According to a report by Business News Americas (ABN), Mexico’s senate passed seven energy reform bills on Thursday, Oct. 23 – 109 in favor 10 against. The reforms provide incentives for foreign contractors. These measures will free up Mexico’s state-owned Pemex to conduct offshore operations using foreign companies.

The bills are intended to reform the secondary law regulating Article 27 of Mexico’s constitution, which prevents private sector participation in the nation’s oil industry. The bills add additional rhetoric to the existing law stating that Mexico will maintain “direct dominion” over its petroleum resources and is responsible for all oil and gas production. They establish in writing that all payments for service contracts will be made in cash — no payments will be made through production sharing or sales. ABN says, the measure will also ban Pemex from submitting to foreign tribunals over service contracts.

The bills serve to change the company’s structure providing allowances to invite specific companies to bid on contracts. In some cases, awards could me made directly to foreign companies. If the reforms are passed by the Lower House, Pemex could benefit by gaining more autonomy in managing its own finances.

The energy reforms began as an attempt to alleviate Mexico’s declining production rates. Last April, President Felipe Calderon urged an overhaul of Pemex calling on congress to allow the state-owned company more freedom in signing contracts with foreign firms that had more experience and capital to build efficient refineries and to conduct costly deepwater drilling projects. His call was met with widespread populist resistance. Many protestors saw the possible reforms to the nation’s oil and gas industry as having the potential to break down national sovereignty. At the time, the oil price was on a consistent upward track, reaching an all-time high of US $147/bbl in mid-July.

The reforms are now being re-introduced in the face of tanking oil prices, a fallout of the current financial crisis. Mexico’s declining production, combined with losses in revenue due to lower oil prices, has drawn special attention to the benefits of private capital. Mexico’s petroleum industry has waned in recent years, and the new fiscal climate has gone far to dampen the nationalist backlash to prevent reforming the state’s energy policy.

With the price now less than half of its July peak and credit markets drying up, the government is looking to reform its energy policy to stave off major losses within its petroleum export sector.

Analysts predict that Mexico will be importing oil within seven years unless it can develop new oil fields fast. Mexico relies heavily on revenue generated by exported crude (oil exports account for 40% of Mexico’s national budget). A major decline could also affect the US, which currently purchases 86% of Mexico’s production. Major oil and gas firms are not totally convinced that Mexico is prepared to open its access to the region.

With production sharing off the table, it is unsure how much interest will be generated by “fee-based” contracts. ABN reported that Calderon described the reform as
“what is politically possible, but falling short of what the industry needs,” adding that his plan to legalize joint-ventures between Pemex and international oil companies for deepwater developments was killed before the bills were sent to congress.

The good news from all of this is possible benefits for the drilling industry. The credit crunch may have cracked a significant nut for willing and capable drilling contractors in the southern Gulf of Mexico (GoM).

As of Friday, October 17, Pemex issued tenders for one deepwater rig and four jackups. The company is moving forward with its plans to increase production and increase reserves in its portion of the gulf. All of these rigs combined would go for a combined day rate of $865,000 in today’s market. In addition, the reform bills will also include incentives — early completion bonuses and larger than expected discovery bonuses. While it won’t be business as usual for operating companies, drilling contractors may find a new market in the southern GoM. As opportunities dissipate in the current financial climate, it appears that newer opportunities may be materializing. Deadline for bid submission on all five tenders is Dec. 1, 2008, with an expected signing date of Jan. 8, 2009.

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