Mexican Congress approves oil bill breaking 75-year monopoly


Mexican Congress approves oil bill breaking 75-year monopoly


MEXICO CITY (Bloomberg) -- Mexico will end 75 years of government control of its vast oil reserves after Congress approved the nation’s most significant economic reform since the North American Free Trade Agreement.

The bill secured the required two-thirds majority in a 353-134 vote in Mexico City’s lower house today after challenges to articles were rejected. Before becoming law, the proposal must be ratified by state assemblies, the majority of which are controlled by the party alliance backing the reform.

The bill will change Mexico’s charter to allow companies such as Exxon Mobil and Chevron to develop the largest unexplored crude area after the Arctic Circle. Supporters say the overhaul could propel Mexico into the top five crude exporting countries while opponents say it will funnel resource wealth to foreign investors.

“It’s an extraordinary moment,” Tony Garza, a former U.S. ambassador to Mexico under President George W. Bush and an adviser at law firm White & Case LLP in Mexico City, said by phone. “There’s potential to attract additional investment into shale and ultra-deep waters so that those resources can be exploited in a way that’s ultimately good for the country.”

Producers will be offered production-sharing contracts or licenses where they get to own the pumped oil and will be allowed to log crude reserves for accounting purposes. The reform could increase foreign investment by as much as $15 billion annually and boost potential economic growth by half a percentage point, JPMorgan Chase & Co. said in a Nov. 28 report.

Pena’s Cornerstone

The passage comes one year after President Enrique Pena Nieto took office and returned his Institutional Revolutionary Party, or PRI, to power after a 12-year hiatus.

The 47-year-old leader has called the oil overhaul the cornerstone of his administration, following approval of an education bill to make teachers more accountable for performance, a law to spur increased telecommunications competition and a program to jump-start bank lending.

Since joining a free-trade agreement with the U.S. and Canada in 1994, 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 SAB in mobile-phone service and Comision Federal de Electricidad, or CFE, in electricity.

In October, Congress passed a tax overhaul to reduce the government’s dependence on revenue from Petroleos Mexicanos, the state-owned producer known as Pemex. Proceeds now fund about a third of Mexico’s federal budget.

Job Creation

“It’s the biggest perceived opening of the Mexican economy since Nafta, there’s no question,” James Jones, the U.S. ambassador to Mexico when Nafta took effect, said in reference to the energy bill.

The peso rose for the first time in three days, gaining 0.4% to 12.988 per U.S. dollar at 1:44 p.m. in Mexico City. The nation’s stock market is closed today for a holiday.

The energy overhaul probably will be ratified by a majority of Mexico’s 31 states early next year, with the first contracts based on its model ready by the end of 2014, Alexis Milo, chief economist at Deutsche Bank Securities Inc. in Mexico City, wrote in a research note.

The overhaul “will increase the availability of energy for Mexicans, at more affordable prices, and increase oil and natural gas production,” Eloy Cantu, a PRI lawmaker, said during the bill’s debate. It will “generate greater economic growth that will lead to job creation,” he said.

Before today’s final passage, the bill received approval in general terms in a 354-134 lower-house vote late yesterday and was passed by the Senate two days ago.

Bill’s Opposition

The proposal was supported by the PRI, the National Action Party and the Green Party. The Democratic Revolution Party, or PRD, and smaller allied parties say Mexico should hold a voter referendum on whether to allow private investment in the energy industry and that the debate should have first gone through lower house committees.

PRD lawmakers and allies forced yesterday’s legislative session into a cramped alternate auditorium at the lower house complex in Mexico City after seizing control of the main legislative chamber in a bid to prevent the bill from being debated.

“You’re traitors to your country,” Ricardo Monreal, a Citizens’ Movement lawmaker who opposes the bill, shouted at rival legislators after they assembled at the alternate location.

