Mexico would make available profit-sharing contracts and split Pemex into two divisions as part of a proposal presented in mid- August by Mexico’s President, Enrique Peña Nieto.

The energy reform proposal —which revises articles 27 and 28 of the Mexican constitution—would bring to an end the state-owned oil company’s hold on the energy sector by allowing private investment; however, the bill maintains the ban on granting concessions, leaving the country as the sole owner of oil reserves and revenues. Also, Pemex, which would not be sold or privatized, and its subsidiaries would be restructured into two divisions—E&P would be the focus on one division, and industrial transformation would be the focus of the other.

The move comes as an effort to stimulate worldwide interest in Mexico’s energy sector in hopes of boosting production, which has been on a steady decline. The proposal presented by Peña Nieto points out how far behind the country has fallen compared to its neighbor to the north —the U.S.— despite the two having some commonalties, including shale potential and deepwater possibilities in the Gulf of Mexico.

Using deepwater drilling in the GOM as an example, the proposal points out that 137 wells with depths of greater than 1,640 feet were drilled in the U.S. Gulf, compared to only six in the Mexican GOM, in 2012. It also noted U.S. success with shale oil and gas.

Realizing the benefit of partnerships, the proposal also pointed out how different countries have adjusted their laws when confronted with challenges and complex sites that require large investments, shared risks, and new technology. Such change has taken place in Brazil, Colombia, and Norway.

“This reform represents one of the greatest opportunities for Mexico in recent years. If we seize this opportunity, we’ll create hundreds of thousands of new jobs and better wages,” Peña Nieto said in a statement. “I hope that the discussion of this reform initiative within the Congress itself will focus on how to transform Mexico, on how [to] self-modernize our energy sector …”

A day after the release of the proposal, the president’s office announced the objectives of the hydrocarbons policy. These included increasing oil production from its current rate of 2.5- to 3 million barrels daily in 2018 to at least 3.5 million per day by 2025.

The much-anticipated energy reform proposal from the country’s reigning political party, Partido Revolucionario Institucional (PRI), comes more than a week after the main opposition political party, Partido Acción Nacional (PAN), presented its energy reform proposal. Both proposals lay out the constitutional groundwork needed for change. Additional regulatory and legislative moves would be needed.

The PAN proposal opens Mexico’s upstream, downstream, and midstream, as well as other energy-related sectors, to competition and private investment by amending articles 25, 27, and 28 of Mexico’s constitution.

The National Hydrocarbon Commission would be charged with approving concessions and contracts, while a newly created Mexico Oil Fund would work to maximize the country’s oil profits and possess fee-setting authority to attract investments. And, the president would have to decrease fiscal dependence on oil resources and lower Pemex’s labor liabilities over a 10-year period. Mexico is heavily dependent on its oil sector to generate revenue.

Gabriel Salinas, an associate with Mayer Brown in Houston, said PAN’s proposal raised the bar in terms of expectations for energy reform in Mexico. However, the PRI proposal also has potential to “revolutionize the Mexican energy sector.”

“The mere fact that we are discussing issues such as profit-sharing arrangements is pretty significant considering where we were in the debate about six months ago,” Salinas told E&P magazine.

Debate and negotiation between the parties are likely, Salinas added, noting the proposal that is ultimately passed could be more liberal than the PRI’s proposal. Production sharing and booking of reserves are among the issues that could be clarified further. “The PRI proposal is intended to allow profit-sharing arrangement but not necessarily production-sharing arrangements.”

Ideally, the constitutional reforms would permit production-sharing agreements, allowing private operators to own hydrocarbons at the wellhead after extraction of the hydrocarbons, Salinas said. “That plus the correct economic terms could lead to an oil and gas contract and framework that could attract the major international oil companies that are needed to develop Mexico’s hydrocarbon potential.”

A two-thirds majority vote is needed in Congress before either proposal could move on the Mexican states, where a majority vote would push forward plans. And although the PRI is the party in power and holds more seats, it still needs PAN support for a constitutional amendment. “In a way, the parties need each other,” Salinas said, “but there’s definitely leverage that comes with being the party in power.”

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