Oct. 20 (Bloomberg) -- Mexican legislators rejected President Felipe Calderon's proposal to allow private companies to refine oil for state-controlled Petroleos Mexicanos, a blow to his plan to boost investment in energy.

Members of the Senate's energy committee agreed to block Calderon's plan after a meeting yesterday, opposition lawmakers Graco Ramirez and Francisco Labastida told reporters in Mexico City. Instead, the committee will draft a bill with no changes to refining, Labastida, a member of the Institutional Revolutionary Party, said.

``There won't be outside or third parties in refining,'' Ramirez, a member of the committee from the Party of the Democratic Revolution, said at a conference attended by members of the country's three biggest political parties.

The defeat for Calderon follows draft legislation he sent to Congress in April seeking to allow private and foreign companies to operate oil refineries in Mexico, and to explore for and produce oil for Petroleos Mexicanos, or Pemex. Under current law Pemex can hire private companies to upgrade plants but can't contract with them to refine oil.

Lawmakers have already drafted bills that, if approved, would allow the state oil monopoly to hire private and foreign companies for exploration and production under contracts that provide performance-based incentives. The companies would only be paid in cash and wouldn't be allowed to own Mexican oil or book reserves.

Calderon has said allowing private or foreign companies to partner with Pemex would free up funds for exploration. Opponents led by the opposition Party of the Democratic Revolution say such a plan would transfer Mexico's oil wealth to foreigners and the business elite and that cutting Pemex taxes is a better option.

Oil output at Pemex fell 9.2 percent to 2.834 million barrels a day in the first eight months of the year. Declining production will cost 275 billion pesos ($21.1 billion) in sales this year, threatening Mexico's budget, as 40 percent of the government's revenue comes from Pemex royalties.

To contact the reporters on this story: Adriana Lopez Caraveo in Mexico City at adrianalopez@bloomberg.net; Jens Erik Gould in Mexico City at jgould9@bloomberg.net

Last Updated: October 20, 2008 07:50 EDT