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Pena Nieto Opts for Oil Sharing Pacts, Lawmaker Says

Mexican President Enrique Pena Nieto will probably seek to amend key articles of the constitution to break the nation’s state monopoly on oil exploration and production, ruling party lawmaker Javier Trevino said.

Trevino, a secretary on the lower house’s energy committee, said in an interview the bill will likely change articles 27 and 28 of the charter to allow either production or profit sharing contracts between private companies and Mexico’s state-owned oil interest. The proposal probably won’t offer concessions to companies, said Trevino, who has knowledge of the government’s bill scheduled to be presented next week.

Pena Nieto is pledging to open the energy industry to private investment to double growth that’s fallen behind the regional average over the past decade. The government’s bill will likely require oil sharing contracts be managed by regulators and the government, instead of by the state-owned oil company Petroleos Mexicanos, Trevino said.

“We expect a reform to strengthen and transform Pemex,” Trevino said. The bill will also likely “strengthen the role of the regulatory body.”

Mexico’s peso rose 1.5 percent to 12.6311 against the dollar at 12:24 p.m. in Mexico City, extending its gains after Trevino’s comments, according to Alejandro Urbina, a money manager at Silva Capital Management, which oversees $800 million in emerging-market assets.

Production Sharing

The bill by Pena Nieto and his Institutional Revolutionary Party will be presented next week and first be debated by the Senate. The government’s proposal will follow a bill presented July 31 by the opposition National Action Party that seeks concessions for private companies to explore and produce oil.

Congress is in recess until September, although a special session is expected for the last week of August.

Under a typical concession regime “hydrocarbons underground will belong to the State, but when it reaches the wellhead it automatically passes to” the international oil company, Michael Bunter said in his book “The Promotion and Licensing Of Petroleum Prospective Acreage.” In production sharing accords, crude is the property of the state until the country sells the petroleum, he said.

Devilish Details

While energy companies prefer the certainty of concessions, profit and production-sharing contracts can attract “significant investment” if favorable conditions exist, said Dallas Parker, a Houston-based partner at Mayer Brown LLP.

“The devil’s in the details,” Parker said in a telephone interview. “We need to look at the structure of the fiscal system in each of these offers, the royalty rate, the government’s take, the tax system, how cost recovery is permitted and the flexibility on pricing. It certainly appears to us that both the PAN and the PRI are committed to a world-class arrangement.”

Mexico’s government received $69 billion of Pemex’s revenue last year, the most since at least 2005, the Mexico City-based company said in a presentation this month.

Oil companies will want to know if Mexico plans to eliminate a legal ban against booking reserves on their financial statements, Parker said.

Production-sharing contracts will probably require companies to pay royalties, taxes and licenses, Trevino said. The president’s bill will probably seek the gradual removal of Pemex from the government budget, giving the company greater investment autonomy, he said.

The Energy Ministry’s press office didn’t respond to phone calls and an e-mail requesting comment.

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