’s ruling Institutional Revolutionary Party, or PRI, with the conservative opposition, the National Action Party, which wants an oil reform as open as possible to investment and partnership possibilities.

Meanwhile, the PRD has left the three-party political coalition, Pact for Mexico, to protest any constitutional changes to open the oil sector.

The PRI has been more moderate than the PAN in its approach, given the leftist opposition that has drawn thousands in street protests.

But the mobilization so far hasn’t been as great as in 2008, when former presidential candidate Andres Manuel Lopez Obrador all but killed the congressional attempt to open the oil industry to greater private investment. Lopez Obrador was sidelined by a heart attack last week, but protesters still showed up outside the Senate on Wednesday to oppose the oil reform.

Up to now, Pemex has allowed contracts that only pay a fee for services rendered.

But the constitutional safeguards now act more like a straitjacket, keeping the Pemex state oil monopoly slow, outdated and unable to attract the investment and technology it needs to tap shale and deep-water reserves, say people inside and outside the government.

While oil production has increased substantially in the U.S. and Canada, Mexico’s has fallen 25 percent since 2004, and proven reserves are down 41 percent since 2001, the Mexican Institute on Competitiveness says.