August 11, 2013 / 8:42 PM / 6 years ago

Exclusive: Mexico energy reform won't offer private oil concessions - ruling party leader

MEXICO CITY (Reuters) - A sweeping energy overhaul that Mexican President Enrique Pena Nieto is set to unveil on Monday will not offer private firms concessions to tap Mexican oil, but will propose amending the constitution to allow them to invest in the ailing sector, the head of the ruling party told Reuters on Sunday.

Mexican President Enrique Pena Nieto speaks at the annual Allen and Co. conference at the Sun Valley, Idaho Resort July 11, 2013. REUTERS/Andrew Gombert/POOL

The energy overhaul is the cornerstone of a wide-reaching reform package that Pena Nieto hopes will boost economic growth in Latin America’s No. 2 economy and lift Mexico’s energy sector into the modern era, but is politically divisive.

“In no way is it a privatization. It is opening up the possibility for private capital to join public policies ... without going as far as concessions,” said Cesar Camacho, chairman of Pena Nieto’s ruling Institutional Revolutionary Party (PRI).

Leftist parties are against constitutional changes, calling them tantamount to privatizing Mexico’s oil wealth controlled by state-owned oil monopoly Pemex PEMX.UL.

“It is an audacious reform that includes a constitutional reform, knowing that the constitution and the law should be at the service of the Mexican people,” Camacho said.

The bill will offer more generous contracts to oil companies than current service contracts, and open up deep water oil and shale gas reserves, Marco Antonio Bernal, a PRI member who heads the energy commission in the lower chamber of Congress, told Reuters.

Bernal said the government’s bill would seek to amend articles 27 and 28 of the constitution to allow greater private-sector participation, but would not detail the new proposed language.

Article 27 bans the government from granting private-sector concessions and production-sharing contracts for oil or gas, making their exploitation the sole preserve of the state. Article 28 defines oil and gas as a strategic sector where the public sector exercises exclusive control.

Oil companies like BP (BP.L) and Exxon Mobil (XOM.N) are awaiting details of the language of the proposed constitutional changes, and that of ensuing so-called secondary laws that include the fine print of how to implement the bill, to gauge how far-reaching, and thus lucrative, the reform will be.

Breaking up the 75-year-old state energy monopoly could double foreign investment in Mexico and improve growth, potentially providing the biggest leg-up to its economy since the North American Free Trade Agreement (NAFTA) two decades ago.

Exports to the United States and Canada tripled and foreign direct investment quadrupled in the decade after Mexico joined NAFTA in 1994. Growth rates rose to 4.8 percent or more in four of the first five years of NAFTA, then faded.

Mexico is the world’s 10th-biggest producer of crude oil, according to OPEC data, yet output has fallen by a quarter since hitting a peak of 3.4 million barrels per day in 2004.

The country is a top oil exporter to the United States, but has to import nearly half of its gasoline due to a lack of domestic refining capacity.


By opting against concessions, but allowing private capital to exploit Mexican oil, the government is treading a middle ground between political rivals.

The opposition conservative National Action Party (PAN) has made a more aggressive proposal that allows for oil concessions, while the leftist Party of the Democratic Revolution (PRD) opposes both constitutional changes and new contracts that share production and risk.

The PRD is shortly set to unveil its own reform proposal, which would keep the constitution unchanged, stick with existing service contracts and call for changing Pemex’s tax structure so it could finance operations itself, instead of funneling profits to the government, PRD Chairman Jesus Zambrano said.

The Mexican government relies on oil revenues to fund about a third of the federal budget. The heavy tax burden has limited Pemex’s ability to fund new projects and lift output. The government warns that Mexico could become a net oil importer as early as 2018 if major new oil finds cannot be developed.

The PRD proposal would allow private companies to invest in building pipelines, call for the creation of a stability fund that manages Pemex’s oil profits and seek to crackdown on any corruption within Pemex and the powerful oil worker union.

Zambrano, however, distanced himself from former party ally and leftist firebrand Andres Manuel Lopez Obrador, who was runner-up to Pena Nieto in last year’s election.

AMLO, as he is known, has since defected from the PRD, vowing massive protests against any proposed constitutional changes and calling the government’s reform plan “the robbery of the century.”

“He has chosen his own path, his own strategy, and we have chosen ours,” Zambrano told Reuters when asked if the PRD would join in the planned protests.

One top PRD lawmaker said on condition of anonymity that the party would remain within a cross-party pact Pena Nieto has used to push through a series of other reforms, even if the PRI seeks to change the constitution.

That bodes well for the other major element of the reform drive, a fiscal overhaul that seeks to wean the government off its Pemex dependence, crack down on evasion and widen the net to improve the tax take.

Reporting by Simon Gardner; Editing by Gabriel Stargardter, Jackie Frank and Stacey Joyce

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