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Pena Nieto Submits Bill to End Mexico’s 75-Year Oil Monopoly (2)

August 12, 2013

Pena Nieto Submits Bill to End Mexico’s 75-Year Oil Monopoly

Petroleos Mexicanos offshore jack-up rigs drill in the Ku-Maloob-Zaap field in the Gulf of Mexico, 65 miles northeast of Ciudad del Carmen, Mexico. Photographer: Susana Gonzalez/Bloomberg

Mexico’s President Enrique Pena Nieto presented a bill to Congress today that would end a seven-decade state energy monopoly.

Pena Nieto plans to allow private companies such as Exxon Mobil Corp. (XOM:US) and Chevron Corp. (CVX:US) to pump crude for the first time since 1938 by changing articles 27 and 28 of the constitution, he told reporters today in Mexico City. Under the proposal, companies would receive a portion of profit within a risk-sharing model that would also allow them to book a percentage of reserves under U.S. Securities and Exchange Commission rules, said Deputy Energy Minster Enrique Ochoa.

The bill to loosen state-owned Petroleos Mexicanos’s grip on production and attract investment needed to reverse an eight-year output drop would be the economy’s biggest overhaul since the North American Free Trade Agreement in 1994. An even more aggressive proposal delivered last month by an opposition party increases Pena Nieto’s chances of pushing his bill through Congress, said Nomura Holdings Inc.

“The risk-sharing or profit-sharing contracts have a long-term economic interest that the SEC registers to define the percentage” that a company can use to book reserves from a project, Ochoa told reporters in Mexico City.

Pena Nieto, the 47-year-old former governor who returned the PRI party to power in December, opted for risk-sharing contracts similar to those used in Ecuador, Bolivia and Iran, rather than a concession model, Energy Minister Pedro Joaquin Coldwell said. The state would retain ownership of oil reserves.

Majors Interested

The government plans to split Pemex, as the state producer is known, into two units, as well as ending the state’s electricity generation monopoly. Mexichem SAB would invest as much as $500 million in power generation, Ricardo Gutierrez, head of the Mexican chemical maker, said in an interview in Mexico City after the proposal.

Exxon, Chevron, Royal Dutch Shell Plc (RDSA) and Repsol SA (REP) are among major producers that have expressed interest in Mexican oil fields. Pacific Rubiales Energy Corp. (PRE), Latin America’s most valuable non-state crude producer, would consider investing in Mexico if the PRI’s bill succeeds, Chief Financial Officer Carlos Perez said in an Aug. 9 telephone interview.

“We welcome any decision by the government and people of Mexico to provide new opportunities for investments,” Kurt Glaubitz, a Chevron spokesman, said in an e-mail before today’s announcement.

Middle Ground

Exxon and Repsol declined to comment on the planned regulatory changes through their respective spokesmen, Patrick McGinn and Gonzalo Velasco. Shell referred a request for comment to a June 7 speech by Upstream Americas Director Marvin Odum, in which he referred to Mexico’s “enormous” potential and Shell’s “strong and growing” relationship with Pemex.

The National Action Party, or PAN, of Pena Nieto’s predecessor Felipe Calderon, wants to open the door to selling shares in Pemex. Jesus Zambrano, head of the Democratic Revolution Party, or PRD, whose candidate Andres Manuel Lopez Obrador finished second to Pena Nieto in last year’s election, said on Aug. 8 the party opposes changing the constitution.

The PRI, which ruled Mexico for seven decades until 2000, may try to take the middle ground between the two positions, Benito Berber, a strategist for Nomura in New York, said by telephone before today’s announcement.

Bond Rally

Investors are gaining confidence that lawmakers will approve the bill. The yield on Mexico’s benchmark fixed-rate government peso debt due in 2024 has fallen 0.26 percentage point to 5.75 percent since July 30, the day before the PAN unveiled its energy proposal.

Pemex’s dollar-dominated notes due 2018 are the best-performing Latin American energy company debt this quarter with a 3.94 percent return, according to data compiled by Bloomberg. The average return among more than 80 securities is 0.24 percent, the data show. Yields fell to 3.06 percent at 1:44 p.m. in New York from 3.09 percent at the end of last week.

Pena Nieto has also promised fiscal changes to wean the government off revenue from Pemex, which can’t invest enough in its own operations because of a tax burden that funds about a third of the federal budget.

Since Nafta, Mexico has become one of the world’s most open trading economies. Even so, many industries are still dominated by single groups, such as billionaire Carlos Slim’s America Movil (AMXL) SAB in mobile-phone service and Comision Federal de Electricidad, or CFE, in electricity.

Both Pemex and CFE will remained fully state owned under the government’s proposal.

Tax Collection

The President has already achieved legislative success with the Pact for Mexico, an accord signed between the PRI, PAN and PRD on Dec. 2, the day after he took office. The accord has helped pass 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.

Oil at all stages of production, refining and distribution has been the legal property of the Mexican people since 1938, when then-President Lazaro Cardenas seized fields from U.S. and British companies and changed the nation’s charter. The expropriation is celebrated every March 18 and trumpeted as a point of pride in schoolchildren’s textbooks.

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 high as 460 trillion cubic feet, according to data compiled by Pemex.

The state-owned company says that with the proper investments and technology, about 27 billion barrels of crude in the deep waters can be added to the nation’s proven reserves.

Protests Called

The PRD wants to maintain the state’s exclusive right to oil refining, preventing private companies from entering the process, Luis Sanchez, a PRD senator, said in a speech in Guadalajara Aug. 3. Zambrano told reporters Aug. 8 that the party is against oil concessions.

“It’s absolutely unacceptable that we would give up part of our territory in a concession,” Zambrano said. “It’s giving up the future of our country.”

Lopez Obrador, who left the PRD following his election loss to found his own movement, said people who offer natural resources to foreigners are “traitors” and has called for supporters to protest in Mexico City’s main square next month.

Marcelo Ebrard, the former mayor of Mexico City who leads the Progress Movement within the PRD, has called for a national energy referendum and said in an interview that Pemex’s tax burden can be lessened and its autonomy increased without constitutional changes.

Constitutional Change

This isn’t the first time a Mexican leader has tried to reform Pemex. Under PRI President Ernesto Zedillo, Pemex tried to sell some assets in 1995, only to pare back the plan amid opposition from members of his own party.

President Vicente Fox, or the PAN party, replaced Pemex’s politician-staffed board in 2001 with businessmen, including Slim. The board was dismantled two months later amid accusations by lawmakers that it was unconstitutional.

PRI lawmakers defeated an attempt by Calderon to open the nation’s refining and distribution projects to outside partners. Calderon was able to win approval for private companies to operate fields under incentive-based contracts.

Opposition from within the PRD is unlikely to derail the energy proposal if the PAN and PRI reach an agreement. The two parties, with the PRI-allied Green Party, would control more than the two thirds each of the lower house and Senate needed to pass a constitutional change.

“The government can now present something closer to the PAN proposal than to the PRD proposal, but they can say they’re offering a moderate position,” Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington, said by telephone before today’s announcement. “They can really say they are representing the interests of the Mexican people.”

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

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net


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