Mexico's lower house passes oil overhaul to end state monopoly


Mexico's  lower house passes oil overhaul to end state monopoly


MEXICO CITY (Bloomberg) -- Mexico’s lower house passed an energy bill that ends Petroleos Mexicanos’s 75-year oil monopoly in a bid to attract foreign investment and boost growth.

Lawmakers approved the bill in general terms in a 354-134 vote late yesterday and continue to discuss minority-party challenges to specific articles. If these are rejected, the initiative will be sent to Mexico’s states, where it’s likely to receive approval from more than half of the legislatures, the threshold for changing the constitution.

The bill, passed by the Senate two days ago, would change Mexico’s charter to permit companies such as Exxon Mobil and Chevron to drill for oil for the first time since 1938. It would allow production sharing and licenses for outside companies that will also be able to log crude reserves for accounting purposes. Supporters say it will boost economic growth, while opponents say it will funnel the nation’s resource wealth to foreign investors.

“This is a very important reform, probably the most important reform of the past 30 years in economic terms,” Jorge Chabat, a political scientist at the Center for Economic Research and Teaching, a Mexico City-based university, said in a phone interview. “We will probably see many private investors coming to Mexico and many jobs generated. This is a big decision, and a big victory for Pena Nieto.”


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

Congress in October also passed a tax overhaul to reduce the government’s dependence on revenue from Pemex, as the state- owned oil company is known, which funds about a third of Mexico’s federal budget.

The peso strengthened 0.4 percent to 12.9839 per U.S. dollar at 3:46 a.m. in Mexico City. The nation’s stock market is closed today for a holiday.

The energy-industry overhaul should be approved by at least 17 of Mexico’s state legislatures 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.

Job Creation

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 debate. It will “generate greater economic growth that will lead to job creation,” he said.

The bill is supported by the PRI, the National Action Party and the Green Party. The Democratic Revolution Party 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 the legislative session into a cramped alternate auditorium at the lower house complex in Mexico City after seizing control of the permanent 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.

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.

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 barrels per day by 2025.

“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, said in a phone interview. “Realistically, it could double the amount of oil that Mexico produces.”

Falling Production

Mexico’s oil production has fallen 25% to 2.5 MMbopd from a high of 3.3 million in 2004, according data from Pemex. Should Mexican output reach 4 MMbopd 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 Removal

The bill also approves the removal of all five representatives of the Pemex workers’ union from the company’s board of directors. Under the new legislation, Pemex’s board would be trimmed to 10 from 15. It would 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.

Opening the oil industry to foreign drillers could unleash a wave of exploration equaling Iraq in recent years, Youngberg said. Mexico’s deepwater prospects in the Gulf of Mexico would be attractive to Exxon and Chevron, while shale tracts would interest 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 uninterrupted for seven decades until 2000.

“The issue of oil is embedded in the Mexican soul, in the Mexican tradition, in Mexican history,” Chabat said. 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.

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