Mexico proposes energy reform, some investors skeptical

MEXICO CITY Mon Aug 12, 2013 7:16pm EDT

Mexican President Enrique Pena Nieto listens to an attendee at the annual Allen and Co. conference at the Sun Valley, Idaho Resort July 11, 2013. REUTERS/Rick Wilking

Mexican President Enrique Pena Nieto listens to an attendee at the annual Allen and Co. conference at the Sun Valley, Idaho Resort July 11, 2013.

Credit: Reuters/Rick Wilking

MEXICO CITY (Reuters) - President Enrique Pena Nieto on Monday proposed an overhaul of Mexico's energy industry to offer private companies profit-sharing contracts, but investors said it might be too cautious and some sold Mexican assets.

The proposal calls for changes to key articles of the constitution that ban certain contracts and make oil, gas, petrochemicals and electricity the sole preserve of the state, in a bid to lure investment to stem sliding oil output.

If enacted, the reform would mark the largest private sector opening in decades for Mexico's energy industry, which was nationalized in 1938 and is controlled by state monopoly Pemex.

However, the centrist government's bill stops short of proposing concessions to tap Mexican oil, or production-sharing, that were viewed as the best-case scenarios by oil companies.

It also avoids giving private companies ownership over Mexico's oil and gas and instead gives them a share of profits, in cash but not oil. It was not yet clear how attractive the reform would be for oil majors such as BP Plc and Exxon Mobil Corp.

Energy Minister Pedro Joaquin Coldwell said the government had "not spoken with the big oil companies" about the reform.

Chevron Corp welcomed "any decision by the government and people of Mexico to provide new opportunities for investments" but said it had not yet reviewed the proposal.

An executive with an independent U.S.-based oil company said the proposal lacks the main element oil companies require.

"If the operators aren't going to own the reserves, it would be really hard" to view the reform as a game-changer. "That's how we're judged by Wall Street, by growing production and growing reserves," the executive added, requesting anonymity.

Mexico's proposal falls short of frameworks in oil-producing peers such as Brazil, Colombia and Norway, which allow companies to keep a share of output, and its success will now likely hinge on how generous the profit-sharing contracts are.

Pemex CEO Emilio Lozoya said the new contract plan would auction new, unexplored oil and gas fields to private companies.

Mexico's ample deep water oil and shale gas reserves are often cited as likely to figure into new contracts.

The proposal will be sent to Congress this week and is expected to pass because the government has backed away from more aggressive reform that would have faced bitter opposition from the left.

"The reform neither promotes nor contemplates production-sharing contracts," Pena Nieto said in a televised address from his official residence.

"What it seeks to do is reach profit-sharing contracts which allow the nation to keep total control over the oil," he added, saying that oil and gas reserves would remain under the exclusive ownership of the state. "Pemex is neither being sold nor privatized."

Finance Minister Luis Videgaray told analysts the contracts would include "moderate" royalties payable to the government in addition to income tax and rents, which are standard elsewhere in the world.

Some have suggested that breaking up the 75-year-old Pemex could double foreign investment in Mexico and improve growth, potentially providing the biggest leg-up to its economy since the North American Free Trade Agreement two decades ago.

The government would also offer permits in association with Pemex to refine, transport and store hydrocarbons and petrochemicals.

Under the proposal, the state would also retain control of electricity transmission and distribution currently controlled by state monopoly CFE, while strengthening electricity regulator CRE and the energy ministry. But it would further open electricity generation to more private investment.

PLAN 'MAY BE TOO CAUTIOUS'

"It may not be enough," said Marcelo Mereles, a partner at Mexico City-based energy consultancy EnergeA. "It might be an improvement on the current legal setup, but I don't know if it's going to be enough to make Mexico attractive at a global level. It may be too cautious."

Fred Lawrence, vice-president of economics and international affairs at leading Washington-based oil industry association Independent Petroleum Association of America, was more upbeat.

"It's very interesting ... It would be much better than what was there before for an E&P (exploration and production) company," he said.

Mexico's peso currency weakened after the announcement and the stock market also dropped. Mexican petrochemical companies that stood to benefit from stronger reforms fell sharply, giving up some recent big gains.

Mexico has the biggest proven oil reserves in Latin America after Venezuela and Brazil, at nearly 14 billion barrels. It also has shale-gas resources that might be as high as 460 trillion cubic feet, according to Pemex data.

The reform proposal tries to tread a fine line between the demands of leftist and conservative lawmakers on an emotive issue that overshadows Pena Nieto's wider reform agenda.

The energy overhaul is the cornerstone of a wide-reaching reform package he hopes will boost growth in Mexico, Latin America's No. 2 economy, and lift its energy industry into the modern era. But it is politically divisive.

The proposal seeks to tweak the language from one paragraph in Article 27 of the constitution to allow profit-sharing oil contracts.

Oil companies are awaiting details of the language of the ensuing so-called secondary laws that include the fine print of how to implement the bill to gauge how far-reaching and lucrative the reform will be and how contracts will be structured. Those details are expected to emerge later in the year at best.

The proposal also gave an insight into a fiscal reform, due later this year, aimed at boosting Mexico's paltry tax revenues.

Mexico leans on Pemex to fund about a third of the federal budget, which has hampered its ability to invest in abundant, but technically challenging deep-water reserves.

The reform would ease the financial burden on Pemex, lessening the amount used to prop up the government and using the leftover money to reinvest in the company or to be paid out as a dividend for the government to invest in public spending.

(Additional reporting by Gabriel Stargardter, Luc Cohen, Ana Isabel Martinez, Anahi Rama and Miguel Gutierrez; Editing by Kieran Murray and Ken Wills)

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Comments (2)
advill wrote:
Mexicans always have problems with the language of their laws, the final result usually is that they get an argument…and the contrary using the same law.

The “profit sharing” is just a 50 to 70% tax after running the exploration and development risks, their only advantage is geographical position.

Aug 12, 2013 6:21pm EDT  --  Report as abuse
UauS wrote:
“It was not yet clear how attractive the reform would be for oil majors such as BP Plc and Exxon Mobil Corp.” – no worries, whatever it is, it’ll be attractive enough for PetroChina…
Canada, Mexico and the USA next.

Aug 12, 2013 10:56pm EDT  --  Report as abuse
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