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Mexican Congress passes radical shake-up of oil industry

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[December 13, 2013]  By Dave Graham and Adriana Barrera

MEXICO CITY (Reuters)  Mexico's Congress on Thursday overwhelmingly voted to open up the country's oil and gas sector to private investment in the biggest overhaul of the industry since it was nationalized in 1938.

After a whirlwind final passage through Congress, President Enrique Pena Nieto's bill will offer companies the chance to operate oil wells, commercialize crude and partner with state oil giant Pemex as Mexico seeks to revive flagging output.

It aims to entice oil majors such as Exxon Mobil Corp <XOM.N> and BP Plc <BP.L> with production- and profit-sharing, service contracts and licenses.

Mexico's two biggest parties faced down accusations they were betraying their homeland to foreign oil firms, and approved a series of changes to the constitution that could radically transform the fortunes of the world's No. 10 oil producer.

At more than 10 billion barrels, Mexico has Latin America's third-largest proven oil reserves after Venezuela and Brazil. It also has nearly 30 billion barrels of prospective resources in territorial deep waters of the Gulf of Mexico.

"The energy reform marks a fundamental transformation that will allow us to increase our energy sovereignty and self sufficiency in Mexico," Pena Nieto said in a Tweet after the reform's approval.

"It will also drive productivity, economic growth and job creation in Mexico," he added.

Pemex has struggled to exploit Mexico's oil reserves due to a lack of investment, high taxes and persistent allegations of corruption. Mexico's crude output peaked at 3.4 million barrels per day in 2004, and has fallen by more than a quarter.


Proponents of the reform said Mexico would fall further behind its peers without finding new investors to help exploit its deep water and subterranean oil and shale reserves.

"Today, the name of the game is greater economic competitiveness," Javier Trevino, a lawmaker in the ruling Institutional Revolutionary Party (PRI) on the lower house energy committee, said in a debate that went through the night.

U.S. oil giant Exxon sees an opening up of Mexico's oil sector as a "win-win".

"To put it bluntly, we believe that would be very good for the people of Mexico," William Colton, the company's vice president of corporate strategic planning, told reporters on a webcast from Washington before the reform's final approval.

Experts said the world's leading oil companies will need to see final investment terms and new regulations before deciding whether to do business in the country.

"We have to keep an eye on those," Tim Cutt, head of petroleum at resources giant BHP Billiton <BHP.AX>, said of Mexico's reforms. Both the Eagle Ford shale and Permian Basin in Texas as well as the U.S. Gulf of Mexico abut Mexican borders.

END OF AN ERA?

Pena Nieto first presented his bill in August, and after weeks of negotiations with the center-right opposition National Action Party (PAN), the PRI unveiled a revised plan at the weekend in the Senate that was far more radical.

The new draft bore the stamp of the PAN, which had urged the government to offer companies full concessions at a time the president was only talking about profit-sharing contracts.

The revised bill did not go that far, but it opened up the prospect of production-sharing contracts and licenses, and both parties were keen to pass it this week.

Barely 24 hours had elapsed since Senate approval when PAN and PRI lower house deputies signed off on the reform. They packed a smaller chamber of the house after a group of left-wing legislators of the Party of the Democratic Revolution (PRD) tried to derail the reform by blocking access to the main floor.

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Supported by the Green Party, a group allied to the PRI, lawmakers from the three parties gave final approval to the bill with 353 votes in favor and 134 against after rejecting a long list of objections to the bill argued by left-wing opponents.

Critics lamented the energy reform as an act of submission and the end of an era, tapping into the pride many Mexicans still feel over the 1938 move by then-President Lazaro Cardenas to expropriate foreign oil companies' assets and create Pemex.

"Today is a black day," said Ricardo Monreal, a trenchant critic of the government and leader of the leftist Citizens' Movement in the lower house. "More poverty for everyone, which has been the rule for Mexican privatizations."

One leftist lawmaker stripped down to his underwear on the podium during the overnight debate, accusing the backers of the reform of leaving Mexico naked without its oil wealth.

OPENING THE DOOR

The floor of the lower house started to debate the bill just a few hours after it arrived from the Senate. In a swipe against the PRD and other left-wing lawmakers trying to derail the reform, legislators from the PRI, PAN and Green Party voted to bypass the committees usually consulted.

Following congressional approval, the constitutional changes must be ratified by a majority of the 32 regional assemblies in Mexico, most of which the PRI and the PAN control.

However, experts say the shake-up is some time away from yielding fruit. The government must still draw up secondary legislation to implement the reform.

"They removed the lock from the door, but do you want to go through?" said Alberto Ramos, an economist at Goldman Sachs.

Seeking to lure billions of dollars to Mexico, the reform formally puts an end to Pemex's monopoly in oil and gas and will offer companies the right to be paid in barrels of oil.

That is a big departure from the service contracts now on offer, in which firms are paid a fee and can recover costs.

But how lucrative the new regime will be is not yet clear.

"They still have to determine royalty rates and tax structures and national content requirements," said Carlos Sole, an energy specialist with law firm Baker Botts in Houston.

"All that will determine the scope of potential investment," he added. "But given Mexico's market has been mostly closed to investment for so long, this is really a transformative change. The lion's share of the excitement is on the upstream side."

(Additional reporting by Gabriel Stargardter, Miguel Gutierrez, Ana Isabel Martinez, Tomas Sarmiento, Lizbeth Diaz, David Alire Garcia and Michael O'Boyle in Mexico City and Terry Wade, Anna Driver and Kristen Hays in Houston; editing by Simon Gardner, Alden Bentley, Andrew Hay and David Gregorio)

[ 2013 Thomson Reuters. All rights reserved.]

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