Lawmakers Propose Reform to Pemex Fiscal Regime

Mexican political parties PRI, PRD, Convergencia, PT and PVEM jointly submitted a bill to congress on Tuesday for the reform of state oil company Pemex's fiscal regime.

The proposal calls for reform of Mexico's federal duties law in order to provide Pemex with more resources for reinvestment in current operations, development of new opportunities and research, according to the legislation, which was published in the congressional gazette.

REFORM DETAILS

The most substantial change put forth is the reduction of taxes paid on the value of extracted hydrocarbons to 70% from 79%. The bill acknowledges 70% is still a high tax obligation, but argues the 9% difference would be important.

In addition to the 79% tax, Pemex must pay the following: 10% on top of the 79% for the stabilization fund when the average price of crude is above US$31/b, as it has consistently been for the past few years; a 76.6% tax on the value of oil not produced to federally mandated requirements; a tax of 13.1% on the difference between the price of oil foreseen and actually obtained from exports; and 0.05% and 0.003% contributions to the Mexican petroleum institute and the superior audit federation respectively.

The reform would create a unique tax of 20% for mature fields with wells that have been closed off for at least three years and that Pemex deems necessary to redevelop, while also removing those fields from all other taxes typically levied on hydrocarbons.

The reform also aims to eliminate the duties table that obliges Pemex to pay higher taxes when oil prices drop, along with the artificial restriction of production costs that could be deducted and temporary articles that fix a production platform for Pemex, according to the bill.

Under the new terms, Pemex would gradually increase contributions for scientific research in the energy sector, reaching 1% of the annual value of extracted crude and gas in 2010. Three-quarters of these funds would go to IMP for studies related to medium and long-term production, deepwater exploration and the refining of crude of less than 15-degrees API.

The remaining quarter of research funds would go to projects related to the development of alternate forms of energy as defined by energy ministry Sener and be carried out by Mexican institutes and universities. This measure aims to diversify Mexico's reliance on hydrocarbons, which currently provide 84% of national energy supply.

The reform also increases the percentage of the federal sharing collection (RFP) so as not to decrease the participations of states and municipalities.

If passed, the reform would take effect in January 2008.

"WE NEED PROFOUND REFORM"

The preamble to the reform's outline highlights the fact that hydrocarbons currently provide nearly 40% of federal tax revenue and more than 30% and 20% of state and municipality revenues respectively.

Furthermore, Pemex was required to pay more than 100% of its profits to the federal government between 1998 and 2005, causing Pemex to take out loans in order to meet obligations, according to the bill.

"We need a profound reform that permits us effectively to articulate a policy to give the country energy security, diversify our [energy] sources, save energy, add value to our products, generate employment and make Pemex a more efficient effective and competitive public company," according to the bill.

The bill aims to bring about such changes by modifying laws but without privatizing the company.

"Today, we are at a crossroads, at a breaking point, at which there is which we the risk our oil will end along with the fiscal resources from which its production stems, or we can begin a new stage in the national transformation."

Although Mexico's natural gas production has been increasing moderately, its crude production has been falling steadily, due primarily to the Cantarell field's natural decline. At current rates, the sixth-largest global oil producer has less than 10 years of output remaining.

In order to bring about Pemex's sustainability, reforms will be needed, not only for Pemex's fiscal regime, but on a variety of fronts. Modifications have been called for in Pemex corporate governance, resource allocation and increased regulatory oversight, among other areas.

Mexico's President Felipe Calderon submitted a bill in June for national fiscal reform that could help diminish the government's reliance on tax revenue from Pemex.

Calderon's reform would employ a new tax (CETU) and improve collection efficiency in order to increase government revenue by 1.5% of GDP in 2008, and up to 2.8% in 2012, roughly two-thirds of which would go to the federal government and the remainder to state governments.

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