BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Mexico Reverses History And Allows Private Capital Into Lucrative Oil Industry

This article is more than 10 years old.

The Mexican Senate approved the most far-reaching oil reform in 75 years on Tuesday, opening up Mexico’s $95 billion-a-year oil industry to private capital. In a building ringed by thousands of security forces, the ruling PRI party and the opposition PAN  voted to pass the politically controversial reform, overriding the strong opposition by the leftist PRD party lawmakers who displayed a gigantic banner in the center of the hall reading: “NO TO PEMEX’S PRIVATIZATION.” Pemex is Mexico’s state-own oil monopoly.

“The historical significance of the reform is enormous. This is a paradigm shift in the Mexico hydrocarbons sector, with a meaningful role for the private sector permitted for the first time since the 1930s,” Duncan Wood, President of  the Woodrow Wilson Center’s Mexico Institute, told me.

With 95 votes in favor and 28 against, the Senate approved a bill allowing domestic and foreign companies to explore and develop oil fields for the first time since President Lázaro Cárdenas expropriated major U.S., British and Dutch oil companies in 1938.

Exxon Mobil Corp. (XOM), Chevron Corp. (CVX), Brazil’s Petrobras, Spain’s Repsol and U.K.’s Petrofac, among others, have shown strong interest on returning to Mexico. Mexican billionaire Carlos Slim Helú is expected to take advantage of the oil opening since he is already involved in the energy sector with presence not only in Mexico but also in Colombia, Argentina and the U.S.

Under the bill, the world’s tenth largest oil producer will permit profit-sharing contracts, production-sharing contracts and licenses (a euphemism for concessions). In profit-sharing contracts, oil firms will be paid in cash; in production-sharing contracts, oil barrels will be divided in a percentage yet-to-be determined between the government and the companies; and in the case of the licenses, major oil companies will take control of oil at the well head, paying royalties and taxes to a newly-created oil holding trust to be run by Mexico’s Central Bank.

Although concessions will continue to be formally forbidden, a last minute move by the sponsors of the bill added the words “among others” after a description of the types of contracts allowed, leaving the door open for offering concessions.  The Woodrow Wilson Center's Wood said that the concept of the “’license’ will operate in a very similar way to a concession."

The legislation does not allow companies to book crude reserves on their balance sheets, but they will be able to report projected earnings from agreed contracts. This will make it easier to obtain project financing.

PRD lawmakers, major opposition figures and most Mexicans believe the overhaul, proposed by President Enrique Peña Nieto last summer as a cornerstone of his ambitious reform agenda, will undermine Mexico’s sovereignty and give up control of the nation’s oil and gas reserves, currently in the hands of the State. Under the new law, Pemex will cease to have the monopoly on exploration, production and refinery of oil and gas.

Leading opposition leader Andrés Manuel López Obrador, who came in second in last year's presidential elections,  has been unable to participate in the daily demonstrations against the reform in Mexico City. He is recovering from a recent heart attack. However, Cuauhtémoc Cárdenas,  a three-time presidential candidate and son of the much revered President Cárdenas, has joined the demonstration to denounce the reform as a “privatization sell-out” of the nation’s strategic resources. He has pledged to continue fighting until it is overturned.

But Wood believes that the opposition is largely irrelevant for two reasons. “First it has been ignored by the government and the two main parties in Congress, the PRI and the PAN. Second, the opposition to reform has largely collapsed in the streets, with very few people demonstrating outside the Senate. As I have said many times before, the Street matters less and less in Mexico,” said Wood.

The full lower House, where the PRI, PAN and the other minor parties have a two-thirds majority, is expected to pass the bill before Sunday.

UPDATE: By a vote of 345 to 134, Mexico’s House of Representatives approved on Wednesday the oil reform bill submitted by the Senate with no changes. The bill, which includes amendments to three articles of the Mexican Constitution, was passed by the Senate the day before.   

Twitter: @DoliaEstevez