Mexican President Enrique Pena Nieto is proposing legislation that will ensure Petroleos Mexicanos owns at least 20 percent of oil and gas fields that span the country’s borders.
The proposal is part of secondary legislation to an energy bill approved last year, Energy Minister Pedro Joaquin Coldwell told reporters today after the legislation was sent to Congress. The northern border on-shore region is home to some of the world’s largest shale oil and gas fields, including the Eagle Ford play, which produced about 1.2 million barrels a day last year, according to data compiled by Bloomberg.
The additional legislation also proposes the gradual reduction of state-owned Pemex’s tax burden, which currently funds about a third of the government budget, Finance Minister Luis Videgaray said. Weaning government funding off Pemex’s earnings is a key element of the Dec. 20 law approved by Pena Nieto that ended the company’s 75-year state oil monopoly to allow for foreign companies to develop oilfields in Mexico.
The new tax regime will increase Pemex profits three- or four-fold, Videgaray said today. The tax structure will be “highly progressive” and provide Pemex the financial space to be able to compete with private energy firms, he said.
The energy overhaul intends to halt nine straight years of declines in Mexico’s oil output and will boost economic growth by 1 percentage point by 2018, the government has said. The overhaul may bring in as much as $30 billion more in annual foreign direct investment, according to Edgar Rangel of the National Hydrocarbons Commission.
Proposed legislation also calls for operators to use Mexican providers for at least 25 percent of supplies and services by 2025.
“At first instance, with conditions of quality, price and delivery being equal, the national provider will have priority over foreign” companies, the government said in a statement.
The local content requirement appears high and seems to be “a goal rather than a mandate,” according to Dallas Parker, an energy analyst and partner at law firm Mayer Brown in Houston. It should be implemented with flexibility to enable the Mexican industry to ramp up demand, he said.
Production at state-owned Pemex averaged 2.52 million barrels a day of crude in 2013 and slid to its lowest monthly level in almost two decades in March as output at Mexico’s biggest discovery, Cantarell, declined. Monthly production fell 2.1 percent in the first quarter this year, Gustavo Hernandez, acting director of exploration and production, said on an earnings conference call today.
Mexico will probably offer its first oil drilling contracts to private companies as early as this year or the beginning of next year, Videgaray said in a Feb. 6 interview.
“I applaud Mexico for going forward boldly to move the reform along,” Parker said in a phone interview from Mexico City before the bill’s presentation. “The overall sentiment we’re getting is that the legislation is going to closely follow the directives of the constitutional amendment. If that’s the case, the international community will be happy.”
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