Mexico Senate panels OK energy reform; leftists oppose

MEXICO CITY Mon Dec 9, 2013 7:10pm EST

1 of 7. Protesters kick a barricade surrounding the senate building in Mexico City December 9, 2013.

Credit: Reuters/Tomas Bravo

MEXICO CITY (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.

(Additional reporting by Michael O'Boyle, Dave Graham, David Alire Garcia and Alexandra Alper; Writing by Simon Gardner; Editing by W Simon, Leslie Adler and Andrew Hay)

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