End of Mexico 75-Year Oil Monopoly Looms With Senate Deal

Mexico’s seven-decade state energy monopoly is poised to end after senate committees voted in principle to approve output sharing and licenses for outside producers.

The lawmakers are still debating articles of the bill reserved by minority opposition senators in the committees that would allow private companies from Exxon Mobil Corp. (XOM) to Chevron Corp. (CVX) to develop fields in the largest unexplored crude area after the Arctic Circle as state-owned Petroleos Mexicanos seeks to reverse eight years of falling output. The bill would allow companies to log crude reserves for accounting purposes, which may make it easier to secure project financing.

The bill announced on Dec. 7 ended four months of political wrangling following the release of separate plans from President Enrique Pena Nieto’s ruling Institutional Revolutionary Party, or PRI, and the opposition National Action Party, known as PAN. The government estimates an energy overhaul would lift economic growth 1 percentage point by 2018 and reverse production losses.

“I see a sense of willingness to move this bill forward,” Ninfa Salinas, a Green Party senator in the energy committee, said in a telephone interview yesterday. “There’s an understanding of using this as a tool to boost growth.”

Vote Tomorrow?

Pena Nieto, the 47-year-old former governor who returned the PRI party to power a year ago, has called the oil overhaul the cornerstone of his administration. PRI Senator David Penchyna, who heads the senate energy committee, said there may be a vote on the proposal by the full upper house as soon as tomorrow, in an interview today with Radio Formula.

Senators from the two parties, which with political allies have the two-thirds majority needed to pass the bill in both houses, are seeking to amend the nation’s charter to allow private and foreign energy companies to pump oil in Mexico’s $95 billion-a-year industry for the first time in 75 years.

Similar to the concession model proposed by PAN, licenses would grant broader operational control than the government’s initial profit-sharing model and allow companies to manage oil directly. In production-sharing contracts, companies can register crude reserves as assets for accounting purposes, the bill says. The oil remains state property until it is pumped.

Politically ‘Palatable’

“Although licenses will mimic concessions, we believe they could be politically more palatable than concessions as all of the oil reserves belong to the state,” Alberto Ramos, chief Latin American economist for Goldman Sachs, said in a research report. “Licenses are akin to concessions as they allow companies to take control of oil at the well head by paying royalties and taxes to the government.”

The 295-page initiative calls for changes in articles 25, 27 and 28 of the constitution. It also sets 21 mandates to be fulfilled with secondary regulations to be drafted next year.

The bill was passed by three committees with a total of 24 votes in favor and nine against.

Senator Manuel Bartlett, of the Labor Party, said that most of the elements--if not all--will be challenged after the vote in principle.

The bill also proposes the creation of a sovereign fund, originally proposed by PAN, that would be used to manage oil profit for long-term investment and savings.

The sovereign fund will be a public trust that will be operated by Mexico’s Central Bank, which will act as trustee, and receive all the earnings derived from contracts.

“The PRI has accepted almost all of the PAN proposals,” PAN Senator Salvador Vega said. “Many of the proposals contained in our original initiative have been included, though there are some things that could be added to advance it.”

Shale Exploration

Licenses will be used principally for shale-gas exploration, according to PAN Senator Jorge Luis Lavalle. Mexico has shale-gas resources of as much as 460 trillion cubic feet, according to data compiled by state oil company Pemex.

While Jorge Luis Preciado, the PAN’s leader in the Senate, says that licenses aren’t the same as concessions, Houston-based energy consultant George Baker said the models are very similar.

“It’s a 180-degree turn for Mexico,” Baker said in a telephone interview. “I never thought they would do that.”

The Democratic Revolution Party, the third-biggest party in both chambers, opposes the constitutional amendments.

The bill also will seek to promote alternative energy sources in Mexico through investments, said Salinas, whose party forms part of Pena Nieto’s coalition in Congress.

The congressional session ends Dec. 15. Emilio Gamboa, the Senate leader for the PRI, said last month that he expected senators would agree to extend the legislative process through the end of the year if needed to pass constitutional changes to open the energy industry.

To contact the reporters on this story: Adam Williams in Mexico City at awilliams111@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.