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Pena Nieto Presents Energy Reform Bill to Congress

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August 13, 2013

Under the provisions of the energy reform bill presented to congress by Pena Nieto yesterday, companies such as Exxon Mobil and Chevron could be allowed to pump crude in Mexico for the first time since 1938

Mexico City, Mexico - Mexico’s President Enrique Pena Nieto presented a bill to Congress yesterday that would end a seven-decade state energy monopoly.

Pena Nieto plans to allow private companies such as Exxon Mobil and Chevron to pump crude for the first time since 1938 by changing articles 27 and 28 of the constitution, he told the Mexican press. Under the proposal, companies would receive a portion of profit within a risk-sharing model that would also allow them to book a percentage of reserves under United States Securities and Exchange Commission rules, said Deputy Energy Minster Enrique Ochoa.

The bill to loosen state-owned Petroleos Mexicanos’s grip on production and attract investment needed to reverse an eight-year output drop would be the economy’s biggest overhaul since the North American Free Trade Agreement in 1994. An even more aggressive proposal delivered last month by an opposition party increases Pena Nieto’s chances of pushing his bill through Congress, said Nomura Holdings Inc.

"The risk-sharing or profit-sharing contracts have a long-term economic interest that the SEC registers to define the percentage that a company can use to book reserves from a project," Ochoa told reporters in Mexico City.

Pena Nieto, the 47-year-old former governor who returned the PRI party to power in December, opted for risk-sharing contracts similar to those used in Ecuador, Bolivia, and Iran, rather than a concession model, Energy Minister Pedro Joaquin Coldwell said. The state would retain ownership of oil reserves.

Majors Interested

The government plans to split Pemex, as the state producer is known, into two units, as well as ending the state’s electricity generation monopoly. Mexichem SAB would invest as much as $500 million in power generation, Ricardo Gutierrez, head of the Mexican chemical maker, said in an interview in Mexico City after the proposal.

Exxon, Chevron, Royal Dutch Shell, and Repsol are among major producers that have expressed interest in Mexican oil fields. Pacific Rubiales Energy, Latin America’s most valuable non-state crude producer, would consider investing in Mexico if the PRI’s bill succeeds, Chief Financial Officer Carlos Perez said in an August 9th telephone interview.

"We welcome any decision by the government and people of Mexico to provide new opportunities for investments," Kurt Glaubitz, a Chevron spokesman, said in an e-mail before the announcement.

Middle Ground

Exxon and Repsol declined to comment on the planned regulatory changes through their respective spokesmen, Patrick McGinn and Gonzalo Velasco. Shell referred a request for comment to a June 7th speech by Upstream Americas Director Marvin Odum, in which he referred to Mexico’s "enormous" potential and Shell’s "strong and growing" relationship with Petróleos Mexicanos.

The National Action Party, or PAN, of Pena Nieto’s predecessor Felipe Calderon, wants to open the door to selling shares in Pemex. Jesus Zambrano, head of the Democratic Revolution Party, or PRD, whose candidate Andres Manuel Lopez Obrador finished second to Pena Nieto in last year’s election, said on August 8th the party opposes changing the constitution.

The PRI, which ruled Mexico for seven decades until 2000, may try to take the middle ground between the two positions, Benito Berber, a strategist for Nomura in New York, said by telephone before yesterdays announcement.

Pena Nieto has also promised fiscal changes to wean the government off revenue from Pemex, which can’t invest enough in its own operations because of a tax burden that funds about a third of the federal budget.

Since the North American Free Trade Agreement, Mexico has become one of the world’s most open trading economies. Even so, many industries are still dominated by single groups, such as billionaire Carlos Slim’s America Movil in mobile-phone service and Comision Federal de Electricidad, or CFE, in electricity.

Both Pemex and CFE will remained fully state owned under the government’s proposal.

Tax Collection

The President has already achieved legislative success with the Pact for Mexico, an accord signed between the PRI, PAN, and PRD on December 2nd, the day after he took office. The accord has helped pass an education bill to make teachers more accountable for performance and a law to spur increased competition in the telecommunications industry. It also set a goal of improving tax collection and transparency in spending.

Oil at all stages of production, refining and distribution has been the legal property of the Mexican people since 1938, when then-President Lazaro Cardenas seized fields from US and British companies and changed the nation’s charter. The expropriation is celebrated every March 18th and trumpeted as a point of pride in schoolchildren’s textbooks.

Mexico has the biggest proven oil reserves in Latin America after Venezuela and Brazil, with 13.87 billion barrels, and shale-gas resources that may be as high as 460 trillion cubic feet, according to data compiled by Pemex.

The state-owned company says that with the proper investments and technology, about 27 billion barrels of crude in the deep waters can be added to the nation’s proven reserves

Protests Called

The PRD wants to maintain the state’s exclusive right to oil refining, preventing private companies from entering the process, Luis Sanchez, a PRD senator, said in a speech in Guadalajara on August 3rd. Zambrano told reporters August 8th that the party is against oil concessions.

"It’s absolutely unacceptable that we would give up part of our territory in a concession," Zambrano said. "It’s giving up the future of our country."

Lopez Obrador, who left the PRD following his election loss to found his own movement, said people who offer natural resources to foreigners are "traitors" and has called for supporters to protest in Mexico City’s main square next month.

Marcelo Ebrard, the former mayor of Mexico City who leads the Progress Movement within the PRD, has called for a national energy referendum and said in an interview that Pemex’s tax burden can be lessened and its autonomy increased without constitutional changes.

Constitutional Change

This isn’t the first time a Mexican leader has tried to reform Pemex. Under PRI President Ernesto Zedillo, Pemex tried to sell some assets in 1995, only to pare back the plan amid opposition from members of his own party.

President Vicente Fox, or the PAN party, replaced Pemex’s politician-staffed board in 2001 with businessmen, including Slim. The board was dismantled two months later amid accusations by lawmakers that it was unconstitutional.

PRI lawmakers defeated an attempt by Calderon to open the nation’s refining and distribution projects to outside partners. Calderon was able to win approval for private companies to operate fields under incentive-based contracts.

Opposition from within the PRD is unlikely to derail the energy proposal if the PAN and PRI reach an agreement. The two parties, with the PRI-allied Green Party, would control more than the two thirds each of the lower house and Senate needed to pass a constitutional change.

"The government can now present something closer to the PAN proposal than to the PRD proposal, but they can say they’re offering a moderate position," Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington, said by telephone before yesterday’s announcement. "They can really say they are representing the interests of the Mexican people."