Mexico Opens Oil Sector To Private Investment, Ending 75-Year State Monopoly

August 13, 2013Mexicoby EW News Desk Team

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Mexican President Enrique Pena Nieto proposed on Monday reforms that would open up the country’s oil sector to foreign investors for the first time in 75 years, reforms that could spur economic growth and spotlight Mexico as a rising power as other big emerging markets struggle.

The reforms would allow profit-sharing contracts with private companies that have exploration know-how in deep water and other difficult areas that the state-owned oil company, Petroleos Mexicanos (Pemex), does not have. Such contracts are currently prohibited by the constitution, which would have to be changed.

Profit-sharing is similar to arrangements offered in Ecuador, Iran, Iraq and Malaysia, said Mexican officials, but Pena Nieto's administration offered no details about how it envisioned private participation.

Speaking to reporters, Energy Secretary Pedro Joaquin Coldwell also declined to specify the maximum percentage of profits that could be shared. But officials stressed that Pemex, a key source of government revenues and a crucial driver of Latin America’s second-largest economy, would remain in state hands.

“Mexico faces a historic opportunity,” Pena Nieto said in a televised address on Monday. “This profound reform can lift the standards of living for all Mexicans ... It is time to use all of our energy resources to move forward and transform Mexico”.

Analysts say the liberalisation of the oil sector could double foreign investment in Mexico, giving the economy the biggest boost since the 1994 North American Free Trade Agreement, spur economic growth by attracting billions of dollars in investment and improve competitiveness by lowering energy prices for manufacturers.

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According to figures from OPEC, Mexico is the world's tenth biggest producer of crude although production has fallen by 25 percent since hitting a peak of 3.4 million barrels per day in 2004.

But Pena Nieto predicts oil production could now grow from 2.5 million barrels a day last year to 3.0 million in 2018 and 3.5 million by 2025.

Mexico sits on reserves estimated at 115 billion barrels of oil equivalent, comparable to Kuwait’s. Over half its reserves are non-conventionals, including shale gas, and Pemex estimates that with the right investment and technology about 27 billion barrels of deep sea crude could be added to the nation’s proven reserves.

The proposals are likely to get congressional approval and would mark the largest private sector opening in decades for Mexico's energy industry, which was nationalised in 1938 and dominated by Pemex. Furthermore, Mexico has one of the world’s most restrictive energy laws, where even Cuban laws are perceived as more liberal.

"If Mexico passes this bill, and we have peace in the streets, then the country will make an important leap forward," said Enrique Krauze, a prominent Mexican historian.

Related: Mexico’s Economic Risks: Will Ending Cartel Violence Prove An Impossible Task?

Foreign oil companies, including BP and Exxon Mobil, are waiting to see the details of the reforms to see exactly what investments will be allowed. Chevron said it welcomed "any decision by the government and people of Mexico to provide new opportunities for investments" but added it had not reviewed the proposal.

But oil majors, struggling to find big new oil fields, are likely to find appeal in the relatively familiar geology and operating conditions of Mexico versus the Arctic or some politically unstable regions of Africa and the Middle East, particularly those active on the U.S. side of the Gulf of Mexico.

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