| | |  News Around the Republic of Mexico | October 2008 
Mexico Approves Watered-Down Oil Industry Reform
 Alexandra Olson - Associated Press
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| | Former presidential candidate Andres Manuel Lopez Obrador of the PRD (Party of the Democratic Revolution) covers his eyes during a march near Congress in Mexico City October 28, 2008. Mexico's lower house of Congress passed the final of seven bills of an energy reform package designed to reverse slumping oil production by bringing in private sector expertise. Leftist deputies stormed the podium of Mexico's lower house of Congress on Tuesday to protest energy reforms but failed to derail voting on an overhaul of the slumping energy industry. (Reuters/Jorge Dan Lopez) | | |
Mexico City – Mexico's Congress passed a watered-down energy industry reform Tuesday that enables private contractors to participate in the state-owned oil business but won't likely draw enough investment to reverse declining production in the third-largest oil supplier to the United States.
The lower house overwhelmingly approved the reforms despite protests by leftist lawmakers who stormed the podium to block a bill they said was a stealth privatization of an industry that was nationalized in 1938. The Senate approved the reform last week.
Falling oil prices and output threaten to slash Mexico's state oil income, which makes up 40 percent of the federal budget, just as the country sees falling remittances from U.S. migrants and a plunging peso rattles the long-stable economy.
So far this year, Mexico has produced an average of 2.8 million barrels of oil a day, down 10 percent from 2007 levels. At current production rates, experts say Mexico will blow through its proven reserves in 10 years.
State oil monopoly Petroleos Mexicanos, or Pemex, lacks the technology and expertise for deep-water exploration in the Gulf of Mexico, believed to hold many of the country's unproven reserves. But experts say the reform bill has few incentives for private companies to take on the risk and expense of such exploration.
"It's a big disappointment from the investor's perspective," said John Cogan, a Houston-based attorney for McDermott Will & Emery LLP, who focuses on the hydrocarbons industry. "It doesn't do what needs to be done if they are going to fully benefit from their hydrocarbons natural resources."
Leftists had rallied popular support to limit openings to private investment in the oil industry.
After months of arduous negotiations, the bill was stripped of many of the most significant changes in President Felipe Calderon's original proposal.
It allows deep-water exploration only on a straight contractual basis, instead of paying private companies based on the amount of oil found. It also would no longer allow private investment in the building and operating of oil refineries, or private ownership of storage and transport facilities.
Mexico has not built a new refinery in three decades, and now depends on U.S. refineries to convert much of its crude into gasoline.
The reform will let Pemex keep more of its profits for investment in exploration and development. And it does allow for incentivized contracts, including paying contractors bonuses for early completion of projects and for technological transfer to Pemex.
"Investors will wait and see how this reform translates into actual contracts," said David Shields, an independent energy expert in Mexico City who has written books on Pemex. "But what we won't be able to avoid is a major drop in oil production in the short term."
Still, the government managed through its concessions to build consensus in a divided Congress on one of the most sensitive issues in Mexican politics. The compromise bill easily passed in the Senate last week.
"Oil politics in Mexico is a lot about politics and a little about oil," said Enrique Bravo, a Washington-based oil analyst for Eurasia Group. "For many people, this will be a lacking reform, and I see why they see it that way. But within the political setting in Mexico, it's not a minor achievement."
Even Calderon's original proposal had limited sweep, constrained by a constitutional ban on sharing oil or direct income from oil production with outside companies. That essentially ruled out joint ventures that would allow private companies to shoulder most of the cost burden of deep-water exploration. Such restrictions set Mexico apart even from leftist-led countries like Venezuela, which allows joint ventures in hard-to-explore fields.
In a televised address late Tuesday, Calderon congratulated lawmakers for what he called "a historic achievement." He assured Mexicans that the oil industry will not be privatized.
"With this reform we all win," Calderon said. "Mexicans win, and Mexico wins."
The bill passed even though a group of leftist lawmakers tried to disrupt the debate by seizing the speaker's podium.
The protest erupted shortly after former presidential candidate Andres Manuel Lopez Obrador denounced the bill in a speech to the lower house. Since narrowly losing to Calderon in 2006, Lopez Obrador has used the oil reform as a rallying cry, staging street protests against what he says is an attempt to turn Mexico's natural resources over to private and foreign companies. |
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