Sweeping Mexico energy reform may stumble in Congress

MEXICO CITY (Reuters) - Mexico's incoming government will send a wide-reaching energy reform bill to Congress in the first half of 2013, but it is braced for the prospect of accepting a watered-down version that would likely deter investment by oil majors.

President-elect Enrique Pena Nieto wants to shake up the sector by opening up state oil monopoly Pemex to more private investment, hoping it will help boost production.

But as a feisty debate in Congress over a labor reform bill has shown, Pena Nieto may struggle in a divided Congress to secure a constitutional reform needed to forge ahead with the deep changes he wants to make.

Changing the constitution, which is necessary to allow foreign companies to take a stake in the country's ample hydrocarbon reserves and for Pemex to enter into joint ventures, requires a two-thirds majority vote in Congress.

Sen. David Penchyna, leader of the energy committee in the Mexican Senate and a member of Pena Nieto's Institutional Revolutionary Party, or PRI, has hedged his bets.

"Right now, over there in that drawer I can take out, without exaggerating, six different proposed models, some with constitutional reforms, some without," Penchyna, a senator from Mexico's eastern Hidalgo state and former national PRI spokesman, said in an interview this week.

"Does a constitutional framework give greater certainty? Yes," he added. "But ... the sector is so attractive and profitable even without constitutional changes."

Mexico, the world's No. 7 oil producer, nationalized its energy industry in 1938 and it remains a powerful symbol of national self-sufficiency.

But in recent years, the country has seen its crude output slide by about a quarter since hitting peak production of 3.4 million barrels per day in 2004, even as Pemex has grown into one of the world's largest non-listed companies.

Last month, Pena Nieto repeated the call he made during his campaign to pursue a major energy sector shake-up that boosts the role of profit-seeking energy companies.

"It would be best to do this by constitutional reform," Pena Nieto said in Berlin at a meeting organized by Deutsche Bank, Germany's biggest bank.

While the PRI and its allies could clinch a two-thirds majority if they were to team up with the conservative National Action Party (PAN) of outgoing President Felipe Calderon, tough negotiations with the PAN and expected defections from more nationalistic PRI lawmakers could put it out of reach.

"It's going to be very tricky for Pena Nieto to bring everyone together within the PRI," said Carlos Ramirez, a Mexico analyst at the Eurasia Group in Washington.

"If they don't propose constitutional reform, it will be a major disappointment and Pena Nieto doesn't want to start with a major disappointment," he said.

Pena Nieto will take office on December 1.

Penchyna said that Mexico's energy sector needs annual investment of $80 billion to $100 billion to successfully tap reserves, and that it is "simply unfeasible" for the government to alone provide the funds.

That is in stark contrast to some $363 million in oil field investments through 2014 that Pemex data shows private contractors have committed.

"The oil majors won't be coming unless there's a constitutional change," said Luis Miguel Labardini, partner with Mexico City-based energy consultancy Marcos and Associates.

"It seems what Penchyna is implying is that they will try to go as far as they can without making changes to the constitution," he added.

Labardini and other analysts note that initiatives like new contracting schemes in refining and petrochemicals could attract a modest increase in private investment with no need to modify the constitution.

Jeremy Martin, director of the Energy Program at the Institute of the Americas at the University of California-San Diego, sees trouble ahead for Pena Nieto's team and its quest to boost oil production by luring new private revenue streams.

"I think they're going to feel some heat from people who had higher expectations," he said.

(Additional reporting by Miguel Angel Gutierrez; Editing by Simon Gardner and Jim Marshall)

Source: http://news.yahoo.com/sweeping-mexico-energy-reform-may-stumble-congress-230017291--finance.html

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