Mexico's Energy Reform Advances with Contract Incentives

Dow Jones Newswires

MEXICO CITY (Dow Jones Newswires), October 21, 2008

Mexican energy reform gained speed this week after a key Senate committee drafted and approved a compromise proposal that slightly expands the scope for private investment in the oil sector.

Mexico has one of the most insular oil industries in the world. Only the state can own hydrocarbons and state company Petroleos Mexicanos has a monopoly on production and sales. Pemex hires oil service companies to provide equipment and manage oil fields for a fee, but doesn't offer them a stake in oil production.

The energy reform aims to make these service contracts more attractive by allowing Pemex to offer incentives. These include bonuses when contractors finish projects ahead of schedule and reduce costs by applying new technologies. It also allows Pemex to award additional compensation when a project is more successful than originally anticipated.

The Senate is expected to vote on the reform bills as early as this week.

If passed, the reform is expected to be a boon for oil service companies that have been working for Pemex throughout the company's 70-year history.

"There will be more work and more money in the system," said an executive at an oil services company.

The reform gives Pemex more autonomy to adjust its yearly budgets to take into account fluctuating prices for raw materials. The reform will also gradually allow Pemex to retain windfall oil revenue to invest in operations.

Pemex needs all the help it can get. September oil output was the lowest since 1995 at 2.72 million barrels a day. The combination of sliding domestic production and plummeting oil prices is expected to cause some budget strain on Pemex for next year.

The incentive plan explicitly blocks paying with a percentage of crude oil production or sales. Such a move would require a reform of the 1917 Constitution, a task that has proved politically impossible even though the business-friendly National Action Party, or PAN, has controlled the presidency since 2000.

This makes it difficult for Pemex to attract international oil firms, which are able to own oil reserves in other regions such as North Africa, Alaska and Colombia.

Oil service companies are helping Pemex move into new regions on land, such as the Chicontepec basin where Pemex hopes to ramp up production to 600,000 barrels a day by 2020.

Over the past year Pemex has awarded over $2 billion in contracts at Chicontepec, where service firms will deploy new technologies such as horizontal drilling to maximize output at the difficult formation.

But Pemex will need help form large, integrated oil companies to team up on deepwater fields in the Gulf of Mexico.

"That's where the international oil companies will step in, if it's interesting for them," said the oil services executive. 

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