Mexico Joint Energy Proposal to Break $95 Billion Monopoly

Senators from Mexico’s two biggest political parties proposed a bill to break the nation’s 75-year oil monopoly by amending the constitution to allow production sharing contracts and licenses for outside producers.

The joint legislation would allow private companies such as Exxon Mobil Corp. 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 comes after 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 the PAN. The government says an energy overhaul would lift economic growth 1 percentage point by 2018 and reverse oil production losses.

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

Pena Nieto has called the legislation the cornerstone of his administration.

Senators from the two parties, which with congressional allies have the two-thirds majority needed to pass the bill, are seeking to amend the nation’s charter to allow private and foreign oil companies to pump crude in Mexico’s $95 billion energy industry for the first time in more than seven decades.

Crude Reserves

Similar to 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. 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.

The bill also calls for the creation of a sovereign fund, originally proposed by PAN, that would be used to manage oil profits 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.”

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, Baker said the models are very similar.

Senate committees are scheduled to begin debating the bill tomorrow. The Democratic Revolution Party, the third-biggest party in the Senate, opposes the constitutional amendments.

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