Mexico Senate Approves Energy Bill Decried as Treason

Jul 24, 2014 11:35 am ET

(Salinas corrects statement to remove reference to energy ministry in penultimate paragraph of story published July 18.)

July 18 (Bloomberg) -- Mexico’s Senate approved additional legislation to help open the country’s energy industry to private companies for the first time in more than seven decades, a move decried as treasonous by opponents.

The Senate voted 91 to 27 today to approve a bill that sets a framework for oil and national gas contracts for companies entering the country such as Chevron Corp. and Exxon Mobil Corp. The landmark legislation opens the state-run crude monopoly held by Petroleos Mexicanos since 1938. Three other proposals that will open the electricity industry and set guidelines for state- owned companies will be discussed today and over the weekend. A final vote after all challenges to the four bills have been discussed may occur on July 21, Senator David Penchyna said.

The bills, which require approval from the lower house and President Enrique Pena Nieto, add contract specifications to an energy law approved last year and trumpeted by the government as the biggest economic overhaul since the North American Free- Trade Agreement. The energy law, which modified three constitutional amendments, will allow outside oil companies to help produce an estimated 113 billion barrels of untapped Mexican crude.

Mexico “seems to be doing everything right and seems to be setting up an attractive regime” for international investors, Dallas Parker, an energy analyst and partner at law firm Mayer Brown, said in a telephone interview from Houston.

Production Sharing

Investors will be keeping a close eye on how the oil tax laws, which will determine the financial terms for licenses, profit-sharing and production-sharing contracts with oil companies, will be drafted in the lower house, he said.

“There are a lot of emerging oil and gas spots in the world and Mexico is certainly one of the most attractive, if not the most attractive,” Parker said. “But this is a global business operation and the fiscal terms have to be attractive financially.”

Debate on the four bills, which encompass 4,249 pages detailing new rules for the energy and electricity industries, began yesterday. Opponents, primarily from the Democratic Revolution Party, or PRD, denounced the move as treason.

Empty Heart

“In what empty heart, without soul, could we give away our national riches?” Senator Fernando Enrique Mayans, a PRD member, said from the central podium of the Senate floor. “There are no Mexicans with guts that are defending our country here in the Senate.”

Mayans compared the energy law to the 1999 Mexican movie “La Ley de Herodes.” The movie tells the story of a local politician whose good intentions become corrupted, and openly criticized the ruling Institutional Revolutionary Party, or PRI.

“You saw what happened in the movie,” Mayans yelled. “A Mexican opens the door for a gringo to enter the home to install a light and he ended up running off with his wife.”

Several dozen police guarded barricades outside the Senate on Mexico City’s Paseo de la Reforma thoroughfare. No protesters appeared as of midday.

The legislation creates a requirement that private companies source at least 25 percent of their supplies locally by 2015. The threshold will increase to 35 percent by 2025. It also establishes a minimum 20 percent participation in cross- border fields for Pemex, as the state-owned company is known. Senator Carlos Romero Deschamps, the Pemex union chief, declined to vote on the initial legislation.

$50 Billion

“The approval of this package of secondary laws will boost private investment to as much as $50 billion in 2020,” from $10 billion to $12 billion in 2016, Gabriel Casillas, chief economist at Grupo Financiero Banorte SAB, said in a July 16 research note. “The approval and implementation of the energy reform could add 1 percentage point to the gross domestic product in the long term.”

Mexico’s National Hydrocarbons Commission, or CNH, will have a larger role in the implementation of the energy laws and will grant exploration rights to companies and oversee the drilling of exploratory wells, according to the legislation. Giving the CNH more authority to oversee oil and gas contracts will improve transparency as the industry opens, according to Gabriel Salinas, an energy lawyer at Houston-based Mayer Brown.

“The general spirit of the revisions is providing for a more agile regimen with less bottlenecks and better work between agencies,” Salinas said in a telephone interview from Houston.

--With assistance from Nacha Cattan and Brendan Case in Mexico City.