Mexico Passes Final Rules to Open Oil Industry to Private Firms

Mexican lawmakers gave final approval to rules for awarding private oil contracts in the country for the first time since 1938.

Three months past its own deadline, the Senate yesterday passed the final measure with a vote of 78 in favor and 26 against to implement the constitutional overhaul approved in December ending Petroleos Mexicanos’s exclusive right to crude production, now in its 76th year. The legislation clears the way for President Enrique Pena Nieto next month to present a budget that balances additional potential revenue from taxes on private drillers with reduced dependence on income from Mexico City-based Pemex.

The overhaul is designed to reverse nine years of declining output and boost economic growth that missed analysts’ forecasts in seven of the past eight quarters. The entrance of foreign producers such as Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) will bring in $50 billion of annual private investment by 2020, according to Grupo Financiero Banorte SAB.

“There isn’t the slightest doubt that this is a reform of utmost importance for the country,” Emilio Gamboa, senate leader of Pena Nieto’s ruling Institutional Revolutionary Party, or PRI, said after the vote. “We are entering a new phase, one where Pemex is going to compete, that opens to new markets and competition.”

Pension Liabilities

Pena Nieto said the secondary laws will probably be published in the nation’s official gazette next week, Mexico City daily Milenio reported on its website.

Lawmakers passed legislation yesterday that would allow the government to assume a portion of pension liabilities from Pemex and state utility Comision Federal de Electricidad if the companies succeed in changing their unions’ labor contracts. Mexico’s government could take on pension obligations if Pemex and CFE reach agreements to gradually increase their workers’ retirement age and audit workers’ pension liabilities.

The changes could free up capital for other projects at Pemex, Chief Financial Officer Mario Beauregard said July 25. The oil producer’s pension liabilities total about $127 billion, according to the Finance Ministry. Senator Carlos Romero Deschamps, the Pemex union chief, was not present for the senate proceedings yesterday and didn’t vote on the final legislation.

Round Zero

The next step in the opening will come from the Energy Ministry, which will announce Sept. 17 the fields that Pemex will retain for production as a part of the non-competitive bidding phase known as ‘Round Zero.’ Pemex asked the Energy Ministry on March 21 to retain all of Mexico’s 13.44 billion barrels of proven oil reserves.

“There’s a road map for the reforms, and the next building block was to sign the secondary regulations that relate to the rules of the game,” Gabriel Lozano, chief Mexico economist at JPMorgan Chase & Co., said in a telephone interview from Mexico City. “The baton will now be turned over to the regulators.”

The Energy Ministry and National Hydrocarbons Commission are evaluating Pemex’s technical, operating and financial capacity to maximize production of the fields, Deputy Energy Minister Lourdes Melgar said in a July 8 interview. Pemex will probably keep all the proven reserves requested, she said.

“Round Zero is what everybody is going to be looking at next,” Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington, said in a telephone interview from New York. “That’s of crucial importance for determining the future for Pemex.”

Pemex last month cut its output forecast to the lowest in at least 24 years as mature fields are shrinking faster than it had previously expected.

“We think that very quickly we’re going to see Mexico attracting investment, science and technology, expanding our infrastructure and generating good jobs,” Senator David Penchyna, a member of the Institutional Revolutionary Party and head of the energy committee, said in an Aug. 5 interview with Radio Formula. “This is one of the big changes that we need in this country.”

To contact the reporters on this story: Adam Williams in Mexico City at awilliams111@bloomberg.net; Eric Martin in Mexico City at emartin21@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net Abhay Singh, Iain Wilson

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