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Mexico unveils plan to open energy sector to competition

President Enrique Pena Nieto offered a proposal Monday to open Mexico’s oil and gas industry to foreign investment.

He began selling it to a reluctant nation by saying the move would lower electricity costs, create jobs and revive Mexico’s status as a global energy power.

Flanked by much of his Cabinet, Pena Nieto said the plan would revitalize the oil and gas industry without selling out the giant state oil company to foreign interests.

“Mexican families will feel in their pocketbooks the benefits,” Pena Nieto said, “of our economy returning to faster levels of growth than at any time in decades.”

The proposal was narrower in scope than some in the energy industry had sought. It offers foreign companies the chance to sign profit-sharing contracts to explore for and produce oil and natural gas, but it bars them from keeping some production for themselves.

That moderation figures to clear the way in the Mexican Congress and state legislatures for a historic change to the country’s economy.

“I don’t think they went far enough with this proposal. It’s limited,” said Daniel Kerner, the director for Latin America at Eurasia Group, a global risk consultancy based in New York.

Pena Nieto may see his six-year presidency ride on the outcome of the energy proposal, which he said would create millions of jobs and boost economic growth in a nation that’s one of the world’s top 10 oil producers.

The plan calls for amending two key articles of the constitution to allow foreign companies to explore for and produce oil and gas in profit-sharing arrangements with the state oil giant, Petroleos Mexicanos, known as Pemex, while keeping the company “100 percent” in state hands.

“The country remains the sole owner of petroleum reserves . . . and of the great company that is Petroleos Mexicanos,” Pena Nieto said in his announcement. That addressed fears that the proposal would dilute control of one of the largest companies in Latin America and one that many Mexicans see as a national jewel, formed after the takeover of foreign oil companies in 1938.

Energy Secretary Pedro Joaquin Coldwell laid out a bleak analysis of Mexico’s energy decline. He said Mexico had seen its production fall by 835 million barrels a day in the past eight years, ebbing to the current 2.5 million barrels per day. It now imports a third of the natural gas it needs.

“We need capital, technology and knowledge,” Joaquin Coldwell said. “We must associate with those who have them.”

The government relies on Pemex for roughly a third of its revenues, a dependence that’s drained the company of funds.

In recent weeks, Pena Nieto’s Institutional Revolutionary Party repeatedly has changed the date for the launch of the energy proposal, a sign that party leaders were horse-trading with legislators to sweep away opposition.

The constitutional amendments must pass by a two-thirds vote in both chambers of Congress, then by a majority of state legislatures, to be enacted.

Aurelio Nuno Mayer, the president’s chief of staff, said he thought the constitutional amendments and secondary legislation would be approved by the end of the year.

Pena Nieto, 47, broke from the three-party Pact for Mexico he helped establish on taking office last Dec. 1. He offered the proposal in his party’s name, a sign that the political left still finds relaxing the state’s grip on energy exploration and production deeply unpalatable.

Andres Manuel Lopez Obrador, a leftist candidate in the past two presidential elections, last week characterized any privatization of the energy industry as the “theft of the century.” He’s calling together opponents of the change in oil and gas industry to a massive rally in Mexico City on Sept. 8.

The political environment may be a major reason for the limited scope of the revisions, but analysts said it was unlikely to derail the plan.

In offering foreign companies profit-sharing contracts rather than outright concessions or production-sharing agreements, Mexico opted for a system that isn’t used widely around the globe.

“Ecuador, Bolivia and Iran are the only ones who have profit-sharing contracts,” Joaquin Coldwell said in a briefing with foreign reporters. “Iraq and Malaysia have profit-sharing contracts and production-sharing contracts. They have both. Chile and Angola have concessions and profit-sharing contracts.”

He said opening the energy sector to foreign investment would steadily boost Mexico’s economy. The plan also would offer licenses to private companies to refine, transport and store hydrocarbons and petrochemicals.

“We seek to create half a million additional jobs during this six-year term, and 2.5 million jobs by 2025,” he said. “The reform has a very important economic potential to invigorate the economy, and will add 1 percent (to economic growth rates) by 2018 and 2 percent by 2025.”

The changes aim to encourage outside companies to assume some risk in exploration and production in exchange for a share of profits. Pena Nieto said that meant Pemex would hike crude oil production to 3 million barrels per day by 2018 and double its natural gas production.

Increased gas production would increase and cheapen fertilizer production and lead to less expensive food, a government statement said. By opening the doors to greater private electricity production, it said, power rates also should fall.

Mexican industry currently pays 25 percent higher rates for electricity than its counterparts in the United States do, hurting domestic competitiveness, Joaquin Coldwell said.

He said the days of giant oil finds in shallow waters in the Bay of Campeche and elsewhere in Mexico were nearly over. And he said Pemex needed foreign help exploring for deepwater wells in the Gulf of Mexico and in shale deposits along the border with Texas.

The energy proposal goes hand in hand with an upcoming fiscal revision that would raise taxes on individuals and companies, allowing the government to “confiscate” less money from Pemex, an effort to strengthen the company and make it more autonomous.

Deputy Energy Secretary Enrique Ochoa Reza dismissed charges that the energy proposal had been watered down.

“There has not been a constitutional reform touching on hydrocarbons in 40 years,” Ochoa Reza said. He said the changes would bring Mexico “more jobs, lower bills for electricity and gas and grow the economy.”

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