Mexico's President Offers Diluted Oil Bill


Felipe Calderon
(Click to Enlarge)

MEXICO City, April 9, 2008 (Dow Jones Newswires)

President Felipe Calderon delivered to Congress a weakened version of his plan to overhaul the country's oil sector, dimming hopes that his government will act decisively to stem sliding output.

Mr. Calderon's proposed overhaul does break ground in Mexico, a nation that kicked out foreign oil companies in 1938 and has had a state-run oil monopoly since. The bill seeks to allow full private ownership of oil refineries, something that until now has been the exclusive domain of monopoly Petroleos Mexicanos, or Pemex.

But Mr. Calderon backed away from any attempt to alter Mexico's constitution and allow Pemex to form joint ventures with other oil firms -- a common industry practice that pools the costs and risks of finding new deposits. Instead, the reform would give Pemex an enhanced ability to hire companies through service contracts and pay them fees, rather than allowing the companies to have part ownership of the reserves they find.

The decision to retreat from joint ventures could be a blow to Mexico's future prospects. The country's oil output is declining and it could cease to be a major oil exporter within five years or so if it doesn't find new oil.

"The goal is to ensure that Mexico has oil, not only for the coming years, but for the coming generations," Mr. Calderon said in a televised speech to announce the plan. "Time and oil are running out."

Mexico, which relies on oil to pay more than a third of the government's bills, was the third-biggest oil supplier to the U.S. last year. Its decline in oil exports will force the U.S. to become even more dependent on the Middle East for crude.

Although Mexico is running out of oil, the country may have plenty left in the deep waters of the Gulf of Mexico. But drilling in deep water is a challenge for Pemex, and industry experts say joint ventures help companies share the costs and risks as well as pool technical expertise.

Mexico already pays companies a fee to help extract natural gas. And Pemex relies heavily on contracting oil-service companies like Schlumberger Ltd. to complete many day-to-day tasks. The overhaul attempts to create a risk-reward system where contractors get paid more money if they find or produce more oil than expected.

Some observers say the strategy could work in a world where big oil companies are struggling to find new oil themselves and might be willing to accept difficult conditions as long as they could get in the door in Mexico.

But oil majors would likely demand very large sums of money to do the work if they weren't allowed to keep the oil. That is because these companies make their money by sharing in the big pay-offs of an oil find. A fee-for-service plan would require them to dedicate scarce resources of personnel and drilling rigs to a project -- and forgo the riches of a bonanza find.

"I think [major oil firms] have not expressed a particular interest in that type of an arrangement," said Enrique Bravo, a Latin America analyst at Eurasia Group. "These companies are finding oil in other places where they can book reserves."

Even Mr. Calderon's attempt to open the downstream sector to private investment may falter. Mexico already imports 41% of its gasoline, and the energy ministry says it needs at least three new refineries by 2020. But a Mexican refinery will be a hard sell. An outside firm would have to buy its crude from Pemex and sell the gasoline and diesel to the domestic market, where fuel prices are set by the government through Pemex.

Passing a bill to overhaul Pemex has taken on new urgency amid declining output at Mexico's super-large Cantarell oil field -- an economic mainstay for the nation since it was discovered in the early 1970s. But the field is old and in irreversible decline.

Some observers say Mr. Calderon's strategy is to bring big oil companies into Mexico through the back door -- without changing the constitution. Mr. Calderon's approach may be to find a creative way to accomplish the same goals without raising a political fuss.

MEXICO City, April 9, 2008 (Dow Jones Newswires)

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