Mexico Lawmakers Propose Incentives for Companies to Help Pemex

By Adriana Lopez Caraveo and Jens Erik Gould

Oct. 12 (Bloomberg) -- Mexican lawmakers drafted bills that, if approved, would allow the state oil monopoly to hire private and foreign companies for exploration and production under contracts that provide performance-based incentives.

Drafts of three bills by members of the Senate's energy committee, obtained by Bloomberg News, would let private companies receive bonuses for finding more oil, reaching production goals, using new technology or reducing costs. The companies would only be paid in cash and wouldn't be allowed to own Mexican oil or book reserves, the drafts say.

``The core issue is to give incentives so the private company provides a better service,'' one of the bills reads. ``The more hydrocarbons the company finds, the more it is paid for the service.''

The drafts are similar to the exploration and production proposals President Felipe Calderon sent to Congress in April. While the bills may help the company, they won't do as much to reverse declining oil output as would allowing the private firms to book oil reserves, a change that Calderon didn't propose because it would involve modifying the constitution, said David Shields, an independent energy analyst.

``What the president proposed is what is being accepted,'' said Shields, who publishes Energia magazine. ``It's something necessary and urgent in the absence of anything better.''


A better change would be to allow risk contracts under which private firms could have control over strategic decisions, Shields said. Still, the current proposals may stimulate more production because private firms would be encouraged through incentives to produce more and have a greater interest in making projects successful, he said.

Oil Nationalization

The drafts are the final three of a total of seven bills that the energy committee needs to approve before sending them to the floor for a vote.

Mexico nationalized its oil industry in 1938 and enacted a constitutional ban on foreign energy investment to protect its resources. Lawmakers said yesterday they may propose allowing Pemex to hire private companies for refining services while prohibiting them from owning refineries.

``We're exploring how particular investors can provide services to Pemex,'' said lawmaker Juan Bueno Torio, a member of Calderon's party. Private companies would provide ``services to process crude without Pemex losing control of the product or the raw materials.''

More Exploration

Lawmakers drafted bills on Oct. 9 that would increase the use of renewable energy sources, give the government more control over energy policy and create a board to review exploration projects.

Calderon says bringing private or foreign companies into Mexico's oil industry will free up cash that Pemex could use for exploration. Opponents say the plan would transfer Mexico's oil wealth to foreigners and the business elite, and say reducing Pemex's taxes would be a better way of freeing up money for exploration and production.

Oil output at Pemex fell 9.2 percent to 2.834 million barrels a day in the first eight months of the year. Declining production is costing 275 billion pesos ($21.1 billion) in sales this year and threatening Mexico's budget, as 40 percent of the government's revenue comes from Pemex royalties.

To contact the reporters on this story: Adriana Lopez Caraveo in Mexico City at adrianalopez@bloomberg.net; Jens Erik Gould in Mexico City at jgould9@bloomberg.net