Mexico Senate OKs bill opening Pemex to foreign investment

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Mexican Senate OKs bill to open oil industry to foreign investors

The legislation to overhaul Pemex goes much further than the proposal by President Enrique Peña Nieto’s PRI party.

By Richard Fausset and Tracy Wilkinson

December 11, 2013, 5:35 p.m.

MEXICO CITY — Mexico has taken a giant step toward the most radical opening of the country’s nationalized oil and gas industry in 75 years, a move analysts say could boost lagging petroleum production here and further cement North America’s new reputation as an energy-producing powerhouse.

Passage of a bill in the Mexican Senate was hailed this week by oil industry analysts and goes much further in the effort to attract outside investment to Mexico than a proposal originally introduced in August by President Enrique Peña Nieto’s centrist Institutional Revolutionary Party, or PRI. Peña Nieto praised the more vigorous measure Wednesday.

If it indeed attracts private industry that can help Mexico — the world’s ninth-largest oil producer — do a better job of extracting its reserves, the impact could be significant, adding to the boom in shale oil and gas production in the United States and Canada of recent years, and further redrawing the lines of energy production and consumption that tend to define geopolitical realities.

“The Russians and the Middle East are watching this very closely,” said Dallas Parker, a Houston-based partner at Mayer Brown, a law firm that advises big energy companies. “Their stranglehold [on the oil and gas market] is at serious risk here.”

The Senate approved the legislation minutes before midnight Tuesday on a 95-28 vote, after nine hours of debate. To become law, it must also be approved by Congress‘ lower chamber and a majority of state legislatures. Though it is expected to clear those hurdles, it is already generating passionate protest from the Mexican left, which sees the move as a sellout of one of Mexico’s most precious natural resources.

On Wednesday, members of the Democratic Revolution Party, or PRD, and other leftists closed off the lower house, the Chamber of Deputies, in Mexico City, chaining doors and blocking entrances with chairs in an effort to prevent lawmakers from considering the bill.

“They are selling the entire subsoil of the country to interests that are against Mexico,” former PRD presidential candidate Cuauhtemoc Cardenas said in a TV interview. Leftist leaders hope they can stop the legislation by calling a national plebiscite, though it is unclear whether they will be able to pursue that avenue legally.

The bill’s supporters are hoping it will attract foreign companies to Mexico that can help Pemex, the bloated state-run oil monopoly, reverse its declining production. Two gigantic shallow-water oil wells are running dry, and experts say the country needs outside expertise and investment to extract oil from more technically demanding deep-water wells and shale deposits.

To that end, the legislation would alter the constitution to allow private oil companies to drill for oil and take a cut of the crude produced, as opposed to simply sharing the profits in such ventures, as Peña Nieto’s party originally proposed in August.

Such “production sharing” arrangements are important to big oil companies because they often own their own refineries, and tend to prefer the simplicity of taking oil directly from the wellhead to the refinery. The legislation also mentions that “licenses” could be granted to foreign companies. That could portend even greater freedom for private enterprise, although how these licenses would be defined is a matter likely to be worked out in subsequent legislation.

The bill would also remove the corrupt oil workers union from Pemex’s board of directors, substantially limiting the union’s historically enormous power, and open the electricity sector to private investment.

Rodrigo Aguilera, an analyst for the Economist Intelligence Unit, said the Peña Nieto government was wise to get behind a more vigorous reform law and abandon the less ambitious version it had introduced. The Mexican economy has hardly grown since Peña Nieto took office a year ago, a potentially major problem for a candidate who promised to focus on the economy.

The government expects the economy to grow by 1.3% in 2013. This week, the president of the Confederation of Industrial Chambers, Francisco Funtanet Mange, said the opening of the oil industry could boost economic growth to 3.7% in the short term, an opinion shared by a number of other experts.

Under the original plan, Aguilera said, it was not clear that foreign companies would have invested much at all. Not getting behind the new bill, he said, “would have been too big of a missed opportunity” for Peña Nieto.

On Wednesday , the president tweeted that the bill “will allow the energy sector to boost the industrial and regional development of the country, for Mexicans’ benefit,” and added that energy resources and oil revenue will “remain the property of all Mexicans.”

Although the Mexican people’s ownership of subsoil oil and gas will remain enshrined in the constitution, the left argues — and will no doubt continue to argue, loudly — that Peña Nieto has given away the store to foreign interests.

The topic is a sensitive one in Mexico. The oil industry here was nationalized in 1938 with great fanfare after what were perceived as exploitative practices by British and U.S. companies. Since then, the idea of relaxing the ban on foreign ownership has mostly been a nonstarter, considered unpatriotic at best.

The previous Mexican president, Felipe Calderon, of the conservative National Action Party, or PAN, also promised a radical overhaul of Pemex, but the reform that eventually passed on his watch, in 2008, ended up only modestly changing the status quo.

PRD leaders and other leftist politicians have argued that Pemex’s performance can be improved by modernizing the company and cleaning up its acknowledged corruption, not opening it to foreign interests. This week, the party promised a “new strategy” that would result in voters having a chance to reject the changes in a July 2015 plebiscite.

But whether the law would permit such a vote is unclear, and Peña Nieto’s allies have argued that a plebiscite could not affect the legislation because it has to do with matters of “revenue and expenditure.” Pemex currently supplies about a third of the federal government’s income.

In a poll released in June, 65% of Mexicans said they opposed opening Pemex to additional private investment. For now, angry public protests are likely to continue.

So will skepticism that Peña Nieto’s PRI party can bring about change that will benefit Mexicans, and not just party leaders, given its history of condoning, and benefiting from, corruption when it ruled Mexico for much of the last century.

Columnist Carlos Puig wrote in the newspaper Milenio this week that he opposed the changes because Mexico has historically been unable to adequately regulate other industries, from telecommunications to public transportation:

“If we can’t [regulate] a few taxis,” he wrote, “how are we going to do it with Exxon, or Shell, or BP?”

Researcher Cecilia Sanchez of The Times’ Mexico City bureau contributed to this report.

Copyright © 2013, Los Angeles Times

Photo: An oil rig operated for Mexico’s state-owned oil company, Pemex, in the Gulf of Mexico. A bill approved by the Senate is aimed at luring foreign investors who could help the country boost its energy production. (Omar Torres / AFP/Getty Images / August 30, 2013, via LA Times)

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