Mexican Senators Debate Offering Profit Sharing Contracts Similar to Brazil

On Tuesday, Mexican senators began to discuss a bill that would effectively end a seventy year monopoly of the country’s oil industry. The Partido Revolucionario Institucional (PRI) of President Enrique Pena Nieto, along with the Partido Acción Nacional (PAN) have put together a proposal to offer a profit sharing model similar to those offered in Brazil.

Under the proposed model, companies would be given greater control over the riskier fields, making it easier to attract investment and finally bring an end to the decade-long fall in output from Mexico’s $95 billion oil industry. By offering shares in concessions or licenses Mexico can gain greater attention from foreign energy investors.

Pena Nieto’s government believes that a ‘market-friendly’ reform could increase the level of foreign investment by as much as $15 billion a year, increasing economic growth by as much as one percentage point by 2018.

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Pemex is about to hit a ninth straight year of output declines after production at the Cantarell oil field, once the third largest in the world, has fallen by more than 80 percent over the last decade. Total production for Pemex is currently down to 2.5 million barrels a day, from 3.3 million barrels a day in 2004, forcing the country to import 34% of its oil needs.

Emilio Lozoya, the Chief Executive Officer at Pemex, said that “investment in exploration has multiplied dramatically, though production has fallen. To increase production in Mexico, more investment is required. One way to do this is to share the investment between other companies and Pemex.”

Lozoya stated that Mexico is on track to become a net oil importer, and that without a reform to attract investment, Pemex would need to spend around $1 trillion over the next 50 years in order to develop new reserves. This would require an annual expenditure of $62 billion, up from the current $25 billion.

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Gabriel Lozan, the chief economist for Mexico at JP Morgan, told Bloomberg that since the Partido de la Revolución Democrática (PRD) opted out of a political alliance that was negotiating the energy market reform, there is more chance of an investor friendly draft being created, claiming that “there is room for discussing and submitting a more investor-friendly proposal, something that is more similar to a license type of agreement.”

By. Joao Peixe of Oilprice.com