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Drilling down on Mexico's energy reforms

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Drilling down on Mexico's energy reforms

MEXICO CITY — State legislators across the country this week sealed a deal that will end the government’s 75-year-old energy monopoly, enabling Mexican and foreign enterprises to vie for a slice of the country’s oil, gas and electricity production.

This is big, the stuff of history.

To find out just how huge a deal it is, and why many Mexicans are actually unhappy about it, we spoke to GlobalPost’s senior correspondent in Mexico, Dudley Althaus, who has been reporting on the energy sector for many years.

Both houses of the Mexican congress approved the energy bill last week — over the angry objections of leftist lawmakers, including a fellow who shed his clothes in fury (video below). The reforms’ required constitutional changes were assured Monday when the 17th of Mexico’s 32 states approved them.

President Enrique Pena Nieto, who was in Turkey talking trade when the states gave him the Christmas gift, said he’s going to sign the reforms into law as soon as possible.

Why is Mexico reforming its energy sector now?

Although the government’s near monopoly on electricity is also being dismantled, the future of Mexico’s oil has created the most buzz.

Capitalists at home and abroad have been yearning for a piece of the petroleum pie here since it was taken away from them by the 1938 nationalization.

Now changing economics and politics — and officials’ need for a new bonanza — are about to give it back to them.

Mexico is the world’s 10th largest oil producer. Oil revenues pay for more than a third of government spending.

The easy oil is drying up. Pemex, the country’s petroleum company, has neither the funds nor the technology to get at the difficult stuff.

The country now produces around 2.5 million barrels of petroleum a day. That’s down from 3.4 million barrels daily in 2004 and about the same output as Texas.

Promoters say the reforms will entice private companies — especially experienced and deep-pocketed multinationals. They want them to explore and produce in the extremely deep waters of the Gulf of Mexico and in the shale fields near the Rio Grande. They also want private companies, perhaps partnering with Pemex, to squeeze more black gold from long played-out onshore fields.

The energy overhaul caps a strong first year for Pena Nieto, coming atop reforms in education, labor law and tax policy.

Pena Nieto’s Institutional Revolutionary Party, the PRI, which ran Mexico like a family business for most of the past century and nationalized oil in the first place, has now anchored itself in the business-friendly center.

The president tweeted last week that the reforms will provide Mexico its “energy sovereignty and self-sufficiency,” spuring “productivity, economic growth and job creation.”

So, the oil will be gushing again soon, right?

Let’s not get ahead of ourselves.

These reforms were painted with big brushes. Federal legislators and bureaucrats now need to take pencils to the stack of laws and regulations that will put the changes in place.

Seemingly razor sharp initiatives in Mexico often get ground to impotence in that process.

Big energy companies out of Houston, Beijing and Madrid are plenty interested in Mexico. But they’ll likely wait to see the fine print before jumping in. That’ll take months, if not years.

Mexican planners say they need the multinationals to explore and produce in the very deep waters of the Gulf, which may hold as much as 30 billion barrels of oil.

They want smaller companies skilled in "fracking," firms that have lately made the South Texas borderlands into a mini-Saudi Arabia, to produce shale gas south of the Rio Grande.

But most deep-water drilling platforms and crews are otherwise employed for now. And the fracking technique requires millions of gallons of water per well, a serious challenge in the parched lands that hold Mexico’s shale gas.

New technology can unlock a lot of oil there. And companies like Halliburton, Schlumberger and Weatherford have been working in those fields for decades as Pemex contractors. Until now, they’ve been paid in cash for their services but forbidden by the constitution from claiming a share of the oil produced.

Government officials, including Pena Nieto, phave predicted Mexico’s petroleum production will recover to 3 million barrels a day within five years and to 3.5 million barrels daily by 2025. Private analysts say that’s ambitious but not impossible.

Mexico’s recovery, joined with the ongoing energy booms in the United States and Canada could make North America self-sufficient or even an exporter of petroleum in the near future.

Why do opponents, including that nearly naked congressman, get so worked up about this?

Well, for the same reason many conservative Americans get bug-eyed at the mention of gun control. The oil nationalization engraved Mexico’s right to bear oil, an emotional touchstone for Mexican nationalists.

For them, throwing the foreign oil companies out of Mexico’s oil patch 75 years ago was a watershed victory in the country’s centuries-long struggle against foreign invaders and Mexico’s own rapacious elite.

“The oil is ours,” goes the frequent refrain.

Few opponents of energy reform argue that everything is fine with Pemex or the oil patch. But they say that the ills can be fixed with a scalpel rather than a broadsword.

Pemex’s legendary corruption needs to be cleaned up. Its suffocating contributions to the federal treasury need to be replaced by broadening the tax base, especially forcing the wealthy and other industries to pay more.

Instead, the opponents argue, the reforms are handing one of Mexico’s greatest treasures back to the very foreigners and the wealthy few who have always plagued the country.

Pena Nieto and his aides talk of the potential jobs and prosperity from the reforms. The opponents point to the “crony capitalism” that made a chosen few mega-wealthy when Mexico sold off other government-owned industries in the 1990s.

Among the fortunate elites stands Carlos Slim, the world’s richest person, who as a merely prosperous businessman was handed control of Telmex, the government’s telephone monopoly.

Badly beaten in congress and the state legislatures, the leftist-nationalists vow to overturn the reforms with a popular referendum in 2015. Opinion polls show most Mexicans oppose the energy reforms.

Still, scant crowds showed up at street protests as congress voted on the reforms last week.

Mexico perhaps has moved on.

This article originally appeared on GlobalPost.

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