Analyst: Increased Research Less Effective than Partnerships

Increased investment in research by Mexico's national oil institute (IMP) as stipulated in the new fiscal reform proposal for state oil company Pemex should not be oversold, according to George Baker, research director of Houston-based consultancy

The proposal's terms stipulate Pemex 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.

"I have a bigger budget, can I write a better novel? Probably not. We're talking about what has to happen to make creativity and technological advancement possible. You have to ask the question whether with all this new money they would just be reinventing the wheel, with what oil companies already know," Baker said.

Oil companies possess vast knowledge from decades of development that cannot be purchased in the marketplace, Baker said, adding Pemex could spend 10 years developing technology that exists today.

"Pemex is starting very late to get serious about developing deepwater technology on its own. The shortest path is to find some way to make strategic alliances with oil companies that already have this technology," Baker said.


Senator Ruben Camarillo (ruling PAN party), secretary of the senate's energy committee, also highlighted the effectiveness of private participation.

"We have to remove the straitjacket the law confines Pemex in, particularly the regulatory law of constitutional article 27, which impedes participation of other companies in strategic areas," Camarillo said in an interview.

PAN clearly is not trying to privatize Pemex, he said.

"We are not trying to sell a single screw of Pemex, but we do believe it should move towards a much more competitive productive structure and open itself to the possibility of private sector investment."

Camarillo specifically stressed the need for private-sector investment in the downstream sector, particularly refining, as Mexico - the world's sixth largest crude producer - has to import nearly 40% of its gasoline.

"It's a complete disgrace, something we need to resolve in the far-reaching [energy] reform PAN is going to propose in the senate," Camarillo said.

Reforming Pemex's tax regime is merely the first step toward sustainability of the firm.

"The reform of Pemex's fiscal regime is really not the solution the state company needs," according to the senator.

Pemex has major structural problems, he added.

"It has a very compromised future because we have low [proven oil] reserve levels, only nine years. It's a company that has annual investment obligations of roughly US$20bn just to be able to make the company's future viable," Camarillo said.

Camarillo first expects approval of the national fiscal reform proposed by President Felipe Calderón and, once in effect, attempts to achieve reform of Pemex's fiscal regime.

The reform of Pemex's tax rate as proposed by the PRI, PRD, Convergencia, PVEM and PT parties, calls for a one-time decrease in taxes paid by Pemex on the value of oil and gas production from 79% to 70%. PAN, however, wishes to modify the proposal to lower taxes gradually in proportion with the results of the reform.

The opposition's initiative also includes a unique 20% tax rate for mature wells that have been closed for more than three years.

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