MEXICO CITY Mexico's state-owned oil monopoly Pemex usually coughs up all its profits to the government to pay for everything from teachers' salaries to army barracks, leaving less cash for the company to look for more oil.
Now, after Enrique Pena Nieto of the Institutional Revolutionary Party (PRI) won the July 1 presidential election, industry leaders see a chance to push for more financial autonomy and a lower tax burden for the company.
Reforms to make Pemex more independent and remedy its lopsided balance sheet have wide backing across the political spectrum and could be easier to achieve before other, bolder changes Pena Nieto promised during his campaign.
The PRI has floated the idea of changing the constitution to allow more private investment in the industry, an about-face for the party that in opposition blocked broad energy reform by President Felipe Calderon's National Action Party (PAN).
Pressure for reform of Pemex has built steadily, stoked by fears that the world's No.7 oil producer could become a net importer of crude within a decade if it does not rapidly find new discoveries to replace a decline in production.
Even as the company tries to turn around the 25 percent drop in oil output seen since 2004, it is spending less.
Exploration and production investment fell by nearly 10 percent last year compared to 2010. The number of exploration wells dropped 15.4 percent and the number of wells in development fell by more than a fifth.
Pena Nieto talked of using Brazil's Petrobras as a model to make Pemex more productive and there is growing belief inside his party that the Mexican oil giant needs more freedom.
"Pemex needs an internal reform to turn it into a public company like the ones that exist around the world. Public companies act like companies, not government agencies," said Francisco Labastida, a PRI Senator and former energy minister. "Petrobras is not included in the government budget."
But after holding a massive lead in opinion polls before the election, Pena Nieto stumbled at the finish and the PRI fell short of a majority in both houses of Congress.
Adding to his woes, the election victory is being challenged by a group of leftist parties who accuse the PRI of vote buying and using illicit funds to run his campaign.
Constitutional changes require a two thirds majority in Congress, so smaller steps to give Pemex more independence and loosen its fetters to the state have become a likelier bet.
Pemex doles out more than a dozen taxes and duties to fill government coffers, funding a third of the federal budget. Last year, Pemex earned 785 billion Mexican pesos ($59.53 billion) - before paying 876 billion pesos in taxes.
Without oil, Mexico would need to raise income tax by 91 percent or boost value-added tax (VAT) by almost 120 percent to make up for the loss in revenues, estimates Carlos Elizondo, a researcher at Mexico's CIDE think tank.
Currently, Pemex can only deduct a small amount of costs from its taxes and operates mostly on debt, which means current liabilities represent around 15 percent of the company's assets.
With the energy industry nationalized more than 70 years ago, Pemex cannot list reserves on its books since they are officially property of the nation, hurting the bottom line.
"We have to remove the chains that limit Pemex's budgetary freedom," said Fluvio Ruiz, a member of Pemex's board. "We have to adjust the tax system to remove the limits on deductions."
Ruiz said more oil income should be invested back into exploration in production.
There are signs Pena Nieto's team could try to alleviate Pemex's tax burden first to lay the groundwork for more comprehensive overhauls down the line.
"The energy reform would be presented as part of a package of economic reforms, which will also include tax reform. You can't talk about deeper energy reform without fiscal changes," said Francisco Guzman, a top adviser to Pena Nieto.
The PAN would be Pena Nieto's natural allies on oil reform, but they have been drawn into the dispute over the election, this week joining forces with leftist runner-up Andres Manuel Lopez Obrador to accuse the PRI of money laundering in the campaign.
The PAN's stance may complicate coalition-building in the next Congress, which convenes on September 1, making the PRI more reliant on smaller parties for a simple majority to broker limited structural and fiscal changes to Pemex.
If he tries to open up the oil firm - a near-sacred symbol of Mexican independence since its creation in 1938 - to more foreign investment, Pena Nieto could face strong opposition from his leftist adversary Lopez Obrador, a master of mobilizing huge street protests behind popular causes.
So Pena Nieto will likely tread carefully at the start of his term, which will be the first PRI administration since the party was ousted by the PAN in 2000 after 71 years in power.
Energy reforms finally passed in 2008 - watered-down by the PRI and leftist parties - created modest performance-based oil drilling contracts for private companies, which have already been used to auction off dozens of mature oil fields.
One option for Pena Nieto's government would be to turn to the existing 2008 contracts to exploit the country's vast, unexplored shale gas resources in northern Mexico.
"We have to make a bet on shale gas and shale oil and find a way for Pemex and private companies to tap it," said Manlio Fabio Beltrones, a key PRI powerbroker in Congress.
Pemex's natural gas output fell 6.1 percent in 2011 and Mexico is importing more to meet rising demand for the cheaper fuel.
Mexico has the world's fourth-largest reserve of shale gas, according to the U.S. Energy Information Administration, but Pemex has only drilled a handful of wells so far.
Following in the footsteps of Brazil's Petrobras (PETR4.SA) is still the long-term goal for Pemex's management.
"To turn Pemex into an autonomous organization would mean quantum leaps in how we operate," Pemex Chief Executive Juan Jose Suarez said this month, saying the company could be given independence like Mexico's Central Bank.
Though Petrobras has faced criticism over government intervention, it has for years been considered a model able to strike a balance between returns for private investors while meeting the needs of Brazilian leaders.
Publicly listed, the government holds the majority of its voting shares and the board includes cabinet ministers.
Petrobras has expanded outside Brazil and is successful attracting outside investment.
"In Brazil they were able to assimilate and develop new technology and really take advantage of the experience of private companies," said PRI lawmaker Ildefonso Guajardo, a senior economic adviser to Pena Nieto.
Faced with the natural decline at its largest oil fields, Cantarell and Ku-Maloob-Zaap, Mexico could be producing less than half of the 2.5 million barrels per day it is pumping now within 15 years if nothing changes, said another independent board member of Pemex, Rogelio Gasca.
A constitutional reform would be aimed at luring major oil companies into the lucrative deep waters in the Gulf of Mexico, where Pemex estimates around 29 billion barrels of oil equivalent, or more than half of Mexico's prospective resources.
But oil companies are not holding their breath.
"There is only one rule that never fails in Mexico," said one industry executive who belongs to a round table of the largest global oil producers interested in working in Mexico, "Everything takes double the time that you think it will."
($1 = 13.1863 Mexican pesos)
(Additional reporting by Elinor Comlay, Gabriel Stargardter and David Alire Garcia; Editing by Dave Graham and M.D. Golan)