UPDATE 2-Mexico Senate panels OK energy reform; leftists oppose

Mon Dec 9, 2013 5:54pm EST

By Adriana Barrera
    MEXICO CITY, Dec 9 (Reuters) - Mexican Senate committees on
Monday gave general approval to a draft energy bill allowing
private investment in the world's No. 10 oil producer in what
would be the biggest opening of the state-controlled sector in
its 75-year history.
     The bill, unveiled by senators from the ruling
Institutional Revolutionary Party (PRI) and opposition
conservatives on Saturday, would let private firms partner with
ailing state oil firm Pemex via profit-sharing,
risk-sharing and service contracts as well as
licenses. 
    The revised draft was a positive surprise for many in the
oil industry, and the government hopes it will help stem a
decade-long slide in crude oil output. Mexico's peso
  rallied on Monday to a seven-week high. The
energy reform is seen helping drive economic growth in Mexico,
something that would underpin the peso.
    Lawmakers from Senate committees had debated the bill on
Sunday, but did not wrap up speeches in time for a vote.
    They gave the bill general approval on Monday afternoon, and
then began debating the dozens of reservations raised by leftist
Senators opposed to Pena Nieto's plan.
    Senators from the main leftist group, the Party of the
Democratic Revolution (PRD), chanted "ask the people" inside the
chamber as they tried to stall the process.
    PRD Senators had earlier lined up in front of the podium in
the upper chamber holding placards saying "no to privatization,"
then sang the Mexican national anthem.
    Once committees have fully passed the bill, it would head to
the full Senate and lower chamber for votes.
    The reform is a cornerstone of an economic reform drive that
President Enrique Pena Nieto hopes will boost long-lagging
growth in Latin America's No. 2 economy. 
    
    It would allow private investors to drill for the country's
crude, and although it stops short of full-blown concessions
that oil majors had hoped for, the reform goes much further than
many analysts had expected.
    
    RIGHT TO BOOK RESERVES STILL MURKY
    Lawmakers say companies will not have rights to book oil
reserves on their balance sheets but will be able to report
projected benefits from agreed contracts for accounting
purposes, which lawyers say is tantamount to the same thing.
    Jose Valera, a Houston-based energy expert with law firm
Mayer Brown, stressed that booking reserves is not a function of
ownership.
    "So long as the booking of reserves is not expressly
prohibited by Mexican law, U.S. companies may book reserves in
accordance with SEC guidelines," Valera said in an emailed
statement.
    Other specialists say the proposal is vague on this point.  
 
    "The language... suffers from unnecessary ambiguity for not
making it explicit that the lease-holder may post the expected
economic benefit in volumetric units as well as in monetary
units," George Baker, publisher of industry newsletter Mexico
Energy Intelligence, said in a report.
    In a section setting out how risk-sharing contracts work
internationally, the draft bill explains that production-sharing
contracts let companies book crude reserves for accounting ends.
    The bill later says that "...the hydrocarbons beneath the
surface are and will always be the property of the nation; in
consequence, no participant in the oil industry will be able
report the reserves of these products as assets."
    Jorge Jimenez, a Mexico City-based energy law expert at law
firm Lopez Velarde, Heftye & Soria, said the bill was a "good
compromise" on a difficult political issue but that secondary
legislation expected next year would need to ensure there was no
room for misinterpretation on the issue of reserves.
    
    FINISH LINE
    The bill 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.
    Pena Nieto, who has pushed through overhauls of Mexico's tax
rules, telecoms sector, bank lending regulations and education
system, hopes to pass the energy reform before Christmas but
lacks a majority in Congress.
    He needs the support of the center-right National Action
Party (PAN) to pass the bill because the constitutional changes
he wants to make require a two-thirds majority in Congress. But
the PRD has vowed to fight the bill all the way to the finish
line.
    The reform is a major break with tradition in Mexico, where
assets of foreign oil companies were expropriated in 1938 to
create Pemex, which is still a potent symbol of national pride.
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