Approach seen helping proposal for Mexican energy reform

A middle-ground approach that leaves details to legislation improves chances the Mexican Congress will pass constitutional amendments reforming the state-centered hydrocarbon regime.

Jose Valera, Mayer Brown partner, global energy, describes the Aug. 12 reform proposal by Mexican President Enrique Pena Nieto like this (OGJ Online, Aug. 13, 2013): “What he does is clean the slate.”

At a Mayer Brown seminar, Valera explained the proposal returns crucial parts of the constitution to language written after nationalization of the oil industry in 1938, deleting restrictions enacted legislatively since then.

If Congress passes Pena Nieto’s proposal, the constitution will make three key points, Valera said:

• Hydrocarbons in place belong to the state.

• The government will grant no concessions—in the strict sense of the term in which resource ownership changes hands.

• Congress should set energy policy and determine terms of participation by investors in oil and gas activity.

Valera said elimination of restrictions in Pena Nieto’s proposal extends beyond exploration and production to those now applying to refining and other oil and gas operations.

Dallas Parker, cohead of Mayer Brown’s Global Oil and Gas Practice, praised the proposal as “a stroke of genius” because of the way it focuses on constitutional reform and leaves details to later legislation.

Constitutional changes require assent by two-thirds votes in both houses of Congress, he explained. Enabling laws require majority votes.

“Details are likely to be a bit more controversial” than basic constitutional reforms, he said.

Other proposals

Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars, pointed out that Pena Nieto’s initiative followed and is less ambitious than a reform proposal by the opposition National Action Party (PAN) (OGJ Online, Aug. 12, 2013). It preceded and is more ambitious than a proposal by liberal Party of the Democratic Revolution (PRD), which would reform state-owned Petroleos Mexicanos but leave the government firmly in control of hydrocarbon activity.

In oil and gas, the proposal by Pena Nieto, who leads the Institutional Revolutionary Party (PRI), would:

• Allow Pemex to enter “profit-sharing” contracts with private and foreign oil firms.

• Cut the government’s claim on Pemex revenue, now so high the company is unprofitable.

• Reorganize Pemex into upstream and downstream divisions.

• Improve Pemex transparency and accountability.

• Set a national content requirement.

The proposal also would restructure the electricity industry.

Together, PRI and PAN control enough votes to assure passage of constitutional reform.

Open questions

Important questions that would be left to secondary legislation, Wood said, are whether participation terms will extend to production-sharing or be limited to profit-sharing. Although the government now is discussing only the latter, Congress could allow production-sharing arrangements under wording of the proposal.

Another question is whether the government would allow non-Mexican oil and gas companies to book reserves, now explicitly prohibited. He said the government understands the need to allow reserves-booking.

Other open questions are rates of taxes and royalties, the national-content percentage, and the entity that would regulate terms of participation.

Wood said use by the Pena Nieto proposal of wording in constitutional provisions adopted in 1940 will help overcome political resistance in a country where “privatization is still a dirty word.” 

Protests organized by PRD representatives opposing the Pena Nieto reforms have fizzled, he added.

If Congress acts according to government plans, he said, it will approve the constitutional changes this fall. The government then would present secondary laws for approval late this year and early in 2014.

The first profit-sharing contracts under a new system could be issued for bidding in the second half of next year, Wood said.

Contact Bob Tippee at bobt@ogjonline.com.

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