UPDATE 3-Mexico warns of energy crisis without overhaul

(Recasts; adds details, background)

By Jason Lange

MEXICO CITY, May 8 (Reuters) - Mexico, a key supplier of crude oil to the United States, will suffer a severe energy crisis within a decade unless its huge but troubled oil sector is overhauled, Energy Minister Georgina Kessel said on Thursday.

Kessel urged lawmakers to approve a government proposal to reverse a drop in crude output by letting private companies have a bigger role in the state-run oil industry.

"If we don't do anything, Mexico will face a severe energy crisis before the next presidential administration ends (in 2018)," Kessel told lawmakers.

State oil monopoly Pemex pays for schools, roads and hospitals by funding about a third of government spending, but its reserves are falling because it lacks funds and expertise for exploration.

The government's plan, presented by conservative President Felipe Calderon in April, is being held up by leftists who say it will mean a creeping privatization of Pemex.

Leftists staged protests last month until the government agreed to hold several months of public debates about the oil sector's future.

The left, which like Calderon lacks a majority in Congress, wants to break up the alliance Calderon is trying to build with a centrist party that has said it likes the general look of the proposal but also is suggesting some changes.

Kessel, in kicking off the debate by presenting the government's case for reform, said Mexico's current proved reserves are enough for just nine years of output.

"We need reforms that allow us to be better, more competitive and more efficient and the bills that we have presented try to do this," she said.

Mexico is the world's No. 6 oil producer.

The government's reform effort is the biggest and riskiest policy move of Calderon's 18-month-old presidency and aims to get foreign firms to hunt for oil in potentially massive fields beneath the deepest waters of the Gulf of Mexico.

The proposal would make it easier for Pemex to hire companies to do work in areas where it lacks technology and experience. The government argues that foreign companies can help Pemex get at deep-water fields faster, which would help it stave off a crisis.

"This factor is the most important one there is," Pemex chief Jesus Reyes Heroles told the same audience of lawmakers in Mexico's Senate.

"Other companies have been producing and exploring in deep water for many years, but Pemex has only just started," Reyes Heroles said.

Critics say it would violate a constitutional ban on allowing private companies to share profits in oil production. (editing by Jim Marshall)