MEXICO CITY (Dow Jones Newswires), October 20, 2008
Mexico's energy reform just got a shot in the arm. The financial crisis and tanking oil prices puts a premium on private capital to help shore up the struggling industry, dampening a nationalist backlash.
Oil Firms Not Convinced
Oil majors with the capital and know-how to march into Mexico's untapped fields, especially those buried deep in the Gulf of Mexico, are still waiting to jump on board. The reform will have to deliver similar conditions to what is on offer in other oil provinces such as Colombia, Nigeria or Angola, to win them over.
Compared with these countries, Mexico is handicapped by its nationalist oil tradition. International oil firms normally lease acreage in oil-rich areas, explore, and pay local taxes on production.
In Mexico it's not that simple. The 1938 oil expropriation remains a source of pride to a nation that suffered U.S. and French invasions in the 19th century. In 1938 Mexico faced down U.S. and European oil firms and pressure from their home governments, earning then-president Lazaro Cardenas a star role in history books.
His legacy lives on in oil legislation. Every Mexican oil molecule remains under state ownership, and the most Mexican politicians can stomach is paying outsiders to pump Mexican crude for a fee.
"We have to wait for Pemex to come out with contracts to see if they are globally competitive," said a Mexico City-based executive at an international oil firm.
President Felipe Calderon openly describes the reform as what is politically possible, but falling short of what the industry really needs. A plan to legalize joint-ventures between Pemex and international firms for deepwater fields died before Calderon even sent the reform to Congress.
It is the latest attempt by business-friendly presidents to chip away at Pemex's monopoly.
In 2004 Mexico launched service contracts in the well-explored Burgos natural gas basin south of the Texas border. This attracted companies looking for a foothold in Mexico such as Spanish-Argentine Repsol YPF, Brazil's Petrobras and smaller companies such as Houston-based Lewis Energy.
Executives say they would need more attractive returns before moving into higher risk areas such as the Gulf of Mexico.
"In deepwater the drilling cost is huge, and it is kind of risky for our company," said an executive at a firm that pumps natural gas in Mexico. "If they keep the service contracts, they need to be modified."
The reform allows Pemex to include incentives, such as bonuses when operators complete a project under budget or find more oil than initially expected. This gives Mexico a small but welcome opportunity.
"Incentive-based contracts are better than nothing," said Bern.
Crisis Gives Political Opening
The global credit crisis has edged oil reform out of the limelight and taken the fire out of left-wing detractors who routinely call it a masked privatization.
Mexicans are worried about the economy, which relies heavily on remittances from Mexicans in the U.S. who are sending less cash home.
The peso has taken a beating by foreign investors fleeing the stock market, and a rise in drug-related crime has dominated newspaper headlines and politics in recent months.
"For now the main topic is the economy," said Miguel Segura from the Mitofsky polling firm.
The left-wing Democratic Revolutionary Party, or PRD, still opposes the incentive-based contracts. But so far it has failed to break up a consensus between the ruling National Action Party and the PRI, who both want to push it through.
The PRD stalled reform talks in April by camping out in both chambers of Congress for two weeks. This delayed formal debates for three months.
But with economic insecurity running high and congressional elections slated for mid-2009, PRD politicians will think twice before turning to civil disobedience, said Segura.
Copyright (c) 2008 Dow Jones & Company, Inc.
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