Mexico mulls over compromise oil bill

Mexico's government handed the country's Congress a compromise energy reform plan yesterday that could attract foreign companies to a hunt for new oil reserves to rescue falling output.

After months of wrangling with the opposition over how much to lower barriers to private capital, Energy Minister Georgina Kessel gave the Senate a copy of a proposal that omits controversial risk-sharing alliances.

But the plan by President Felipe Calderon lets state oil monopoly Pemex sweeten service contracts with private companies by adding performance-based incentives.

The reform has been watered down to ensure a smooth passage through the divided Congress, but the government sees it as far-reaching enough to shore up the flagging oil industry, Deputy Energy Minister Jordy Herrera said.

Calderon was due to give a television address later on Tuesday to explain his most ambitious reform attempt yet to a nation famously wary of private involvement in the cherished oil sector.

"The central idea is to give Pemex more flexibility in working with outside companies," Herrera told a briefing with the foreign media.

He said the conservative government was hopeful that backing from centrist lawmakers would give the bill the 50% of Congress plus one vote it needed to pass.

Pemex blames its declining oil production and reserves on years of low spending under previous governments and the fact Mexico has some of the tightest restrictions in the world on private investment in oil.

Mexico's oil production and reserves are both declining and Pemex lacks the technology and resources to explore for deep-water crude deeper in the Gulf of Mexico.

Although opposition parties would not back risk contracts to speed Mexico's entry to deep-sea oilfields, the compromise plan for incentive-based service contracts across Pemex's businesses might make it attractive and effective for private companies to work with Pemex in onshore and offshore oil.

A top lawmaker from Calderon's party said the plan included letting Mexicans invest in "citizens' bonds" in Pemex.

Pemex says teaming up with experienced foreign partners could get it producing from wells more than a kilometre deep in half the time it would take if it went alone.

"There is nothing to do with privatisation but the idea is that it will help Pemex have bigger resources," said Senator Gustavo Madero, a member of Calderon's conservative National Action Party, or PAN, and on the upper house energy committee.

Pemex's output is sliding from peaks in 2004 of 3.4 million barrels per day as its huge Cantarell field begins to dry up.

As things stand, it says its crude output could drop by more than half over the next 13 years.

Most deepwater-savvy oil majors are seen ras eluctant to share valuable know-how for less than a share in the oil discovered. The compromise oil reform could prompt small services companies to drill more wells rather than attract big deep-water players, analysts have said.

Mexican left-wingers and many centrists oppose tampering with a clause in the Constitution giving Pemex sole rights to drill for Mexican oil, and leftists have threatened to scale up street protests once a reform was submitted.

Calderon needs the help of the Institutional Revolutionary Party, the third force in Congress which has backed earlier economic reforms but is more cautious this time around.

An energy reform bill submitted to Congress yesterday by Mexican President Felipe Calderon contains measures to allow Mexicans to purchase "citizens' bonds" in state oil monopoly Pemex, senior ruling party lawmaker Hector Larios said.

Calderon is seeking to overhaul energy laws to help state oil monopoly Pemex explore in deep waters of Mexico's Gulf and raise flagging production.

Howeverm the bill was also said to omit provisions for controversial risk-sharing joint ventures with foreign oil companies.

However, Deputy Energy Minister Jordy Herrera said yesterday the bill should still shore up the flagging oil industry by giving state oil monopoly Pemex more flexibility to work with other companies using service contracts with incentives.

Mexico's oil production and reserves are both declining and Pemex lacks the technology and resources to explore for more crude in deeper waters in the Gulf of Mexico, Reuters reported.

"The central idea is to give Pemex more flexibility in working with outside companies," Herrera told a briefing with the foreign media.

Mexicans are highly sensitive to foreign involvement in the energy sector, which was nationalised in 1938.

Risk contracts are more attractive to private companies because they offer a share in crude deposits if oil is found in potentially huge deep-water fields. But they could get paid nothing if an exploration well hits dry rock.

The risk-sharing idea was central to a government plan to restore oil production and reserves, but faced with stiff opposition in Congress. Reform will now be limited to less divisive ideas like giving Pemex more autonomy and allowing performance-based incentives in ordinary service contracts.

"There is nothing to do with privatisation but the idea is that it will help Pemex have bigger resources," said Senator Gustavo Madero, a member of Calderon's conservative National Action Party, or PAN, and on the upper house energy committee.

Pemex says that unless it can team up with experienced partners, it will take it twice as long to reach deep-water oil at depths of over a kilometre. As things stand, it says its crude output could drop by more than half over the next 13 years.

Savvy oil companies are seen as reluctant to share valuable know-how for less than a share in any oil discovered.

But Mexican left-wingers and many centrists oppose tampering with a clause in the Constitution giving Pemex sole rights to explore for or produce Mexican oil.

PAN leader German Martinez said the party was looking instead at contracts based on incentive fees, but not giving a share in oil deposits, as a way to attract foreign partners.

The government predicts its reform will be passed this year but opposition Institutional Revolutionary Party Senator Francisco Labastida, who is head of the Senate energy committee, said he doubted an energy bill could be passed before the current session ends on 30 April.