(Photo : Wiki Commons)

Foreign Oil Firms Brace for Mexico Comeback

Aug. 7, 2014
While the reform says foreign firms can sign profit- and production-sharing contracts, companies are concerned about navigating Mexico's notoriously corrupt institutions as well as drug cartel violence in the oil- and gas-rich north.

MEXICO CITY -- Foreign energy firms have wanted to return to Mexico since they were kicked out 76 years ago. Now that they have been invited back in, they are cautiously preparing their comeback.

Well before Mexico's Congress voted Wednesday to implement historic reform reopening the state-controlled sector to private investors, foreign companies followed every step of the legislation, hired lawyers and consulted tax experts.

President Enrique Pena Nieto must now sign the centerpiece of his reform drive, which will break the monopoly held by state company Pemex since then president Lazaro Cardenas nationalized the sector in 1938.

The Congress had approved constitutional changes to the country's energy laws in December, but investors were waiting for lawmakers to pass the final legislation that outlines the legal nuts and bolts.

While the reform says foreign firms can sign profit- and production-sharing contracts, they will only see the fine print when the first auctions open next year, experts say.

Other concerns for investors include navigating Mexico's notoriously corrupt institutions as well as drug cartel violence in the oil- and gas-rich north.

"There are a lot of attorneys who have lots of work right now," said Pete Garcia, executive director of the Gulf Coast chapter of the United States-Mexico Chamber of Commerce in south Texas.

"Before people start to invest millions of dollars they want to make sure they understand all the legalities," said Garcia, whose organization represents 100 firms in America's energy hub, including oil giant ExxonMobil.

"We cannot yet run with the ball because we are still taking baby steps here. We still don't have 'project one' yet," he said.

High Taxes and Corruption

The chamber of commerce has recently entered a "strategic alliance" with Pemex's procurement office in Houston to help U.S. companies through the process.

Several companies are also making sure their employees are familiar with U.S. foreign corruption laws because "nobody wants to go to jail over trying to win a bid and not doing it the right way," Garcia said.

In Mexico City, local executives from ExxonMobil and British rival BP head an "energy task force" to monitor developments in the sector for the American Chamber of Commerce of Mexico. The two companies declined to comment.

But before bidding for contracts to drill for shale gas or deep-water oil, companies will weigh the risks, benefits and tax burden, said David Shields, a Mexico City-based author of books on Pemex.

"It's obvious that the big international companies are interested in coming, but they want to see more," he said.

The government will also have to reassure companies that the process will be "clean" and free of corruption, he said.

Raymundo Tenorio, economics director at the Monterrey Technological Institute, said high taxes may temper some of the excitement at first.

"The tax burden will initially discourage private initiatives to arrive in the way that we expect," Tenorio said. "It's a brutal tax burden that will gradually come down."

'Eat You Alive' 

Opponents of the legislation say Mexicans are the ones who will be on the losing end of the reform.

The left fears that Pemex, Mexico's main source of tax revenue, will be privatized and that the country's oil riches will leave the country.

During a visit to Mexico last week, California Governor Jerry Brown warned lawmakers that if they failed to pass tight regulations, foreign firms "will eat you alive."

But the government insists that the reform will boost economic growth, modernize Pemex and reverse declining oil production.

Using his own food metaphor, Pemex director Emilio Lozoya has said that foreign firms have shown a "very big appetite."

"The only thing left is for this hunger and interest, this investment, to translate into infrastructure and jobs," he said.

- Laurent Thomet, Jennifer Gonzalez Covarrubias, AFP

Copyright Agence France-Presse, 2014

Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!