Fight looms over opening Mexico's oil monopoly to private sector

Constitutional safeguards are keeping the Pemex state oil monopoly slow, outdated and unable to attract investment, experts suggest.

November 19, 2013   by The Canadian Press

MEXICO CITY – The fight to revamp Mexico’s moribund, state-run oil industry could start as early as this week with a Senate proposal to allow private access to the country’s oil, a nationalist symbol that for decades has been fiercely protected by the constitution from possible profiteering by foreign companies.

Legislators from the two parties supporting an oil overhaul say they support constitutional changes to allow the government to grant licenses and share oil and profits with multinational giants such as Exxon or Chevron. The anticipated proposal would go much further than the plan introduced by President Enrique Pena Nieto in August, which would have allowed the sharing of profits but not of oil.

Javier Trevino, a legislator from Pena Nieto’s Institutional Revolutionary Party, said his party struck an agreement after several weeks of talks with the opposition National Action Party, which has favoured stronger private investment from the start. The bill emerging from the Senate is expected to offer a wider range of options for companies interested in investing in deep-water drilling, including licenses for the right to extract and commercialize oil. It would allow an oil company to “book” or list reserves as assets, something Mexico has forbidden in its mission to keep its oil in the hands of Mexicans.

Such arrangements have been prohibited in the decades since 1938, when President Lazaro Cardenas nationalized the oil industry, wresting it from the hands of foreign companies accused of looting the country’s wealth. It is considered one of Mexico’s proudest moments.

But those constitutional safeguards now act more like a straitjacket, keeping the Pemex state oil monopoly slow, outdated and unable to attract the investment, technology and knowledge it needs to tap shale and deep-water reserves, say people inside and outside the government.

“The era of easy oil has passed,” Trevino said. “We have to share the risks.”

Up to now, Pemex has allowed contracts that only pay a fee for services rendered.

While oil production has increased substantially in the US and Canada, Mexico’s has fallen 25% since 2004, and proven reserves are down 41% since 2001, the Mexican Institute on Competitiveness says. The US contracted 70 companies to drill 137 deep-water wells last year, while Mexico, using only Pemex, drilled six, according to Mexico’s government.

Oil analysts called the initial Pena Nieto proposal “reform-lite,” saying it was stunningly short on details and more of a political document designed to convince the Mexican public that the reform did not conflict with the intentions of Cardenas, a revered forefather.

“The profit-sharing contracts, there’s no reason to believe that they would be radically different from the contracts we already have,” said Mexico City oil analyst David Shields.

The problem, oil analyst George Baker said, is that Mexicans still think of oil as physical property, patrimony, while oil companies see it as something to post on a ledger. No one exploring or producing in national reserves ever really owns the oil, he said. But the Mexican psyche still centres on the pre-1930s, which US and other foreign companies controlled production and profits in Mexico before nationalization.

“If you’re thinking that the US Navy is going to go out and defend the interests of a private oil company in the Gulf, just because you allow it to post reserves, that goes into science fiction,” said Baker, the Houston-based publisher of an industry newsletter, Mexico Energy Intelligence.

©The Canadian Press

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