Senate proposal: open Mexico's state-run oil sector to private companies

Photo: The Canadian Press. All rights reserved.

Andres Lopez, center, walks past a banner featuring an image of father, Andres Manuel Lopez Obrador, a two-time Mexican presidential challenger, outside the Senate building in Mexico City, Friday, Dec. 6, 2013. For a second day, the Mexican Senate postponed debating the energy reform bill presented by President Enrique Pena Nieto. (AP Photo/Marco Ugarte)

MEXICO CITY - A Mexican senate committee on 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 that is currently prohibited under Mexico's constitution.

It also says that 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 on Sunday, 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 articles expanding on the reform.

The constitution would continue to prohibit oil concessions, considered the most liberal kind of access by private oil companies.

The bill still must be approved by the two houses of Congress and 17 of Mexico's 31 states and federal district. It's the crowning piece of President Enrique Pena Nieto's first year of reforms, which have also targeted education, the tax system and telecommunications.

But energy reform is considered most crucial to impacting the overall economy and the remaining five years of Pena Nieto's presidency.

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.

"This is a big breakthrough," said George Baker, publisher of the Houston-based newsletter, Mexico Energy Intelligence. "This is a very big intellectual and policy leap ... Whether or not it's ultimately commercially attractive can't be decided at this point."

The leftist opposition Democratic Revolution Party, or PRD, renewed its call for a public referendum on the issue.

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

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.

The proposal goes much further than the plan introduced by Pena Nieto in August, which only allowed profit-sharing agreements. It would change three articles of constitution, while Pena Nieto had only proposed to change two.

It 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.

The PRI has been more moderate, 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.

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

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Associated Press writers Carlos Rodriguez and Katherine Corcoran contributed to this report.