December 7, 2013 / 6:32 PM / 6 years ago

Exclusive: Mexico's draft energy reform spans profit-sharing to licenses

MEXICO CITY (Reuters) - Mexican lawmakers unveiled a draft energy bill on Saturday that includes contracts ranging from profit-sharing and risk-sharing to licenses to lure private investment, in what would be the biggest opening in the world’s No. 10 producer in decades.

Mexico's President Enrique Pena Nieto addresses the audience during The Economist's Mexico Summit 2013 in Mexico City November 7, 2013. REUTERS/Tomas Bravo

Approval of the bill would mark the end of the decades-long oil and gas monopoly held by state-run Pemex, which is struggling to reverse a sharp slide in oil output due to years of chronic under-investment.

The bill, which would keep ownership of crude in state hands, is at the center of an economic reform drive that President Enrique Pena Nieto hopes will boost long-lagging growth in Latin America’s second-largest economy.

The reform would allow private investors to drill for the country’s oil and stops short of full-blown concessions that oil majors had been hoping for.

But it is a big step from the service contracts currently on offer, under which companies are paid a fee and are able to recover costs, and also goes well beyond the proposal made by Pena Nieto in August, which was limited to profit-sharing contracts.

“That’s the most aggressive, forward-looking concept that they have ever put forward,” George Baker, the publisher of industry newsletter Mexico Energy Intelligence, said about the inclusion of licenses.

“That’s basically like a concession, meaning you have the rights to produce the oil and commercialize it,” he added. “They don’t want to use the term concession, because it’s just a politically loaded term in Mexican history. They’d rather use a term like license or contract.”

Pemex was created after a 1938 expropriation and is both a symbol of nationalist pride and a major earner for the federal budget. The government hopes the overhaul of the lumbering giant will serve as an engine for growth.

“If there is no watering down in the complementary laws, it could well generate a 50 bps to 100 bps addition (to GDP) and more importantly it may get the rating agencies to give at least a positive outlook to the sovereign,” said Pedro Tuesta, an economist at 4Cast.

He said that the impact of the reform would likely hit the economy from 2015.

Lawmakers from Pena Nieto’s ruling Institutional Revolutionary Party, or PRI, and the conservative National Action Party, PAN, who unveiled the draft bill, were due to start debating it on Sunday.

Pena Nieto aims to pass his most ambitious reform before Christmas.


The draft says the contracts on offer include “services, profit- or production-sharing, or licenses”. It also includes an option to pay companies with a percentage of output obtained under production-sharing contracts.

In August, the PRI proposed offering contracts that would give private companies a share in profits from oil extraction, which was viewed by companies and analysts as too tame. The PAN called for full-blown concessions.

This week, the two sides converged on a middle ground.

The reform does not allow companies to book reserves, but would let them report projected income.

It says that companies can report contracts that have been agreed upon and expected benefits for accounting purposes, but that oil below ground - Mexico’s oil reserves - remains the property of the nation.

Many global oil companies have signaled interest in potential investments in Mexico’s oil patch provided they will be able to share and market the crude they produce, in addition to being able reflect the economic value of long-term contracts on their balance sheets.

An official at a major international oil company declined to comment on the draft bill on Saturday, saying discussions were still at a “premature stage.”

In October, Nils Andersen, the chief executive of A.P. Moller-Maersk, the Danish oil and shipping group, told Reuters his company was interested in deepwater Gulf of Mexico projects.

But he said the company preferred projects where the company can trade and commercialize the crude, something that licenses and production-sharing contracts usually allow.

The proposal would create a new sovereign oil fund, overseen by the country’s central bank, that would be charged with administering the proceeds of oil and gas development, with the exception of taxes paid to the government.

On electricity, while the proposal would end the state-run national power utility CFE’s monopoly on “planning and control” of the sector by in part opening up power generation, it explicitly forbids concessions and maintains government control of electricity transmission and distribution.

Slideshow (2 Images)

The government does not have a majority in Congress, and needs the PAN’s votes to push the bill through after the country’s main leftist party, the Party of the Democratic Revolution, which opposes opening the oil sector, pulled out of talks.

Crude output at Pemex has fallen by a quarter since peaking at 3.4 million barrels a day in 2004, and its management says it needs a huge injection of capital.

Many Mexicans believe the plan is a covert bid to sell off the company, which remains a potent national symbol despite corruption scandals over the years.

Additional reporting by Ana Isabel Martinez, David Alire Garcia and Alexandra Alper; Writing by Simon Gardner; Editing by Vicki Allen, Peter Cooney and Jackie Frank

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below