Mexico’s congress passes key energy reform amid protests (updated)

UPDATES: Mexico’s Congress on Thursday approved changes to the country’s oil sector designed to halt rapidly falling production and ensure Mexico’s oil self-sufficiency in the medium term. The changes, which follow seven months of fierce debate and must now be approved by Congress’s lower house, will give greater financial autonomy and more decision-making flexibility to Pemex, the country’s state oil monopoly. The company’s 11-person board of directors will also gain four independent members, potentially improving transparency and corporate governance. However, the reform places strict limits on the role of private companies, and rules out the possibility of production-sharing contracts, which are favoured by the world’s leading oil companies but prohibited by Mexico’s constitution. The reform also bans the private sector from building and owning refineries or participating in areas of oil transportation – in contrast to the government’s original proposal. Even so, Agustín Carstens, Mexico’s finance minister, on Thursday told the FT that the reform ”should, in principle, be enough” to steady the country’s rapidly falling oil production. This week, Pemex reported that total production of crude in September fell almost 10 per cent compared with 12 months before. The dramatic fall reflects both the sharp decline of the Cantarell oil complex, which for years accounted for about two-thirds of Mexico’s total production, as well as the lack of new discoveries. The fall is particularly worrying for the centre-right administration of President Felipe Calderón because oil revenue accounts for about 40 per cent of total federal-government income. Mr Carstens also said that the reform would make Pemex into a more efficient company. ”By making Pemex more flexible, we will get a much more effective and a much stronger company . . . it is an important step,” he said. On Thursday, legislators also appeared optimistic about the changes. Rubén Camarrillo, senator and a member of the ruling centre-right National Action party, said of the reform: ”Everyone wins.” Experts seemed less convinced, however. David Shields, a Mexico city-based oil analyst, recognised that the reform potentially improved conditions for private companies because it introduced the idea of awarding bonuses for finishing projects ahead of time or for passing on technology to Pemex. ”There is some attempt to give contractors a better deal and get them more involved in the projects,” he said. ”That should have some positive effects in the long term.” Beyond that, however, there was little to get excited about. ”The bonuses are just about the only thing you would find in terms of things that make Mexico more attractive for a private oil company,” he said. More important, perhaps, Mr Shields said that such contractual changes would unlikely be enough to increase Mexico’s production in the long term – or even stabilise it in the medium term.  George Baker, who runs energia.com, a Houston-based oil consultancy, agreed. ”The law itself will not ensure increased production but at least it sets in place the possibility of better decision-making in the future,” he said.

  Riot police surrounded the Mexican Congress on Thursday as the Senate prepared to take up a controversial energy reform bill. The measure would allow more private and foreign investment in the state-run oil monopoly Petroleos Mexicanos, or Pemex, to help boost sagging production by Mexico's oil industry, currently the third-largest supplier to the U.S.  President Felipe Calderon says the plan will help Pemex tackle deep-water drilling.  But analysts say it will do little to halt the company's slide and leftist protesters argue it is a veiled attempt to privatize the industry, nationalized in 1938.
Former presidential candidate Andres Manuel Lopez Obrador, the most outspoken critic, mobilized supporters for massive street protests Thursday to try to stop approval of the plan. But senators were expected to vote in favor of a watered-down version of Calderon's original proposal.  ...Mexico sends more than 1 million barrels a month to the U.S., making it the third-largest source of oil behind Canada and Saudi Arabia. Oil revenues make up about 40 percent of Mexico's budget.