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Mexican Local Content Rules Could Complicate Oil Investment

The Mexican government is considering implementing local content rules for oil and gas exploration in an effort to provide benefits to Mexican companies. According to Reuters, however, the rules risk deterring international investment in Mexican oil fields. Mexico’s landmark constitutional reform that opened up its oil sector after 75 years of being controlled by a state-owned monopoly has attracted interest from several international oil companies.

Now, the government is beginning to add more specific rules as it seeks to setup a governance structure over the newly opened oil sector. Mexican lawmakers are considering adding local content rules that ensure a percentage of goods and services are purchased from Mexican companies. Members of the ruling Institutional Revolutionary Party (PRI) proposed a requirement that Petroleos Mexicanos (Pemex) purchase 100% of goods and services from Mexican companies for onshore development, with no requirements for offshore. The conservative National Action Party (PAN) preferred a case-by-base approach that would be written into individual contracts, rather than blanket requirements.  A powerful Mexican industry lobby is arguing for local content rules of 45% to 60%.

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Yet local content rules are highly controversial. In Brazil, strong local content rules at around 55% have been blamed as a reason for significantly raising the cost of development, and thereby deterring investment. "The national content requirements in Brazil have easily delayed the overall development by a factor of several years and increased costs," said John Padilla, oil analyst with energy consulting firm IPD Latin America, as reported by Reuters.

Mexican President Enrique Pena Nieto aggressively pushed energy reform in order to halt the decline in oil production, which has dropped by a quarter over the last decade. President Pena Nieto argues that the investment from international oil companies could help raise production and spur economic growth of around 6% per year. However, according to Quartz, Pemex is hoping to retain control of 83% of Mexico’s proven and probable oil reserves. It is unclear what affect that would have on international investment if Pemex gets what it wants.

By Charles Kennedy of Oilprice.com



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