UPDATE 3-Mexico seeks quick investment with energy reform rules

Wed Apr 30, 2014 4:01pm EDT

(Adds details on cross border developments and removal of cost caps)

By Adriana Barrera

MEXICO CITY, April 30 (Reuters) - Mexico will force investors in its oil and gas industry to use a certain amount of labor and materials from Mexican firms but will give them a decade to comply with the rules, the government said on Wednesday.

Presenting legislation to flesh out a radical 2013 reform at the core of President Enrique Pena Nieto's plan to boost economic growth, his government said the "local content" requirements would not kick in immediately.

Energy Minister Pedro Joaquin Coldwell said the quota, aimed at strengthening the domestic oil and gas industry, would need to reach an average of 25 percent by 2025.

The secondary laws unveiled on Wednesday set out rules for implementing the reform, and are being closely watched by oil majors such as BP Plc and Royal Dutch Shell.

The laws showed content requirements will vary on a case-by-case basis and will be detailed when contracts are put out to tender, all of which the government said would be public.

"They are emphasizing flexibility because they know that the mosaic of opportunities in the country require a different approach," said Jeremy Martin, an energy expert at the University of California San Diego. "It seems they definitely drew from some lessons in Brazil, where you have much higher (content) percentages that are much more rigid."

The content requirements in Brazil are as high as 55 percent for the development phase of the pre-salt offshore fields.

Mexico's government also said on Wednesday it would cut the tax burden on state oil giant Pemex and guarantee it at least a 20 percent stake of business in potentially lucrative deposits in Mexican waters and land that border the United States.

But analysts say a confirmed discovery of a transborder oil field in the Gulf of Mexico or along the country's northern land border is at least a decade out.

Joaquin Coldwell added that the minimum stake would not require Pemex to operate future cross-border fields, but rather be a partner in such developments.

Those measures and the local content rules are aimed at ensuring the energy reform benefits Mexico's economy even as it seeks to lure foreign investors that would compete with Pemex.

The government will also reduce its involvement in the national electricity utility known as CFE.

"The time has come for the finance ministry to let go of the administration of Pemex and the CFE," Finance Minister Luis Videgaray told a news conference with Joaquin Coldwell.

Pena Nieto's energy reform passed in December ends Pemex's 75-year-old oil and gas monopoly. It aims to generate billions of dollars worth of private investment for the industry in Mexico, the world's 10th biggest producer of crude oil.

The secondary laws show the fiscal burden imposed on companies by the state will vary depending on the contract.

Aside from creating thousands of new jobs, Pena Nieto hopes the energy reform will deliver a significant boost in oil production, which has fallen by 25 percent since peaking at almost 3.4 million barrels per day in 2004.

The new laws would lower the fiscal burden on Pemex to less than 65 percent on average from 79 percent, Videgaray said.

It would also eliminate production cost caps when calculating the company's tax bill.

TROUBLED CONGRESS

The current session of Congress was to end on Wednesday and it is not formally due to reconvene until September. The government had hoped to pass the laws in the session but disputes with the opposition delayed them.

To speed up the process, Congress will call extra sessions and lawmakers hope to pass the energy laws by the end of June.

However, a backlog of legislation has built up in Congress and some officials in Pena Nieto's Institutional Revolutionary Party, or PRI, say it might take longer than that.

The PRI, which created state oil giant Pemex in 1938 when it expropriated the assets of foreign oil companies, wants broad consensus over the energy laws and is counting on support from the opposition center-right National Action Party (PAN).

The PAN, which has been riven by in-fighting amid a bitter party leadership contest, has made its support on energy conditional on the passing of an electoral reform that will weaken the PRI's longstanding domination of Mexican politics.

The negotiations on electoral reform have advanced more slowly than the PRI had hoped in the Senate and could still affect the fate of the energy legislation. (Additional reporting by David Alire Garcia; Writing by Dave Graham; Editing by Kieran Murray and Chizu Nomiyama)

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