Mexico proposes energy reform, some investors skeptical – by David Alire Garcia and Simon Gardner (Reuters U.S. – August 12, 2013)

MEXICO CITY – (Reuters) – President Enrique Pena Nieto on Monday proposed an overhaul of Mexico’s energy industry to offer private companies profit-sharing contracts, but investors said it might be too cautious and some sold Mexican assets.

The proposal calls for changes to key articles of the constitution that ban certain contracts and make oil, gas, petrochemicals and electricity the sole preserve of the state, in a bid to lure investment to stem sliding oil output.

If enacted, the reform would mark the largest private sector opening in decades for Mexico’s energy industry, which was nationalized in 1938 and is controlled by state monopoly Pemex.

However, the centrist government’s bill stops short of proposing concessions to tap Mexican oil, or production-sharing, that were viewed as the best-case scenarios by oil companies.

It also avoids giving private companies ownership over Mexico’s oil and gas and instead gives them a share of profits, in cash but not oil. It was not yet clear how attractive the reform would be for oil majors such as BP Plc and Exxon Mobil Corp.

Energy Minister Pedro Joaquin Coldwell said the government had “not spoken with the big oil companies” about the reform.

Chevron Corp welcomed “any decision by the government and people of Mexico to provide new opportunities for investments” but said it had not yet reviewed the proposal.

An executive with an independent U.S.-based oil company said the proposal lacks the main element oil companies require.

“If the operators aren’t going to own the reserves, it would be really hard” to view the reform as a game-changer. “That’s how we’re judged by Wall Street, by growing production and growing reserves,” the executive added, requesting anonymity.

Mexico’s proposal falls short of frameworks in oil-producing peers such as Brazil, Colombia and Norway, which allow companies to keep a share of output, and its success will now likely hinge on how generous the profit-sharing contracts are.

Pemex CEO Emilio Lozoya said the new contract plan would auction new, unexplored oil and gas fields to private companies.

Mexico’s ample deep water oil and shale gas reserves are often cited as likely to figure into new contracts.

The proposal will be sent to Congress this week and is expected to pass because the government has backed away from more aggressive reform that would have faced bitter opposition from the left.

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