| MEXICO CITY
MEXICO CITY Oct 30 Saddled with a tax rate of
almost 100 percent, Mexican state oil company Pemex hands over
so much cash to the government that it has only a fraction of
the money it needs to invest in production and exploration.
So hopes were high when President Enrique Pena Nieto
announced last month that a government fiscal reform would ease
the burden on Pemex and create a tax structure for the
75-year-old monopoly "just like any other oil firm in the
But as details of the reform emerged, a more sober view has
set in: that it would take years before Pemex can free itself
from the grip of the Mexican tax collector.
Mexico's fiscal reform is likely to generate significantly
less revenue than originally planned, and the government would
have leeway to continue taking as much as it needs from Pemex to
make up shortfalls.
The Senate approved the broad outline of the fiscal bill,
which is close to becoming law, late on Tuesday and is still
debating sections that some lawmakers want to throw out or
From 2015, the reform aims to lower the finance ministry's
main levy on the world's No. 5 oil company by sales, which
reached $127 billion in 2012.
But the fiscal overhaul would also put also new charges on
Pemex. They include a dividend to the government, which could
adjust the amount to avoid any "imbalance in the public
In effect, said former Pemex Chief Executive Officer Jesus
Reyes Heroles, the plan was tantamount to maintaining the status
quo under a different name.
"Actually, they don't reduce the tax burden on Pemex," he
told Reuters. "They change the structure."
Pemex accounts for a third of the federal government's tax
revenue and regularly operates at a heavy loss after taxes.
Last year, Pemex paid $69.4 billion in taxes on $69.6
billion in pretax profits, a 99.7 percent tax rate.
That compares with rates of 69 percent for Venezuelan
state-owned oil company PDVSA, 25 percent for
Brazil's Petrobras and 31 percent for Royal Dutch
Shell Plc, according to the companies' 2012 annual
If Pemex cannot keep more of its revenue to invest, it will
struggle to reach untapped deepwater oil and shale gas reserves
to lift output, which is down by a quarter from 2004.
The government hopes to boost production to 3 million
barrels per day by 2018 from 2.5 million bpd today. That could
add 1.1 percentage points to Mexico's economic growth, JPMorgan
Pena Nieto has also proposed energy reform that would bring
in new capital to help exploit Latin America's third-largest
proven oil reserves.
The president hopes that by offering profit-sharing
contracts with oil companies, crude output will jump, generating
additional tax revenues and spurring faster growth.
But that revenue will probably only come if companies like
Exxon Mobil Corp and BP Plc return to a country
that seized foreign-owned oil holdings in 1938.
Mexico is counting on big outlays by private and foreign
companies. Pemex CEO Emilio Lozoya says $60 billion must be
invested annually to maximize Mexico's oil and gas potential.
That sum is more than double the record $23.9 billion Pemex
invested in 2012. The company itself expects to invest an extra
$10 billion by 2018 if oil prices remain high and the
government's proposed tax plan is implemented, Lozoya said.
Under the proposal, the finance ministry would set
recoverable costs and crude sales prices for new contracts.
So far, big foreign oil companies have been biding their
time about committing significant investment to Mexico.
There is still uncertainty over how much the government
would levy from oil producers in the profit-sharing plan.
Officials only say the rate will be internationally competitive.
Pena Nieto's proposal notes the government take is 78
percent of net profit in Norway, 75 percent in Colombia and just
above 50 percent in the deep waters of the U.S. Gulf of Mexico.
Finance Minister Luis Videgaray has said a "reasonable"
government take would be above 50 percent. The plan would allow
the government to vary its share in each contract.
And the plan dictates every drop of oil from a new well must
be turned over to a state-run sales agency, meaning companies
will not be allowed to market the oil they produce.
"I think that will make it less attractive," said Nils
Andersen, CEO of A.P. Moller-Maersk. The Danish oil
and shipping group has signaled interest in deepwater drilling
projects, depending on the outcome of the reform.
Oil companies had hoped Pena Nieto might propose
production-sharing contracts so they could control and market
But that would imply handing over the crude to foreigners in
a country where ownership of oil wealth became a part of the
national psyche when the industry was nationalized.
Vigorous leftist opposition to even profit-sharing contracts
makes a more liberal reform a big political challenge, though
not necessarily an insurmountable one.
Some government officials and lawmakers say privately that
the door may still be open to production-sharing schemes.
Without more tax dollars from other companies, the
government will probably keep seeing Pemex as its favorite cash
The finance ministry estimates the additional tax revenue
from fiscal reform at less than 2.7 percent of gross domestic
product by 2018, significantly less than the 4 percent officials
To help plug a projected shortfall in the 2014 budget, the
government simply raised its expected oil price from $81 to $85
a barrel, underscoring its dependence on Pemex.
Compounding the problem for Mexican tax collectors has been
weak growth since Pena Nieto took office, which has left
analysts forecasting Latin America's second-largest economy will
fall far short of GDP expansion of 2 percent in 2013.
On paper, though, Mexico is committed to lightening Pemex's
More than half of the company's current tax bill comes as an
annual charge based on the value of oil and gas proceeds. The
proposed reform would reduce the rate from 71.5 percent to 60
percent in 2015 and then to 10 percent in succeeding years.
But the reform aims to introduce a new royalty based on the
value of the oil, gas or condensates produced, indexed to market
fluctuations. Pemex would also have to pay Mexico's 30 percent
corporate income tax.
Furthermore, the government would impose a new surface
rental fee paid monthly on acreage of oil and gas fields sitting
idle, as a way to stimulate production.
Then there is also the dividend payable to the government.
Although that payment is due to decrease from at least 30
percent of the company's after-tax earnings in 2016 to 15
percent in 2021 and then to zero in 2026, the government can
demand more if it comes up short.
Because the final decision on how to adjust the payment
would remain with the finance ministry, the government has Pemex
on a short leash, said Luis Miguel Labardini, a partner in
energy consultancy Marcos and Associates in Mexico City.
"The only thing that changes is the way you tax Pemex,"
Labardini said. "The government is making sure that this
transition is not going to affect its ability to extract from
Pemex what they are extracting now."