Mexico's Lower House Approves Changes to Oil Industry

By Jens Erik Gould and Adriana Lopez Caraveo

Oct. 28 (Bloomberg) -- Mexico's lower house of congress approved measures to give state-owned Petroleos Mexicanos more leeway to hire private and foreign companies.

Lawmakers led proceedings at a makeshift stand on the floor of congress after opposition legislators allied with former presidential candidate Andres Manuel Lopez Obrador seized the usual podium, waving Mexican flags and setting off air horns and sirens in a bid to derail the vote.

The passage is a political victory for President Felipe Calderon, who overcame two attempts by opponents this year to block congress from voting on the measures, said Jeremy Martin at the Institute of the Americas in La Jolla, California. Nonetheless, the initiatives won't stop a drop in reserves that will eventually force Mexico to begin importing crude, he said.

``It didn't work out quite as well as Calderon hoped,'' said Martin, who directs the energy program at the institute. Still, ``any kind of energy reform in Mexico is important. It's an incremental step.''

The measures, already passed by the Senate and only awaiting Calderon's signature to become law, will allow the state-owned company, known as Pemex, to sign service contracts that provide performance-based incentives to outside companies. They show that Calderon is able to pass controversial legislation that his predecessors were unable to muster, Martin said.

Still, led by resistance from the opposition Institutional Revolutionary Party, or PRI, lawmakers amended Calderon's plan by removing a measure to let other companies operate refineries.

Protests

The plan also met resistance from Lopez Obrador's Party of the Democratic Revolution. He and his supporters first shut down congress in protest for two weeks in April, chaining the doors to congress and camping in sleeping bags on the lower house floor.

Calderon has said his proposals would free up funds for exploration to help reverse declining production at the company, without jeopardizing the state monopoly on oil. Opponents say the initiative would transfer Mexico's oil wealth to foreigners and the business elite, and that cutting Pemex taxes is a better option for giving the company money to use for exploration.

Since Pemex was created with the expropriated assets of U.K. and U.S. oil companies in 1938, the government has enforced the clause of the federal constitution that gives the state the exclusive right to process and distribute oil and natural gas.

Democracy

The protests by the opposition lawmakers signal the arrival of democracy less than a decade after 70 years of one-party rule ended, said Miguel Tinker-Salas, professor of Latin American studies at Pomona College in Claremont, California.

A body that once served as a rubber stamp for Mexican presidents proved Calderon's biggest obstacle to revamping the oil industry, softening what is perhaps the most important initiative of Calderon's term, he said.

``Congress has been exerting more power, pressuring the executive, and that's the reflection of greater democracy,'' Tinker-Salas said. ``That would have been unheard of when the president was all-powerful.''

The PRI forced Calderon to drop his original plan to change the constitution and let Pemex form partnerships with foreign and private oil companies, possibly allowing them to a own stake in newly discovered reserves , Pemex Chief Executive Officer Jesus Reyes Heroles said July 24.

Pemex's monthly crude output fell to 2.722 million barrels a day in September, a decline of 14 percent from a year ago and the lowest since November 1995, on decreased demand from U.S. refiners and as its largest field declined.

Crude output has declined for four years, and Pemex only has reserves to last about 9 years, according to government estimates.

Mexico has 12.4 billion barrels of untapped oil reserves, or 10 percent of the world's crude, according to the U.S. Energy Department. The country's reserves are declining because most formations in the Mexican section of the Gulf of Mexico remain unexplored, the department said last year.

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