Mexico energy reform eyes big opening for private capital

MEXICO CITY Sun Dec 8, 2013 4:04pm EST

Demonstrators sit in front of riot policemen during a protest against the energy reform bill outside the Senate building in Mexico City December 6, 2013. REUTERS/Tomas Bravo

Demonstrators sit in front of riot policemen during a protest against the energy reform bill outside the Senate building in Mexico City December 6, 2013.

Credit: Reuters/Tomas Bravo

MEXICO CITY (Reuters) - Mexican lawmakers unveiled a draft energy bill on Saturday that includes contracts ranging from profit or production-sharing to licenses to lure private investment, in what would be the biggest opening in the world's No. 10 oil producer in decades.

Approval of the bill presented in the Senate would mark the end of the decades-long oil and gas monopoly held by state-run giant Pemex PEMX.UL, which is struggling to reverse a sharp slide in oil output due to years of chronic under-investment.

The bill, which would keep ownership of oil in state hands, is at the center of a package of economic reforms that President Enrique Pena Nieto hopes will re-energize Latin America's second-largest economy after years of lagging its peers.

Nevertheless, major street protests against the changes are likely in a country whose modern identity has been deeply intertwined with oil since the industry was nationalized 75 years ago.

The reform would allow private investors to drill for the country's crude but stops short of full-blown concessions that oil majors had been hoping for. Furthermore, companies will not be allowed to book oil reserves on their balance sheets.

But it is a big step from the service contracts now on offer, under which companies are paid a fee and can recover costs. It also goes well beyond the proposal made by Pena Nieto in August, which was limited to profit-sharing contracts.

"That's the most aggressive, forward-looking concept that they have ever put forward," George Baker, publisher of industry newsletter Mexico Energy Intelligence, said of the inclusion of licenses. "That's basically like a concession, meaning you have the rights to produce the oil and commercialize it."

"They don't want to use the term concession, because it's just a politically loaded term in Mexican history," he added.

Created in 1938 when President Lazaro Cardenas expropriated foreign oil companies' assets, Pemex is both a symbol of pride and the source of one third of the federal budget.

But crude output at the company has fallen by a quarter since peaking at 3.4 million barrels a day in 2004, and its management says it needs a huge injection of capital. Still, many Mexicans think the plan is a covert bid to sell off Pemex.

The government hopes that shaking up both the local oil industry and Pemex will serve as an engine for growth.

"If there is no watering down in the complementary laws, it could well generate a 50 bps to 100 bps addition (to GDP) and more importantly it may get the rating agencies to give at least a positive outlook to the sovereign," said Pedro Tuesta, an economist at 4Cast.

He said that the reform, which Pena Nieto wants to pass before Christmas, would likely have an impact from 2015.

Senators from Pena Nieto's Institutional Revolutionary Party (PRI) and the conservative National Action Party (PAN) who unveiled the bill, are due to start debating it on Sunday.

MIDDLE GROUND

The draft says the contracts on offer include "services, profit- or production-sharing, or licenses," and an option to pay companies with a percentage of output obtained under production-sharing contracts.

In August, the PRI proposed offering contracts that would give private companies a share in profits from oil extraction, which was viewed by companies and analysts as too tame. The PAN argued that concessions were needed to bring in big investors.

This week, the two sides converged on a middle ground.

The reform does not allow companies to count the reserves as assests, but would allow them to register their projected income. It stipulates they can report contracts that have been agreed upon and expected benefits for accounting purposes, but that oil below ground - Mexico's oil reserves - remains the property of the nation.

"You cannot book reserves, because they belong to the nation," said Salvador Vega, the senior PAN member on the Senate's energy committee. "What they can report, like any other company, is the profit and benefits expected from exploitation."

it means they are not allowed to add the reserves under the ground to their existing reserves. (a key metric for oil companies is reserves, i.e. amount of oil estimated to be under the ground where they are operating)

Many oil majors have signaled interest in investing in Mexico's oil patch provided they can share and market the crude they produce and reflect the economic value of long-term contracts on their books. The reform aims to allow this.

In October, Nils Andersen, chief executive of A.P. Moller-Maersk (MAERSKb.CO), the Danish oil and shipping group, said his company was interested in deepwater Gulf of Mexico projects.

But he told Reuters the company preferred projects where the company can trade and commercialize the crude.

The reform plans to allow the government to pay companies in oil, whereby the investor would buy the crude from Mexico after extraction in the form of charges such as royalties and taxes.

"In this case the only difference is that payment takes place 100 meters beforehand at the mouth of the well and not at the end of the pipeline," PAN's Vega said.

An official at a major international oil company declined to comment on the bill after it was presented on Saturday, saying discussions were still at a "premature stage."

FEARS OF SELLING OUT

The proposal would create a new sovereign oil fund, overseen by the country's central bank, which would be charged with administering the proceeds of oil and gas development, with the exception of taxes paid to the government.

On electricity, the proposal would end the state-run national power utility CFE's monopoly on "planning and control" of the industry by in part opening up power generation. But the bill explicitly forbids concessions and maintains government control over electricity transmission and distribution.

The government does not have a majority in Congress, and needs PAN votes to pass the bill in the face of opposition from the main leftist party, the Party of the Democratic Revolution.

The PRD is likely to help mobilize big demonstrations against the reform, and the Senate has been surrounded by police and heavily barricaded during talks to keep out protesters.

Photos of dozens of senators alongside the words "traitor" and "corrupt" plastered some of the metal barriers, and protesters outside said the government was selling Mexico out.

"They want to privatize the industry so that Exxon (XOM.N), Shell (RDSa.L) and BP (BP.L) will come," said former Pemex worker Raul Gutierrez, 64, who had come to the Senate from the Gulf of Mexico port Tampico to take a stand against the reform.

"But we're losing our sovereignty, because these companies can pick and choose governments as they please," he added.

(Additional reporting by Ana Isabel Martinez, David Alire Garcia and Alexandra Alper; Writing by Simon Gardner; Editing by Vicki Allen, Peter Cooney and Jackie Frank)

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