Mexico’s Senate passes sweeping oil industry reforms

MEXICO CITY—The Mexican Senate has approved a sweeping reform of the country’s energy sector that would open the underperforming state-run oil company to foreign investment — a move that supporters say could boost a stagnant economy and bolster President Enrique Peña Nieto’s assertions that he is leading Mexico through a time of profound transformation.

The vote to approve the bill came at 11:55 p.m. Tuesday, after nine hours of debate on the Senate floor, and as leftist opponents, who argue that the reform amounts to “selling the Fatherland,” used stones and hammers to beat furiously upon tall metal barricades surrounding the Senate building.

Among other things, the legislation would alter the Mexican constitution to allow major foreign oil companies to drill for oil and take a cut of the crude produced, as opposed to simply sharing profits in such ventures, as Peña Nieto’s party had originally proposed in August.

Such “production sharing” arrangements are important to big oil companies because they often own their own refineries and tend to prefer the simplicity of taking oil directly from the well-head to the refinery.

But the idea of foreigners taking a cut of Mexican oil is a sensitive matter. The oil industry here was nationalized in 1938 with great fanfare after what were perceived as exploitative practices by British and U.S. oil companies.

Though production has been declining in recent years, Mexico’s abundant oil and gas resources remain a great source of national pride and a key source of government funding: Pemex, as the national oil company is known, currently supplies about a third of the federal government’s income.

The legislation will not change the part of the Mexican constitution that declares the nation to be the owner of subsurface oil and gas. But Dolores Padierna, a senator with the leftist Party of the Democratic Revolution, noted on the Senate floor that with a production-sharing contract, “at the mouth of the well, the private oil company will be the owner of a percentage of the production.”

Energy industry experts have been surprised that the bill contains this and many other elements that could make private industry keen to jump back into the Mexican oil game. Though Peña Nieto has overseen the passage of a number of reforms during his one year in office, some, like his education and fiscal reform packages, have been criticized as overly watered-down by political bargaining.

The energy bill that was approved by the Senate incorporates numerous proposals first introduced by the conservative National Action Party. To become law, it must be approved by Mexico’s lower house of Congress, and then by the state legislatures.

Pro-reform forces contend that foreign companies will be key to helping Mexico reverse its declining production numbers. Two gigantic shallow-water oil wells are running dry, but the country needs outside expertise and investment, experts say, to extract oil from more technically demanding deepwater wells and shale deposits.

“The bottom line is that it’s the end of an era, really, if this goes through,” said Tim Samples, a University of Georgia business professor who has been following the reform effort closely. “If this goes through, it will be a sea change for Mexico’s energy industry.”

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Twitter: @richardfausset

richard.fausset@latimes.com