RPT-INSIGHT-Mexico's rural landowners pose threat to foreign energy investors

Wed Jun 18, 2014 7:00am EDT

(Repeating to additional subscribers)

By Gabriel Stargardter

EMILIANO ZAPATA, Mexico, June 18 (Reuters) - When foreign investors begin to pour into Mexico's overhauled energy sector in the coming months, they will face a potent force well-known to miners: Mexico's ejidos, or rural landowner groups.

The product of revolutionary land reform - almost a century ago - that redistributed more than 100 million hectares from large landowners to small farming groups, the ejidos control surface rights to large swaths of Mexico.

The ejidos are often poor but they can be powerful: machete-wielding landowners shuttered government plans for a new Mexico City airport in 2002.

For years, foreign companies have owned concessions to mine metals in Mexico, leading them into delicate negotiations with the ejidos, who often block mines for months when they feel they are getting a raw deal.

But until last year, when Congress approved a reform to end state oil giant Pemex's 75-year monopoly, foreign firms were blocked from exploiting the oil and gas reserves of the world's 10th largest oil producer.

Now, they too will have to get along with the ejidos, forging long-term relationships that will help define the success of Mexico's efforts to boost economic growth and lure new investment to stem a decade of declining crude oil output.

"If you don't manage it well, this can be a real challenge," said Gustavo Nieves, a project manager for Mexican oil services company Grupo Diavaz, which operates on behalf of Pemex in the Chicontepec region in central Mexico and pumps up to 13,000 barrels of crude a day. "It can get really complicated."

Leftist lawmakers and agrarian groups, many of whom opposed the reform, have raised the temperature for foreign investors by accusing them of planning land grabs.

"This is the total destruction of property in this country in the service of international companies," said Labor Party Senator Manuel Bartlett.

LAND UNCERTAINTY

Unlike in Mexico, where the state owns all oil and gas in the ground, U.S. mineral rights are privately owned. Such clearly defined land rights are one of the reasons some believe the U.S. shale oil and gas revolution has been so successful, and will be hard to replicate overseas.

Oil majors like BP and Exxon Mobil have been quietly building up their presence in Mexico City, but they have not disclosed specific investment plans. Last month Chevron said it saw "tremendous opportunity" in Latin America's second-largest economy.

But, experts say, investors in Mexico's energy sector face troubling questions.

"Who do we deal with, what kinds of arrangement can we make, and third, can they be enforced and will they be respected?" said Jim Rice, a Houston energy lawyer at global law firm Sidley Austin.

The Mexican government is trying to bring some clarity to these questions. Under the terms of the reform, whose fine print is still being hashed out in Congress, surface rights holders will be incentivized to reach a quick and amicable agreement at a fair price or face the prospect of expropriation.

But the previous experience of miners suggests the reality is far more complicated, with costly shutdowns a fact of life.

"The land tenancy issues are the biggest piece of uncertainty you have to deal with as a foreign mining company and I would foresee energy companies having the same issue in the future," said Michael Harvey, director of corporate affairs at Canadian gold miner Goldcorp.

The company's Los Filos mine was blocked by an ejido for more than a month earlier this year, and it has faced weeks of legal uncertainty at its giant Penasquito mine.

In 2012, Canadian silver miner Excellon saw its share price fall by nearly 50 percent during a 99-day blockade at its La Platosa mine in northern Mexico.

Miners complain of outlandish demands.

In the case of Excellon, it said the ejido wanted a concession to truck silver from the mine but was unwilling to insure the cargo, a charge the ejido disputes.

Harvey recommended engaging landowners from the outset and dealing with them directly rather than through middlemen.

OIL AND TOIL

Experts say much of the initial investment resulting from the energy reform will head to areas like Chicontepec, which holds about a third of Mexico's reserves and where mid-size companies can forge relationships with Pemex or operate alone.

Emiliano Zapata, a sweltering citrus-growing village in the Chicontepec oil basin, is one of the 3,631 ejidos in the eastern state of Veracruz. It has the highest number of landowner groups in Mexico, making up 40 percent of the area of the state.

As such, it is a testing ground for whether foreign oil companies can make nice with local landowner groups.

On March 2, an eight-inch Pemex oil pipe burst into a stream that provides water to the village, which is named after a revolutionary peasant leader who fought for land redistribution.

Pemex took responsibility for the leak, but months passed until the stream was this week finally declared clean. During that time, residents relied on tanked-in water supplies, and they said up to eight days would pass without a delivery.

Exasperated by the lack of water and a perception they were saddled with all the costs of oil extraction, but saw none of the benefits, members of the 2,000-strong ejido blocked the main road into the oil-producing zone.

"The government's slogan is that the oil belongs to us Mexicans," said laborer Josue Sanchez. "But us Mexicans, who live the reality, haven't seen half a peso of that wealth."

Faced with the prospect of more investors arriving, locals in an area where half the population lives on food handouts, say they are left with few options to make themselves heard.

"We're looking at the prospect of blockades, because nobody wants to take responsibility for these problems," said Gumercindo Gonzalez, the head of the ejido.

A Pemex spokesperson said the company took care of the leak in Emiliano Zapata, but added that a lot of ejido complaints lacked substance, and that the groups were usually looking for financial gain.

According to Gustavo Hernandez, the head of Pemex exploration and production, Mexico's extractive industries generally enjoy a fruitful relationship with the ejidos.

"The ejidos collaborate closely with the mining industry, with the oil industry, with Pemex, and with the energy companies working there extracting gas," he said.

But the experience of energy firms already operating in Mexico provides a different perspective.

"For foreign companies it's a real nightmare," said the security manager of an international oil services firm operating in the state of Tabasco who declined to be identified because he wasn't authorized to speak to the media.

He spoke of widespread oil theft and impromptu blockades.

"You can't blame them really," he added. "(Oil services companies) make all these promises, 'Oh yeah, we'll build you a new school, we'll build you a new clinic.' But a lot of the time it doesn't really come to fruition." (Additional reporting by David Alire Garcia; Editing by Simon Gardner and Martin Howell)

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