Stripped Wealth

Antonio Garcia, a PRD lawmaker, stripped down to his underwear during a speech before the lower house today to symbolize the bill stripping the nation of its wealth. Manlio Fabio Beltrones, leader of the PRI in the lower house, said the PRD’s seizure of the chamber was undemocratic and that lawmakers had a right to skip the committee stage and proceed to a full house debate.

“It’s robbery,” Ricardo Monreal Avila from Movimiento Ciudadano said after the vote. “There are going to be serious operational problems. Indigenous communities and places chosen by foreign companies for extraction won’t allow them on their property.”

Mexico is the world’s ninth-largest oil producer, according to the U.S. Energy Information Administration, and possesses the biggest unexplored crude area after the Arctic Circle. Industry analysts and the bill’s authors say the overhaul will reverse eight years of oil output declines for Pemex and increase production to as much as 4 million bpd by 2025.

Falling Production

“With reform there will undoubtedly be a spurt of production growth as Mexico is a very rich hydrocarbon area both onshore and offshore,” Ed Morse, the New York-based head of commodities research at Citigroup Inc., said in a phone interview. “Realistically, it could double the amount of oil that Mexico produces.”

Mexico’s oil production has fallen 25% to 2.5 million bpd from a high of 3.3 million in 2004, according data from Pemex. Should Mexican output reach 4 million bpd by 2025, it could surpass Canada to become the world’s fifth-largest producer, given current production levels.

Natural gas production would almost double to as much as 10.4 Bcf by 2025 from current output of 5.7 Bcf, according to the bill. The initiative could push Mexico to become one of the top-five crude exporting countries in the world and a natural gas exporter, Morse said.

Pena Nieto’s government forecasts the initiative will attract investment and spur production that will boost Mexico’s annual gross domestic product growth by 1 percentage point by 2018. The Finance Ministry projects the economy will expand 1.3% this year, down from 3.9% in each of the past two years and the least since the 2009 recession.

Board Changes

The bill also removes all five representatives of the Pemex workers’ union from the company’s board. Under the new legislation, Pemex’s board will be trimmed to 10 from 15. It will consist of five government members, including the energy minister as board president, and five professional advisers.

Easing restrictions that have barred the largest international oil explorers from drilling in Mexico for three- quarters of a century will help Pemex revive output and crack vast shale formations, said Brian Youngberg, a St. Louis-based analyst at Edward Jones & Co., who covers oil producers including Chevron and Occidental Petroleum Corp.

Opening the oil industry to foreign drillers may unleash a wave of exploration equaling Iraq in recent years, Youngberg said. Mexico’s deep-water prospects in the Gulf of Mexico would be attractive to Exxon and Chevron, while shale tracts would probably lure EOG Resources Inc. and ConocoPhillips, he said in a telephone interview on Dec. 9.

‘Right Direction’

Enticing foreign investment “should jump-start production and get it moving back in the right direction,” he said.

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. Cardenas was from Pena Nieto’s PRI party, which ruled Mexico uninterruptedly for seven decades until 2000.

“The issue of oil is embedded in the Mexican soul, in the Mexican tradition, in Mexican history,” said Jorge Chabat, a political scientist at the Center for Economic Research and Teaching, a Mexico City-based university. Passing the overhaul through Congress “was the mother of all battles for the Mexican government, and the most important success of the Pena Nieto administration so far,” he said in a phone interview.

Paradigm Shift

Oil production has stagnated partly because energy didn’t get the competitive impulse from Nafta that other industries did, said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington.

“What this reform does is it now exposes the Mexican energy sector to national and international competition,” said Wood. “It marks a fundamental paradigm shift in the mentality of the energy sector. Now we get beyond 1938.”

--With assistance from Joe Carroll in Chicago, Brendan Case, Ben Bain, Jonathan Roeder and Carlos Manuel Rodriguez in Mexico City, Jose Enrique Arrioja in New York and Robin Saponar in Buenos Aires.

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