| MEXICO CITY, April 1
MEXICO CITY, April 1 Mexico is considering rigid
rules that would ensure a hefty cut of the spoils of a landmark
energy overhaul go to Mexican firms, but that could
jeopardize billions of dollars in investment from oil majors
seen as key to future growth.
Late last year, Mexico's Congress approved a constitutional
reform pushed by President Enrique Pena Nieto that ends state
oil giant Pemex's 75-year monopoly, and aims to lure new
investment into the sickly energy industry.
Secondary legislation that will flesh out the details of the
reform are due any day, but one of the main sticking points has
been the issue of local content purchasing rules.
Lawmakers are deciding whether to follow the example of
Brazil, which opted for high levels when it liberalized its oil
industry, or copy Norway and Colombia, which both rejected set
Pena Nieto says the energy reform could help drive economic
growth to as much as 6 percent a year in Latin America's No.2
economy, which has long lagged regional peers.
A key aim of the overhaul is to attract oil majors to boost
declining crude output, so policymakers must tread carefully or
risk scaring off the same companies that have balked at Brazil's
local content requirements.
"We are not in favor of prescriptive percentages," Alberto
De La Fuente, Shell's top executive in Mexico, said at
a recent energy forum in Mexico City.
The constitutional reform passed in December says the law
should establish "minimum national content percentages" as a way
to promote domestic supply chains, but gives no further detail.
Javier Trevino, a lawmaker with the ruling Institutional
Revolutionary Party (PRI) on the lower house energy committee,
left the door open for specific percentage content targets but
also acknowledged tensions over which content path to take.
"It's the most controversial issue," he said referring to
the debate over the energy reform's enabling legislation.
A senior congressional official told Reuters in February
that the PRI proposed requiring that Pemex purchase 100 percent
of goods and services from Mexican firms in onshore and shallow
water contracts for up to three years, but proposed no such
mandates on deep water developments.
Ruben Camarillo, an opposition lawmaker of the conservative
National Action Party (PAN) who also sits on the lower house
energy committee, said the PAN wants case-by-case content rules
in individual contracts, not in the secondary laws due by the
end of April.
The vast sums expected to arrive have raised the stakes in
Mexico, where crude output has slid by a quarter over the last
decade to settle at around 2.5 million barrels per day.
Foreign direct investment (FDI) in Mexico's oil sector will
rise to up to $20 billion a year by 2016, bank Nomura estimates.
Total FDI in Mexico's economy hit a record of $35 billion in
Barclays says the oilfield service sector could quadruple in
size within six years to $80 billion, which "would rival the
current massive investment cycle underway in the Middle East."
BRAZIL'S CAUTIONARY TALE
Mexican industry lobby Concamin wants content of 45 to 60
percent, said Regulo Salinas, the head of the chamber's energy
committee, with still-higher levels for services like pipeline
manufacturing but a much lower, rising level for services such
as deep-water drilling where Mexican firms lack expertise.
A senior PRI lawmaker pitched a similar sliding-scale in
Mexico's main construction chamber CMIC took out a recent
newspaper ad calling for a 50 percent local content level.
International comparisons are, however, guiding the debate
"We have to copy the good, not the bad," said Camarillo.
Norway was one of the first countries to set content rules
as it began exploiting its massive North Sea reserves in 1971,
encouraging foreign operators to partner with local firms.
Domestic firms got early access to tendering information and
tie-ups between industry and state universities were privileged.
Those measures, which stopped short of specific percentages,
helped Norway develop some of the world's top oilfield service
companies like Seadrill and Aker Solutions.
Brazil, Latin America's largest economy, opened its
state-run oil sector in 1997, ending Petrobras's
But it wasn't until Brazil discovered its Santos Basin
deepwater oil province in 2007, an up to 50-billion-barrel haul
that then-President Luiz Inacio Lula da Silva called Brazil's
"second independence," that appetite for local content exploded.
Many in Brazil saw local participation as a simple way of
turning the country into a global oil and infrastructure player,
and companies were encouraged to increase the amount of business
bound for domestic firms to win bids.
Local content requirements are as high as 55 percent for the
development phase of the pre-salt fields, according to Nomura.
Industry experts say rigid content rules often tie companies
to unexpected cost spikes during multi-year contacts.
"The national content requirements in Brazil have easily
delayed the overall development by a factor of several years and
increased costs," said John Padilla, oil analyst with energy
consulting firm IPD Latin America.
Nonetheless, Brazil's shipbuilding industry, which mainly
serves the offshore oil sector, has grown dramatically due in
large part to content rules. It now employs 60,000 workers, up
30-fold since 2000, according to shipbuilder union Sinaval.
Oil production has nearly doubled in Colombia since
liberalizing its oil sector in 2003. Like Norway, the country
has no set local content requirements.
(Additional reporting by Alexandra Alper; Editing by Simon
Gardner and Kieran Murray)