Senate proposal: open Mexico oil to private firms

MEXICO CITY -- A Mexico senate committee Saturday proposed the most dramatic oil reform in decades that would open the country's beleaguered, state-run sector to private companies and investment.

The Senate proposal would allow the government to grant contracts and licenses for exploration and extraction of oil and gas to multinational giants such as Exxon or Chevron, something currently prohibited under Mexico's constitution.

It also says contracts could be made directly with the state, rather than issued by the state-run oil company, Petroleos Mexicanos, or Pemex, ending its monopoly on Mexican oil.

The proposal, which gets official committee consideration today, could allow contracts for profit- and production-sharing, as well as licenses, in which companies pay royalties and taxes to the Mexican government for the right to explore and drill. Pemex would get first consideration for licenses.

It would give private companies the ability to post expected benefits in their financial statements, as long as they specify in their contracts that all oil and gas they find in the ground belongs to Mexico, according to the articles outlining the reform. An earlier draft proposed included that language in the constitution, but that was eliminated in the final draft.

The proposal specifies that oil in the ground is the property of the Mexican state. The constitution would continue to prohibit oil concessions, considered the most liberal kind of access by private oil companies. It still must be approved by the two houses of Congress and 17 of Mexico's 31 states and federal district.

Opponents said the proposal outlines a system that has been proven a "total failure," while analysts consider it an unprecedented move in opening the door to the private investment Mexico needs to save its oil sector. Mexican oil production has been declining despite increased investment, and Pemex has not had the wherewithal to date to exploit the country's vast deep-water or shale oil and gas reserves.

"It's a very good setting of the table," said George Baker, publisher of the Houston-based newsletter, Mexico Energy Intelligence. "I think they've done a good job saying ... the lease-holder has commercial rights to production. What we don't know is if they will have rights to all of the production or part of the production."

The opposition Democratic Revolution Party, or PRD, said the document would "cancel and annul the nationalization of oil the electricity" and renewed its call for a public referendum on the issue.

"They're trying to give the industry to foreigners," said PRD Sen. Dolores Padierna. "The participation of private oil companies has been, if you look at it calmly, a total failure."

The proposal goes much further than the plan introduced by President Enrique Pena Nieto in August, which only allowed profit-sharing agreements but not arrangements for sharing oil.

The measures in the Senate proposal have been prohibited in the decades since 1938, when then-President Lazaro Cardenas nationalized the oil industry, a symbol that for decades that has been fiercely protected by the constitution from possible profiteering by foreign companies.

It would change three articles of constitution, while Pena Nieto had only proposed to change two.

The proposal still specifies that oil in the ground is the property of the Mexican state. The constitution would continue to prohibit oil concessions, considered the most liberal kind of access by private oil companies.

Contracts and licenses would be issued by the Secretary of Energy in consultation with the National Hydrocarbons Commission, which some senators had wanted to make an independent authority from government to oversee auctioning and bids.

The proposal would establish a Mexican Oil Fund to receive, administer and distribute the money from contracts and other types of grants.

The proposal was hashed out by Pena Nieto's ruling Institutional Revolutionary Party, or PRI, with the conservative opposition, the National Action Party, which wants an oil reform as open as possible to investment and partnership possibilities.

Meanwhile, the PRD has left the three-party political coalition, Pact for Mexico, to protest any constitutional changes to open the oil sector.

The PRI has been more moderate than the PAN in its approach, given the leftist opposition that has drawn thousands in street protests.

But the mobilization so far hasn't been as great as in 2008, when former presidential candidate Andres Manuel Lopez Obrador all but killed the congressional attempt to open the oil industry to greater private investment. Lopez Obrador was sidelined by a heart attack last week, but protesters have still shown up every day since Wednesday to oppose the oil reform.

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

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

While oil production has increased substantially in the U.S. and Canada, Mexico's has fallen 25 percent since 2004, and proven reserves are down 41 percent since 2001, the Mexican Institute on Competitiveness says.