Rifts deepen over Mexican energy reform
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Emerging Markets

Rifts deepen over Mexican energy reform

Senators raise objections as Calderon plan goes to congress

A reform of Mexico’s oil sector proposed last week by president Felipe Calderon faces stiff political opposition. Calderon said last week that his National Action Party (PAN) would restructure the rules of the game for Pemex, the national oil producer, so that the company can step up and diversify exploration to include deep-water searches, maintain its production levels in the medium term, increase proven reserves and improve productivity.

PAN senators are optimistic the reform could be presented and debated this month, before congress goes on recess from May 1 to September 1.

But forging a consensus is going to be a big challenge. Resistance is strong, and a reform is by no means assured. President Calderon’s PAN party holds a minority of votes, and must obtain the entire bloc of opposition Institutional Revolutionary Party (PRI) votes to secure passage of reform measures.

The PRI is, up to now, divided on the issue, but even its more reformist leaders say the party would not approve a change in the constitution. Mexico’s leftist Party of the Democratic Revolution (PRD) holds enough votes, about 30% of congress, to block a reform. Former PRD presidential candidate Andres Manuel Lopez Obrador promises to take the resistance to the streets, blocking highways, congressional offices and airports.

Although the PRD is evenly split between the Lopez Obrador forces and more moderate factions, “no one in the PRD will vote in favour of the reform,” PRD Senator Graco Ramirez told Emerging Markets in a telephone interview Monday.

PRD will block performance contracts and any opening to private investment, Ramirez said. “We believe Pemex has enough resources [to develop], they need to be taken out from under the control of the executive and the finance ministry,” the opposition senator said.

Performance contracts are out of the question for the PRD, because “it is the same as paying [a service company] with oil,” Ramirez said. PAN Senator Ruben Camarillo, head of Senate Energy Committee, told Emerging Markets in a telephone interview: “We want the law to be discussed in this session, but more important is that the law respond to the (government’s) diagnosis.”

The government proposal is expected to create some flexibility that would give Pemex more autonomy in control of its revenues, and possibly create mechanisms that would seek to streamline the Pemex bureaucracy and combat corruption. However, industry desires for an opening to risk contracts, joint ventures and strategic alliances for deep-water drilling will go unrequited.

The government-backed draft legislation to be presented soon is not expected to change the constitution which prohibits private investment in Pemex drilling or selling operations, PAN senators say. “No one in their right mind is thinking of privatizing Pemex. That issue is not on the table,” says PAN’S Camarillo.

A sweeping “diagnostic” report released by the energy secretary on March 31 underscores the urgency of the reform: Mexico’s proven reserves would fuel domestic demand for only 9.2 years. Production has been declining since 2005, causing Mexico to forgo oil revenues totaling $10 billion over the past three years, the report says.

Oil distribution and refining might be opened to private investment under a reform, and the legislation could include performance contracts to allow Pemex to hire oil companies for services like drilling and pay them a premium for good results.

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