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Energy reforms in Mexico clear hurdle, but foreign investment could be slow to follow

Offshore staff

MEXICO CITY – After months of contentious debate, a proposal to amend Mexico’s constitution to allow greater participation by international oil companies in the country’s energy sector has been approved by lawmakers.

The legislation, championed by President Enrique Peña Nieto, would end the 75-year monopoly of state oil company Pemex and, its supporters maintain, attract some $20 billion in annual investment needed to shore up the nation’s declining hydrocarbon production.

The reform bill passed with a broad coalition of the major political parties, PRI and PAN, and the Green party. It now moves to the states, where it is expected to be approved by a majority of of Mexico’s 31 state legislatures.

While the bill’s passage is “important, and a little hard to believe,” it could be years before the country sees its benefits, says Jorge Piñon, interim director of the Center for International Energy and Environmental Policy at the University of Texas at Austin.

But if ratified, the legislation could give Pemex the flexibility to address technological hurdles or changing market conditions without triggering constitutional debates.

The Mexican government is “setting the constitutional framework from which secondary law” can be crafted, he says. “The challenge is now in the details.”

The reforms offer private and international firms the opportunity to enter contracts to explore and drill for oil, something currently prohibited by law. The legislation creates a sovereign fund to collect and invest oil revenue and relieves some of Pemex’s financial obligations to the state.

Still to be determined are what form those contracts will take, and whether they will prove attractive to the large, international oil companies that could provide the investment and technology needed to access Mexico’s promising deepwater and unconventional reserves.

Moreover, Piñon says, Pemex itself will require major structural and cultural changes if it hopes to emulate more successful Latin American national oil companies.

“For the last six months, we’ve been hearing about how Pemex wants to be more like (Brazil’s) Petrobras and (Colombia’s) Ecopetrol,” he says. “Those companies were able to change their cultures, and have been playing with the big boys for years.” Pemex, on the other hand, “hasn’t stepped out of Mexico for 75 years. It’s not a lack of will to cooperate. It’s that you don’t find a culture of entrepreneurship in a monopolistic company.”

Mexico nationalized its mineral resources in 1938 and imposed strict rules prohibiting private companies from sharing oil revenues. Modest reforms passed under former President Felipe Calderón in 2008 loosened some restrictions on contracts, but have been slow to show results.

The current legislation would allow much more sweeping reforms, including the possibility of production-sharing agreements and US-style lease auctions. But such rule changes must be spelled out in further legislation.

“Yes, it’s good news. Yes, we’re looking forward to the changes,” says Piñon. “But let’s not be naïve. It’s going to be a tedious process for the next several months, possibly years.”

Oilfield service companies, which have established footholds in Mexico under existing rules, could be the first to benefit from the reforms, he adds.

12/13/2013

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