OilVoice - Mexican Government Waters Down Oil Reforms

Mexican Government Waters Down Oil Reforms

Friday, February 19, 2010

The Mexican government has inked an agreement with state-run oil firm Petrpleos Mexicanos (Pemex) to revise rules allowing the firm to award cash-based incentive contracts to private overseas oil companies. The deal marks yet another blow to incumbent President Felipe Calderon's attempts to liberalise Mexico's energy sector.

Further watering down of the reforms is likely to set back Pemex's efforts to take on the more ambitious exploration projects which have been cited as imperative in the bid to stem Mexico's falling oil production rates. News of the agreement comes just as legislators from the Partido Revolucionario Institucional (PRI) have threatened to launch additional legal challenges against energy sector reforms introduced back in 2008 that sought to give Pemex greater financial autonomy from the state and the ability to hire private overseas firms to assist in exploration and development. The 2008 reforms were part of Calderon's push to open up space for foreign direct investment in the state-monopolised energy sector.

The PRI, and other staunch opponents of the reforms, protest that the new rules promulgated by Pemex grant private companies far too much control over operations and perhaps more significantly, allow oil revenues to pass directly into the hands of private firms. The President had argued that the reforms were necessary to encourage overseas oil firms to assist in the country's more challenging upstream operations, including production at the Chicontepec field and exploration of potential deepwater reserves in the Gulf of Mexico. But it seems Calderon's opinion has shifted somewhat, and is backing down in order to avoid a second constitutional challenge to the reform laws.

Calderon was incredibly successful at managing to garner at least lukewarm support for the reforms from the nationalist PRI, whose support was needed to get the bill through the country's senate despite the party being in opposition at the time. However, the balance shifted in July of last year when the PRI, along with its ally the Partido Verde Ecologista de Mexico, gained control of an absolute majority in Mexico's lower parliamentary house. As a result, the PRI quickly reverted to its familiar nationalist position on energy sector reforms once again. Calderon meanwhile continued to push for further liberalisation but PRI stepped up its opposition to the reforms it had previously helped pass through the senate. PRI lead a lawsuit challenging the constitutionality of regulations enacted after the reform law passed.

Going forward, the endemic uncertainty in Mexico's energy sector and an inability to utilise the technical expertise of overseas firms is likely to result in continued declines in Mexico's oil production for now. Mexico has seen its oil production fall south from 3.8 million barrels per day (bpd) in 2003 to just 3.1 million bpd in 2008, according to the BP Statistical Review of World Energy published in June 2009.