Mexico Parties Said to Seek Oil License Contracts in Bill

Mexico’s two largest parties reached a preliminary accord that would give oil producers more control in riskier fields than the current government proposal, three people with direct knowledge of the agreement said.

The ruling PRI and opposition PAN parties will support a measure to allow the state to decide the type of contracts to be offered for each project, including service contracts, profit and production sharing and licenses, two of the people said, asking not to be identified as talks are private. Like the concession model proposed by PAN, licenses would grant broader operational control than the govenment’s initial profit-sharing model and allow companies to manage oil directly.

President Enrique Pena Nieto is seeking to end a 75-year state monopoly on pumping crude and to attract investment from companies like Exxon Mobil Corp. and Chevron Corp. to boost the $95 billion industry. The government says the bill, now before the Senate, would lift economic growth 1 percentage point by 2018 and help state-run Petroleos Mexicanos return to output growth.

“If the bill that Congress decides is a bit more aggressive in terms of legal structures beyond profit sharing, or production sharing or licenses, we’re ready for that,” Pemex Chief Executive Officer Emilio Lozoya said in an Oct. 31 interview. “What we have been advocating as the sole operator in the country is whatever legislation gives long-term legal certainty to investors.”

Yields on Pemex’s dollar bonds due 2024 rose 4 basis points at 4:45 p.m. in New York to 4.85 percent, their highest levels since Sept. 16.

Contract Options

Allowing companies to explore and drill for gas and oil in Mexico requires a constitutional amendment that could only pass with a two-thirds majority in both the lower house and Senate.

The PAN, Mexico’s largest opposition party, along with Pena Nieto’s Institutional Revolutionary Party, or PRI, and its allies, have enough votes to approve a charter change. Both parties have said talks are advancing in Congress on an electoral reform that the PAN has said is a requirement for it to pass an energy bill. The third-largest party, the Democratic Revolution Party, is against a constitutional change in energy.

Pena Nieto presented his energy overhaul Aug. 12 that limited contracts to risk-sharing accords with cash payments. The PAN presented its own version in July that offers concessions, allowing companies to book reserves directly on balance sheets. The preliminary agreement will seek to have as many contract options as possible, including those where producers are paid with oil, the three people said.

Concession Allure

Legislation that permits concessions or license contracts would be much more attractive to major international oil companies, said Jeremy Martin, an oil specialist at the Institute of the Americas in La Jolla, California. A concession or production-sharing model would give companies clearer guidelines when making large-scale investments, he said.

“There is no doubt that the closer you get to a more concession model, the much more appealing it becomes for major international oil companies,” Martin said by phone. “If you did a concession model in Mexico, it would be huge.”

Exxon Mobile Corp. and Royal Dutch Shell Plc declined to comment on possible modification to energy reform legislation through spokespersons Patrick McGinn and Kayla Macke. Chevron Corp. and Repsol SA did not immediately respond to messages seeking comment.

PRI President Cesar Camacho said his party hasn’t reached a preliminary agreement to include production-sharing or license contracts in the energy bill, although he didn’t rule out that party members in Congress may be negotiating such changes.

Oil Reserves

“We want to be a country sufficiently attractive for national and international investors, but with nothing that comes close to concessions,” Camacho said in a telephone interview. Negotiations in Congress “could be happening. But for now that’s not the position of the PRI.”

Lozoya has advocated for legislation change that would allow Pemex to tap reserves and reverse production losses. Mexico has the biggest proven oil reserves in Latin America after Venezuela and Brazil, with 13.87 billion barrels, and shale-gas resources that may be as much as 460 trillion cubic feet, according to data compiled by Pemex.

Brazil and Colombia, both of which opened state-run oil producers to allow private companies to pump crude during the past 20 years and changed legislation to offer concessions. Production has nearly tripled in Brazil since energy reform was approved in 1997, while almost doubling in Colombia since legislation changes.

Bigger Profits

An opening-up of the industry would “allow us to grow much faster, to invest along with co-investors more, and grow our balance sheet and increase profitability,” Lozoya said. Pemex’s third-quarter crude production was 2.506 million barrels per day, a 1.6 percent decline from the same year-ago period. It reported a 39.2 billion-peso ($3 billion) loss in the three-month period.

Pemex is interested in raising capital through real-estate trusts, known as Fibras, or structured securities known as CKDs, as soon as the first quarter of 2014, Lozoya said.

Without a reform, Pemex would need an estimated $1 trillion of investment for extraction of prospective reserves in the next 50 years, Lozoya said. To do so, annual investments would have to be increased to $62 billion from $25 billion.

Analysts forecast 2013 economic growth of 1.24 percent this year after a 3.9 percent expansion in 2012, according to a central bank monthly survey published Nov. 1.

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