Lawmaker: PAN to Propose Pemex Fiscal Reform Modification

Mexico's ruling PAN party will propose a modification to the fiscal reform of state oil company Pemex presented in July by opposition parties, senator Ruben Camarillo (PAN) told BNamericas.

The original model, proposed by the PRI, PRD, Convergencia, PVEM and PT parties, called for a one-time decrease in taxes paid by Pemex on the value of oil and gas production from 79% to 70%.

PAN suggests the taxes should be lowered gradually and in proportion with the results of the national fiscal reform proposed by President Felipe Calderon, said Camarillo, who serves as secretary of the senate's energy commission.

"Senator [Francisco] Labastida's initiative proposes a one-shot reduction from 79% to 70% in this tax. We think doing it this way is unfeasible," Camarillo said. Labastida is a member of the PRI party.

And as part of PAN's proposed modification, the tax reductions would not be unconditional but would instead be fiscal incentives tied to productivity and efficiency improvements.

Such improvements could include increases in proven reserves, higher well productivity, reduced gas flaring, improved efficiency in drilling and expenses and reductions in idle equipment time.

PAN is still working on how exactly the reduction in taxes would be calculated and as such does not have a final proposal ready. But PAN has been in meetings with other parties and says the modification has been well received.

"First, we had a meeting in committee where we put forth this element of the initiative," Camarillo said. "All the senators of the senate's energy and finance committees looked kindly on the idea that additional resources to Pemex would be conditional on certain productivity or efficiency indicators."

The lawmakers also agreed the Pemex reform should be gradual and proportional to the final government reform that will reduce the oil industry's contribution to government coffers.


However, George Baker, research director of Houston-based consultancy, stressed that while the PAN modification has the right thrust, linking tax rate decreases to operational improvements could be problematic without increased regulatory oversight.

"An argument Pemex has made for years and years is that it needs more money and no doubt it does. But having more money doesn't necessarily mean you have the efficiency, the oversight or the tools in place actually to use that money for efficient ends," Baker said.

Pemex might not use additional funds for investment with its own cash, he said. Baker cited as precedent the billions of dollars in new oil revenues earned during the previous administration of Vicente Fox that still resulted in increased debt through use of the Pidiregas public infrastructure-financing model.

Further, Pemex's lack of transparency casts doubt on the credibility of the figures it releases. As such, it could be difficult to verify whether Pemex is actually meeting productivity and efficiency benchmarks.

"Pemex is swamped with auditors from a half-dozen ministries - energy, finance, environment, economy and so on - but Pemex has almost no regulators," Baker said.

This reform, however, would address just one small part of the problem, he added.

"What they're basically doing is a Soviet-style facelift management of the oil sector. 'We're going to adjust this lever in taxes, this lever in incentives and this lever in efficiency and see if we can build the perfect state oil company, without touching the union, without having any real oversight of the marketplace, without having any real regulators for Pemex,'" Baker said.

The original reform proposal also includes the creation of a unique 20% tax regime for mature fields that have been closed for at least three years and increased contribution to research, particularly related to assuring Pemex's long-term sustainability.

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.

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