UPDATE 1-Mexico senators begin Pemex reform talks

(Recasts, adds details and background)

By Noel Randewich

MEXICO CITY, Dec 10 (Reuters) - Mexican senators began hammering out a modest reform of the struggling energy sector on Monday, possibly loosening the barriers to private-sector participation.

A proposal for energy reform could be made in Congress when it convenes in February, ruling party Sen. Fernando Elizondo and other lawmakers told Reuters.

They ruled out drastic changes to allow full foreign investment in the industry, but some senators said the reform could give state oil monopoly Pemex more freedom to team up with foreign state-run companies,

"We will likely consider the issue of strategic alliances, particularly in deep water and cross-border oil deposits," Elizondo, of the National Action Party, or PAN, said before a meeting with members of the Senate's energy commission.

Past attempts at energy reform have faltered at the drawing board, mostly due to fears by many Mexicans of foreign ownership of the oil industry, nationalized in the 1930s.

Mexico is facing a double headache of declining output and proved oil reserves that have shrunk to just nine years' worth of output.

Pemex, whose profits go directly to the government to make up for the country's low tax base, lacks the technology to explore deep waters in the Gulf of Mexico where seismic tests indicate huge oil reserves might be found.