Mexico proposes private firms in oil industry

MEXICO CITY — Mexican President Enrique Pena Nieto is making the most daring gamble yet of his 8-month-old presidency with a proposal to lift a decades-old ban on private companies investing in the state-run oil industry, a cornerstone of Mexico's national pride that's seen production plummet in recent decades.

The reform outlined yesterday proposes profit-sharing with private companies. That is currently prohibited by the constitution, which would have to be changed.

The leftist Democratic Revolution Party says it won't support constitutional changes but Pena Nieto's ruling Institutional Revolutionary Party and the conservative National Action Party have enough votes combined to secure the two-thirds majority need in the Senate to pass the reform. They could do the same with the support of a small, allied party in the lower Chamber of Deputies.

The measure then would have to be approved in 17 of the country's 32 state legislatures.

"Mexicans will remain the sole beneficiaries of the country's oil profits," Pena Nieto said as he presented his proposed reform. "It's time to use all of our energy resources to move forward and transform Mexico."

Pena Nieto's administration offered virtually no details about how it envisioned private participation in the national oil company, Pemex, instead emphasizing an accompanying measure that would allow private companies to produce and sell electricity for home and business use. Pena Nieto said that would lower consumer prices that are far higher than in many other countries.

Pena Nieto said private companies would be able to bid for profit-sharing contracts to explore and extract oil and apply for permits for refining and transportation.

"The private sector will be able to contribute and this will lead to lower prices," said Gerardo Gutierrez Candiani, head of the private Business Coordinating Council. "It's a historic plan that will allow us to get to where investment is going where it should be. That will definitely be reflected in Mexicans' pocketbooks."

Pushing through the reform without the left's support comes with big political costs: Polls show at least 65 percent of Mexicans oppose any private investment in the oil industry, which was nationalized in 1938.

When former President Felipe Calderon tried a similar overhaul in 2008, thousands marched in the streets and Democratic Revolution legislators padlocked the doors of Congress, camping out in the chambers in protest. The watered-down bill that resulted failed to solve Pemex's underlying problems of inefficiency and declining production.

The proposal also threatened to split the Pact for Mexico, the de facto alliance of all three major parties that Pena Nieto is depending on to get major reforms passed.

"This proposal is not part of the pact," said Jesus Zambrano, head of the leftist Democratic Revolution Party.

According to the president's supporters, doing nothing is not an option.

Mexico's oil fields are drying up and Pemex lacks the equipment to explore for new reserves in deep water or to extract shale gas. Production has plunged about 25 percent over the last decade, and a country that was once a significant oil power could become a net energy importer in a few years unless new production is brought online.

Cesar Camacho, the national leader of Pena Nieto's party, said over the weekend that "it isn't much use saying that the country's natural resources belong to Mexicans, if they can't make use of them, because the oil is in the ground and we can't get at it."

The passion over oil arises from one of Mexico's proudest moments. President Lazaro Cardenas nationalized the industry in 1938, kicking out 17 foreign oil companies that Mexicans believe had been looting the country's wealth.

Seventy-five years later, most Mexicans still bristle at any hint of involvement by private companies, especially foreigners, even if Pemex itself is encrusted with the barnacles of a powerful and bloated union, inefficiency, theft, corruption and outdated technology.

Pena Nieto repeatedly has assured Mexicans that his plan will not privatize the industry. Instead, it would allow private firms to share in a percentage of the oil they find, or of revenue from it. At present, the law limits private companies to straight contractual work with incentive bonuses.

Pemex already allows private contractors to do tasks such as operate drills and wells, perform maintenance and provide supplies. But those "integrated contracts" have proven so unappealing to investors that no one bid on half the oil field blocks near Mexico's Gulf Coast that Pemex put up for auction in July.

Backers of the overhaul say there is global competition for expertise and sophisticated equipment, such as the self-propelled deep-water drilling platforms that Mexico needs to unlock its reserves, and they will be sent only to the most profitable fields.

Mexico produces about 2.5 million barrels a day, Pena Nieto said, placing the country among the world's top 10 producers, according to the US Energy Information Administration.

Mexico sends 85 percent of its oil exports to the United States and regularly ranks among the top foreign sources of oil used in the US

Pena Nieto said the reform would boost Pemex production to 3 million a day by 2018 and 3.5 million by 2025.

There is indeed something about oil deep in the national psyche. In a 2012 poll of 2,400 Mexicans by the Center for Economic Research and Teaching, a Mexico City-based think tank, 77 percent said foreign investment in general benefited the country, but 65 percent opposed any foreign investment in the oil industry. The poll had a margin of error of two percentage points.