Mexican Supreme Court Okays Pemex Private Contracts

MEXICO CITY (Dow Jones)

Mexico's Supreme Court has given state oil company Petroleos Mexicanos the green light to continue with plans to award incentive-based service contracts to private companies that would receive a per-barrel fee, plus recovery costs, to drill for oil in the country.

At the same time, the court reiterated Mexico's exclusive obligation and right to develop its oil wealth, reinforcing the understanding that any reserves and hydrocarbons produced remain the property of the state.

The court issued a statement late Tuesday saying reforms to Mexico's restrictive energy laws in 2008 are in line with the country's Constitution, which bars Mexico from granting oil concessions or property rights in the energy sector to private oil companies, foreign or domestic.

Its decision clears the way for Pemex, as the state firm is called, to offer more incentives in service contracts with private firms. Tenders for service contracts could be called before the end of the month, and awarded over the course of next year.

Some members of Congress had questioned the legality of the 2008 reforms, which allow Pemex to subcontract oil services providers to produce oil.

The ruling is important in the sense that the court is supporting Pemex's intentions to broaden its collaboration with private firms, while offering the company legal cover in case of future legal challenges, says George Baker, of Houston-based consulting firm Energia.com.

A source within Pemex echoed Baker's assertion, saying the ruling "removes obstacles" that may have prevented Pemex from hiring private firms to drill.

Mexico expropriated foreign oil assets in 1938 and has since kept foreign participation in the industry to a minimum. But with oil production sliding, the state company, which is extremely short on funds and technology, has been searching for ways to work with foreign energy companies that can offer both.

Pemex turns over the majority of its revenues to the federal government.

Beyond the threat of falling oil output to the federal budget, oil- and gas-rich Mexico faces the risk of becoming a net oil importer not too far down the road if its precipitous decline in oil output isn't reversed. Mexico already imports natural gas and some refined oil products from the U.S.

Pemex's crude production has fallen from close to 3.4 million barrels a day in 2004 to just under 2.6 million barrels a day in the first nine months of this year, largely as a result of the decline at offshore super-giant Cantarell oilfields.

In a bid to boost energy exploration and production, Pemex has been issuing "multiple service contracts" for a number of years that enable it to hire private contractors such as Halliburton Co. (HAL) and Schlumberger Ltd. (SLB). The planned "integrated service contracts," however, offer greater financial incentives and guarantees to private contractors because of their promise of flat per-barrel fees and reimbursement of a percentage of recovery costs.

Pemex plans to open bidding on the first integrated service contracts as early as this month, starting with mature fields in southern Mexico. The company will then roll out contracts for mature fields in the north, subsequently in the complex Chicontepec basin, and finally in the deep waters of the Gulf of Mexico, which could attract interest from foreign oil majors. All the contracts are expected to be awarded in 2011.

Technologies available by partnering with private oil firms are expected to help Mexico squeeze more oil out of mature fields, which Pemex says account for nearly 30% of the country's proven reserves.

Mexico's proven hydrocarbon reserves were 14 billion barrels of crude oil equivalent at the beginning of 2010, of which 74% was crude oil, and the remainder gas and liquids. Total proven, probable and possible reserves were 43.1 billion barrels of oil equivalent.

Pemex's future, though, is tied to difficult-to-tap reserves in the onshore Chicontepec region and the deep waters of the Gulf of Mexico.

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