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Mexican president might push oil-sector revisions past skeptical public

Facing a deeply skeptical nation, President Enrique Pena Nieto will seek in a matter of weeks to usher through a major revision of Mexican energy law that may either turbo-charge the economy or hobble the nation if it falls to defeat or is watered down.

Some experts predict a grand – but quick – battle.

In a major gamble, Pena Nieto is unlikely to lead a campaign to persuade a doubtful public of the wisdom of the revision’s primary goal: letting foreign entities explore and produce oil and gas in association with the sprawling, inefficient state oil giant, Petroleos Mexicanos.

Whip masters in his ruling party appear ready to limit public debate and ramrod the issue through Congress, and then through state legislatures, allowing the constitution to be amended rapidly to permit the investment.

Suggesting that foreigners be allowed to enter the oil sector has long been a third rail of politics in this nationalistic country.

“The debate is going to be very short,” predicted Tania Ortiz Mena, a vice president at Infraestructura Energetica Nova SAB, a natural gas infrastructure company. “Nobody wants to drag this into a one-year discussion.”

The proposed revision to the constitution comes at what many here think is a watershed moment for Mexico’s most important state company. The central government finances a third of its expenses from oil revenues and Pemex, as the state oil company is commonly known, provides work for 140,000 Mexicans.

But Pemex’s crude oil production has dropped steadily for the last decade, and the state’s demands for its revenues have left little capital available for exploration and production. Analysts warn that the nation might become a net importer of oil by 2020 if foreign companies aren’t allowed to bring in cash and expertise.

Such an idea, however, runs counter to the nationalistic ideals that are drummed into every Mexican schoolchild. For Mexicans, the modern era begins with the 1938 oil nationalization, when President Lazaro Cardenas kicked out U.S., British and Dutch oil companies. Since then, the national DNA has been programmed to see energy as a national treasure.

“We have these dogmas embedded in our hardware: The oil belongs to all of us Mexicans. The petroleum industry is untouchable. It’s very sensitive. As soon as the issue comes up, many people get goose bumps,” Cesar Camacho, the president of the ruling Institutional Revolutionary Party, told foreign correspondents earlier this month.

By a wide margin, Mexicans think it’s taboo to open up Pemex. A nationwide opinion poll released in June by the Center for Research and Economic Teaching in Mexico City found that 65 percent of Mexicans oppose privatizing Pemex.

The government has kept almost mum about its energy plans, a sign that it wants to roll out the proposal, perhaps in early September, and move it through Congress quickly, despite public opposition.

“You’ve got to pass the constitutional reforms in 30 days. If you debate them longer, it grows complicated,” said Jesus Rodriguez Davalos, a lawyer with extensive contacts in the government and the energy industry. Rodriguez said he expected Pena Nieto to present “a very aggressive, audacious proposal.”

In one of his only remarks on the issue recently, Pena Nieto told the Financial Times in mid-June that his proposal would be “transformational.” Concurrently, unnamed high-level Mexican officials told The Wall Street Journal that the changes would allow foreign energy companies to enter 25-year profit-sharing deals and joint ventures with Pemex. They also would allow foreign companies to explore for oil in Mexico and count the oil they found as company assets.

Mexico sits atop nearly 14 billion barrels of proven crude reserves, much of it in deep water in the Gulf of Mexico. It possesses what the U.S. Energy Information Administration says may be the world’s sixth-largest reserves of shale gas, the natural gas that’s extracted by the controversial “fracking” technology.

But Pemex has neither the capital nor the technology to boost extraction rates as fast as the government wants. Opening the energy sector to foreign investment, the government says, could increase production and add as much as 2 percentage points to an economic growth rate that now hovers around 3 percent.

“It is evident that Pemex, a company that all of us Mexicans are proud of, is not at its best moment. It needs major surgery,” Camacho said.

A former U.S. ambassador to Mexico, Antonio Garza, warned last week in a newsletter that Pena Nieto risks angering the public if his government doesn’t employ transparency to “avoid appearing to conduct business behind closed doors.”

He called on the president to recognize the “need for the administration to make a clear case for energy reform first, and foremost, to the Mexican people.”

Both the domestic political “blowback” from the leak to The Wall Street Journal and the abrupt street protests that have rocked Brazil over the past month, voicing discontent despite rising standards of living, raise red flags over Mexico’s energy restructuring process, Garza noted.

But it appears that Pena Nieto and his party are willing to take those risks.

"Do they need to win a popularity contest right now? Do we have any elections? Probably not. Or do they want to make certain decisions that can have profound changes and then start showing results?” Ortiz Mena asked. “I don’t have an answer for that."

A victim of the drive to allow foreign investment in the oil sector may be the Pact for Mexico, an alliance of three political parties that Pena Nieto stitched together when he came to office Dec. 1. So far, the pact has obtained sweeping revisions in the education system and in the way telecommunications are regulated.

The energy revision, though, is malodorous to one party in the pact. The president of the left-leaning Party of the Democratic Revolution, Jesus Zambrano, decried last week what he called “privatization fever in energy,” and a fellow party leader, former Mexico City Mayor Marcelo Ebrard, demanded a national referendum before any change to energy policy.

The ruling party still might be able to reach the two-thirds majority in Congress that it needs to amend the constitution with the backing of the other party to the pact, the center-right National Action Party. Last week, its leaders called for even more liberal energy revisions than those the ruling party is rumored to want.

“If we look at other global successes, such as Petrobras in Brazil, Statoil in Norway or the case of Ecopetrol in Colombia, we see that none of them does everything alone like we ask Pemex to do,” said Ricardo Anaya, a National Action Party legislator.

CORRECTION: An earlier version of this story incorrectly said that foreign companies would be allowed to invest in Pemex.

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