Mexico's New Energy Minister Says Law Stalls Deep Water Talks

MEXICO CITY Oct 03, 2005 (Dow Jones Commodities News Select via Comtex)

Mexico's newly appointed energy minister, Fernando Canales, said Friday that discussions between state oil monopoly Petroleos Mexicanos (PEM.YY) and potential partners on deep water projects are being held up by Mexico's legal restrictions.

There are a limited number of companies that have the technology to explore deep water, and they insist on forming partnerships, Canales said in his first press conference since taking over the Energy Ministry this week.

Canales, who was the economy minister, replaced Fernando Elizondo when he resigned from the Cabinet to run for the Senate in the 2006 elections.

Mexico nationalized its oil industry in 1938, and while Pemex contracts work to private companies, oil and gas concessions are banned by the Constitution.

Canales said the abundance of oil in shallow waters - about 2 million barrels a day of Pemex's 3.4 million b/d in crude production comes from the giant offshore deposit Cantarell - partly explains why Pemex hasn't developed its own deep water technology in its 67 years of existence.

Pemex has been discussing possible associations with international companies to explore for what it estimates are billions of barrels of crude oil lying under more than 500 meters of water in the Gulf of Mexico.

"All of them have told us in the negotiation process that they demand a participation in the results, which our laws don't permit," Canales said, adding, however, that negotiations "haven't been exhausted."

With production at Cantarell beginning to decline, Pemex sees deep water exploration as its best bet to increase crude oil and natural gas production, and to build up declining reserves.

The idea of foreign companies producing Mexican oil is a sensitive issue in the country, where for many oil is an important symbol of nationalism.

President Vicente Fox, who earlier this month proposed to Congress a constitutional amendment to allow private companies explore for and produce natural gas, but not crude, recently lamented legislative opposition to a more open energy sector.

"It's incredible that those who continue with that absurd nationalism, and that defense of sovereignty which is totally out of date in the way in which they present it, haven't got the vision that the 'magic formula' today is to associate private investment with public investment without losing sovereignty," Fox said in a recent interview with Dow Jones Newswires.

In Canada Thursday, Fox said he was convinced Mexico was getting "closer and closer" to the day that energy reforms will be approved.

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