Court battle to slow roll out of Mexico oil reform

MEXICO CITY Tue Nov 10, 2009 4:00pm EST

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MEXICO CITY (Reuters) - A legal challenge to a Mexican oil reform law passed last year means international oil firms will have to wait longer for new contracts aimed at luring them back into the country.

Mexico's lower house of Congress has asked the Supreme Court to invalidate recently published regulations for the law, which was passed in late 2008.

The law allows state oil monopoly Pemex PEMX.UL to pay cash-based incentives to contractors. The company hopes the new rules will bring international oil companies back into Mexico's crude oil sector for the first time in decades to boost deepwater exploration efforts and output from unconventional oil fields.

"It's disappointing but not surprising. I had thought Pemex was being overly optimistic with its timetables," said a Mexico City-based executive with an international oil company.

"The sensitivity of any changes to the way the oil industry is run here made a court challenge highly likely," he said.

Mexico nationalized its oil industry in 1938 and state control of the sector plays a central role in many Mexicans' conception of sovereignty.

The country's crude output has fallen by nearly a quarter since peaking in 2004, threatening a major source of government revenues and leading international debt rating agencies to question the sustainability of public finances.

Energy Minister Georgina Kessel told Reuters last month she is confident Mexico will be able to maintain production of at least 2.5 million barrels per day of oil for the coming years, but officials acknowledge Mexico needs international assistance to start raising output.

The reform of Mexican energy legislation championed by President Felipe Calderon was explicitly designed to help reverse the slide in production.

However, the lower house is challenging the very heart of the reform.

The complaint asks the court to rule that the new contractual model is illegal because the cash bonuses would grant private firms access to oil rents and approximate risk-sharing contracts, which are barred by Mexico's constitution.

"The underlying proposition .... is that the contractors will have access to and will benefit from the oil rent which is the sole property of the nation," the complaint reads.

GOVERNMENT CONFIDENT

International assistance is needed for Mexico to quickly ramp up exploration in the deep waters of the Gulf of Mexico, which is largely virgin territory that is believed to contain billions of barrels of crude oil.

While the reform only allows private oil companies to act as contractors, international oil majors have said they are interested in participating if the bonuses are sufficient to make up for their inability to book reserves under the contracts.

Pemex had promised that a draft version of the new contract would be released by the end of the year but energy ministry officials say the contract will remain under wraps until the court rules in the case.

Government lawyers are currently drafting a response to the complaint and officials say they are confident that the regulations fall within Mexico's strict constitutional ban on private companies gaining access to petroleum reserves or revenues.

"We are confident that the regulation will be found to be valid but we have no idea how long it will take the court to rule. Even if it is expedited as a case of national interest it could take many months," said one government official, who is participating in the defense of the regulations.

(Editing by Marguerita Choy)

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