Bloomberg News

Mexico Ruling Party Seeks Amendments to End Oil Monopoly (2)

August 06, 2013

Pena Nieto Said to Seek Amendment to Share Mexico Oil Production

The Petroleos Mexicanos (Pemex) administrative building stands in the distance past one of the company's gas stations in Mexico City. Photographer: Susana Gonzalez/Bloomberg

Mexican President Enrique Pena Nieto will seek to amend several articles of the constitution to break Petroleos Mexicanos’s monopoly in the state-run oil industry, ruling party President Cesar Camacho said.

Pena Nieto will propose production-sharing contracts for oil exploration and output, Camacho said in a phone interview today. The proposal will seek to change articles 25, 27 and 28 of the constitution, and tenders for the most part would be managed by government regulators, and not by the state-company known as Pemex, two people with direct knowledge of the bill said yesterday. They asked not to be named because the bill will be officially presented later this week.

The overhaul would be the biggest change for the industry since 1938, when President Lazaro Cardenas seized oil fields from British and U.S. companies and changed Mexico’s charter to assert control over its energy resources. Pena Nieto’s proposal also would break the electricity distribution monopoly held by state power company Comision Federal de Electricidad, or CFE, according to one of the people.

The oil reform “will create a world-class company,” Camacho said. “It won’t privatize” Mexico’s oil.

Pena Nieto has pledged to push changes to double Mexican economic growth that’s trailed the regional average in Latin America over the past decade. He made overhauling the nation’s oil laws a centerpiece of his campaign for president last year, saying opening the energy industry to more private investment would be the signature issue for judging his success.

‘Historical Magnitude’

“When you talk about changing the constitution, the historical magnitude of that phrase is going to make a lot of people in a lot of places pay more attention,” Jeremy Martin, an oil specialist at the Institute of the Americas in La Jolla, California, said yesterday. “This is the big ticket. This is very close to the whole enchilada.”

The peso rose 0.2 percent to 12.6223 per dollar. The yield on fixed-rate government peso bonds due in 2024 rose seven basis point to 5.84 percent.

The president’s office declined to comment on the content of his proposal or say when it would be presented. Pemex didn’t respond to an e-mail and phone calls requesting comment.

Members of Pena Nieto’s Institutional Revolutionary Party, or PRI, in March voted to end their opposition to constitutional changes that would ease the state’s grip on the oil industry.

‘Opposition’

“It was difficult to imagine a proposal like this” before Pena Nieto began pushing for it, Jorge Chabat, a political scientist at the Center for Economic Research and Teaching, a Mexico City-based university, said in a phone interview last night. “It hasn’t been easy and there was much opposition within the PRI itself” for similar reforms in the past.

The proposal would be the second in the last week to call for opening oilfields to private companies, after the opposition National Action Party, or PAN, on July 31 presented its own bill. Pena Nieto’s proposal, like the PAN’s, won’t limit foreign ownership of crude projects and would allow competition for electricity sales against CFE, according to one of the two people familiar with it.

Exxon Mobil Corp. (XOM:US), the world’s largest energy company by market value, Chevron Corp. (CVX:US) and Spanish oil producer Repsol SA (REP) are among the companies that have expressed interest in Mexico’s oil fields.

Strategy

Pena Nieto’s plan is part of a strategy to reverse an eight-year drop in crude output and push through a tax initiative to wean the government off revenues from Pemex. The company funds about a third of the federal budget.

Pemex production has plummeted as output from its Cantarell field, the world’s third-largest deposit when it was discovered in 1976, plunged more than 80 percent since 2004 to last month’s 380,000 barrels a day. Pemex is the world’s fifth-largest crude oil producer and third-biggest exporter to the U.S., behind Canada and Saudi Arabia.

The PAN and PRI proposals may face opposition from the Democratic Revolution Party, or PRD, the nation’s third-biggest party. Jesus Zambrano, the PRD’s president, has promised the party will oppose any drive that it sees as privatization. Andres Manuel Lopez Obrador, the party’s candidate who came in second to Pena Nieto in last year’s presidential election, said he’ll call supporters to Mexico City’s Zocalo, or main square, in early September to rally against such proposals.

‘Significant Investment’

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

Pena Nieto already has achieved legislative success with the Pacto por Mexico, or Pact for Mexico, an accord signed between the three biggest parties on Dec. 2, the day after he took office. The accord has helped usher in an education bill to make teachers more accountable for performance and a law to spur increased competition in the telecommunications industry. It also set a goal of improving tax collection and transparency in spending.

“Although we’d like to have the reform approved as is, it’s obvious that won’t occur,” said Camacho, the PRI’s president. “It’s necessary to listen to many voices and for the legislators to come to an agreement on the essential topics.”

Reach Agreement

In the end, opposition from within the PRD is unlikely to derail the energy-overhaul drive if the PAN and PRI reach an agreement, Shannon O’Neil, a senior fellow at the Council on Foreign Relations in New York, said by phone last week. The two parties, with the PRI-allied Green Party, would control more than the two thirds needed to pass a constitutional change in each of the lower house and Senate.

“Legislators in all parties can count, and they know what a two-thirds majority is and that it doesn’t have to have all three parties,” O’Neil said. “The PRI has known all along that this could be the reform to break the Pacto. There are at least some people in the PRI who think the energy reform is worth it.”

To contact the reporters on this story: Eric Martin in Mexico City at emartin21@bloomberg.net; Nacha Cattan in Mexico City at ncattan@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net


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