Hurdles remain in push to loosen monopoly grip on Mexico oil

HOUSTON — Historic legislation that cleared Mexico’s Congress Thursday could open its oil industry to private investment for the first time in decades, though several steps remain before the nation can draw much-needed international capital to its oil fields.

Mexico’s lower house, the Chamber of Deputies, approved a constitutional amendment passed in the Senate over the weekend.

If it survives remaining hurdles, as appears likely, the overhaul could open opportunities in Mexico for integrated oil giants and independent producers with major operations in Houston.

It allows private interests to join the Mexican oil monopoly Petroleos Mexicanos, or Pemex, in developing projects as investors rather than contractors — sharing in the risks and rewards.

 Foreign investors

And oil field service companies including Halliburton and Schlumberger, which have had contracts in Mexico for decades, stand to get more work if new investment spurs exploration south of the border.

Lee Tillman, CEO of Houston-based independent Marathon Oil Corp., characterized Mexico as “a tremendous hydrocarbon province” in an August interview with FuelFix.

“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,” Tillman said.

Mexico nationalized its oil sector in1938, and control of the bountiful resource is a source of Mexican pride and identity.

But because it is beholden to government bureaucracy, critics say, Pemex has been slow to develop technology and infrastructure necessary to a vibrant energy industry.

International investors have been reluctant to partake without sharing in ownership of the oil itself once it is produced.

The amendment approved this week is a key initiative of President Enrique Peña Nieto, though it goes beyond his August proposal that would have allowed companies to receive cash payments, called profit sharing contracts, in exchange for participation.

The measure that passed allows them to share in the production, or to contract independently of Pemex.

More approvals needed

It now requires approval from at least of 17 of the 31 state legislatures, which Mexican political observers expect but say could take a few days or several weeks.

Final approval by the states will trigger a deadline the federal lawmakers imposed upon themselves, giving them 120 days to write legislation codifying the overhaul.

Financial struggle: Pemex reports fourth straight quarterly loss as production falls

They will base the legislation on a 295-page report that accompanies the amendment.

How the law takes shape will determine whether the constitutional amendment serves the purpose of attracting investment, but analysts say the level of congressional support for the amendment bodes well for the success of the specific rules to come.

Implementing new rules

“Peña Nieto is only one year into his administration, so he will be the one implementing some of these reforms,” said Gabriel Salinas, an attorney with Mayer Brown who has closely followed the issue. “Similarly, the same Mexican congress that is approving will be the one tasked to pass and modify the secondary laws. The same players that are pushing this reform will be in charge of implementing it – that is a major advantage.”

But they’ll have to wrestle with details including licensing charges and production sharing formulas, said Jose Antonio Prado, an energy partner with Holland & Knight’s Mexico City office. “Investors will look for the certainty of these formulas to start investing in Mexico,” he said.

Former Presidents Vicente Fox and Felipe Calderón both failed in the last decade to push through similar measures. In an interview with FuelFix last week, Fox attributed Peña Nieto’s success to improved cooperation between the ruling Institutional Revolutionary Party and the conservative National Action Party.

The leftist Democratic Revolutionary Party opposed the amendment in debates that raged into the night Wednesday.

Fierce opposition

Opponents — who have protested the measure in the streets as lawmakers debated it in Congress — characterized it as privatization of resources that belong to the Mexican people.

“This is treason to the nation, in this Congress where you pledged to protect the Constitution of Mexico, which you are flagrantly violating – shame on you!” said Antonio Garcia Conejo, a lawmaker with the Democratic Revolutionary Party, who then stripped down to his underwear at the lectern to punctuate his protest.

International auctions

The amendment states explicitly, however, that the Mexican government will retain ownership of all energy resources that lie beneath Mexican soil.

Once the amendment and related legislation receive final approval, the Mexican Ministry of Energy will begin a process called Round Zero, giving Pemex the right to develop some areas within its capabilities, and auctioning off other stakes.

Those auctions could begin by the second half of 2014, said Pablo Medina, an analyst for the energy consulting firm Wood Mackenzie.

“We don’t know the terms yet,” Medina said, “but the opportunity is so big, and there is such a range of opportunities, that firms of all sizes will start looking at it very closely.”

Shale gas

While the bulk of the focus is on the new players that may soon invest in Mexican oil, the overhaul also may open the door for Mexico to become customer-in-chief for natural gas from the Eagle Ford Shale in South Texas.

Expert: Mexico unlikely to tap its Eagle Ford Shale

As the energy sector opens up, investors will be eager to start building pipelines to move the gas across the border, to meet demand for power generation and manufacturing, said Ixchel Castro, an energy markets analyst for Wood Mackenzie, estimating that natural gas fueled electricity generation will double by 2023.

“This reform is not only opening up investment opportunities for production in Mexico,” Castro said. “It is also opening up the opportunity for U.S. companies to supply the cheap natural gas that Mexico, as a growing economy, will need.”

SHOW MORE