Mexico Energy Reform Leaves Narrow Window for Private Investments

MEXICO CITY, March 27, 2008 (Dow Jones Newswires)

Oil majors that hoped Mexico's business-friendly President Felipe Calderon would open the oil industry to outside investment could be facing a letdown.

Ruben Camarillo Ortega, the secretary of the Senate Energy Committee and member of the ruling National Action Party, or PAN, said there are no plans to set up joint-venture companies with outside firms for oil production.

This leaves state-owned Petroleos Mexicanos in charge of finding and developing new oil fields. The reforms will focus on an internal restructuring of Pemex to reduce bureaucracy and improve oversight, not a broad opening of the industry to outside investment.

Mexico's oil output has been declining since 2004, and Pemex is years away from tapping new fields in the deep waters of the Gulf of Mexico, where most of the country's remaining oil reserves are located. Despite the dreary outlook, the country's politicians aren't ready to unwind 70 years of a state monopoly for producing and selling the country's oil.

"There will be no alliances to share oil reserves and production, or risk contracts," said Camarillo in an interview with Dow Jones Newswires on Thursday.

Under a risk contract, a group of oil companies develop a field together, splitting the development costs as well as the risk of not finding commercially recoverable oil, and the profits when oil is found.

"This isn't on the horizon," said Camarillo. "Pemex needs to be more efficient."

He said the reform will focus more on improving efficiency at the state firm. Onerous public works and acquisitions laws make Pemex inefficient at contracting companies to provide services ranging from drilling rigs to pipeline maintenance. This delays projects and creates cost overruns.

John Padilla, a Mexico analyst with IPD, an energy consulting firm based in New York, said Pemex only managed to award 60% of the tenders it announced in the fourth quarter.

"That's not a great hit ratio. It has a lot to do with laws that restrict how Pemex does things," said Padilla.

Oil nationalism runs deep in Mexico, where the 1938 oil expropriation remains a celebrated holiday. The country's powerful oil union and state governments which receive windfall oil revenue benefit from the status quo, making it politically difficult to break down the monopoly.

Camarillo said the PAN is finalizing its energy reform proposal and could open debate on the policy changes as soon as next week.

Oil majors such as Chevron Corp. and Exxon Mobil have had representative offices in Mexico for years, waiting for the country to relax its restrictions on foreign investment. They have also set up technology sharing deals with Pemex as a way to market their expertise in difficult geologic areas, where Pemex has no experience, such as in waters deeper than 3,000 feet.

Energy Minister Georgina Kessel has sent encouraging signs to the oil majors, saying last month that joint ventures with other firms are the only way to rapidly develop deep water oil fields that straddle the maritime border with the U.S.

In the U.S., companies are already drilling within a few miles of the Mexican border, raising the risk of Mexican oil migrating across the border into wells on the other side, a common problem in the oil industry known as leakage.

But any such alliance would require changes in energy laws, which prohibit outsiders from pumping and selling Mexican oil.

Francisco Labastida, the president of the Senate Energy Committee and a high-ranking member of the opposition Institutional Revolutionary Party, or PRI, said his party won't back any constitutional changes. The PAN needs full support from the PRI to pass any significant energy reforms.

The left-wing Democratic Revolutionary Party, or PRD, accuses President Calderon of looking to privatize the industry and has held a series of street protests this year to defend Pemex's monopoly.

With constitutional changes off the table, lawmakers will be limited to reforming the country's bylaws. This could open the pipeline and refining industries to outside capital, but not oil exploration and production. Mexico's pipelines suffer from chronic leaks and theft, and the country's refineries only produce enough gasoline to supply 60% of demand, forcing Pemex to import the rest.

Labastida said the PRI is still waiting on the PAN to present a proposal, and he doubts it could be approved in the current congressional session.

"We need time to study it, digest it and consult with experts," he said in an interview Thursday.

MEXICO CITY, March 27, 2008 (Dow Jones Newswires)

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