Mexican Senate approves oil reform

December 11, 2013 - 1:05 PM

MEXICO CITY (AP) — Mexico's Senate on Wednesday approved the most dramatic oil reform in decades, moving the country closer to opening its beleaguered, state-run sector to private companies and investment.

The Senate voted overwhelmingly in favor of allowing the government to grant contracts and licenses for exploration and extraction of oil and gas to multinational firms, something currently prohibited under Mexico's constitution.

Contracts could be made directly with the state rather than issued by the state-run oil company, Petroleos Mexicanos, ending its monopoly on Mexican oil. The reform allows contracts for profit- and production-sharing, as well as licenses, in which companies pay royalties and taxes to the Mexican government for the right to explore and drill.

The reform gives private companies the ability to post expected benefits in their financial statements, as long as they specify in their contracts that all oil and gas they find in the ground belongs to Mexico, according to articles expanding on the reform.

The constitution would continue to prohibit oil concessions, considered the most liberal kind of access by private oil companies.

The bill still must be approved by the lower house of Congress and 17 of Mexico's 31 states and Federal District. It's the crowning piece of President Enrique Pena Nieto's first year of reforms, which have also targeted education, the tax system and telecommunications.

But energy reform is considered most crucial to the overall economy and the remaining five years of Pena Nieto's presidency.

Opponents said the proposal outlines a system that has been proven a "total failure," while analysts consider it an unprecedented move in opening the door to the private investment Mexico needs to save its oil sector. Mexican oil production has been declining despite increased investment, and Pemex has not had the wherewithal to date to exploit the country's vast deep-water or shale oil and gas reserves.

The measures in the Senate proposal have been prohibited in the decades since 1938, when then-President Lazaro Cardenas nationalized the oil industry, a step written into the constitution to protect the country from possible profiteering by foreign companies.

The reform was hashed out by Pena Nieto's ruling Institutional Revolutionary Party, or PRI, with the conservative opposition National Action Party, which wants an oil reform as open as possible to investment and partnership possibilities.

The PRI has been more moderate, given the leftist opposition that has drawn thousands in street protests.

But the mobilization so far hasn't been as great as in 2008, when former presidential candidate Andres Manuel Lopez Obrador all but killed the congressional attempt to open the oil industry to greater private investment. Lopez Obrador was sidelined by a heart attack last week, but protesters have still shown up every day since Wednesday to oppose the oil reform.

While oil production has increased substantially in the U.S. and Canada, Mexico's has fallen 25 percent since 2004, and proven reserves are down 41 percent since 2001, the Mexican Institute on Competitiveness says.