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Mexico's Fox Again Calls for Constitution Changes to Permit E&P Investment

Mexico's President Vicente Fox last week announced a series of steps to reduce the country's energy costs and its dependence on foreign energy supplies. Among other things, Fox is trying once again to change Mexico's constitution to allow more private investment in natural gas exploration.

Hurricane Katrina, Fox said, threatened not only oil and gas pricing, but also how the country's energy supplies could be limited. Mexico is the sixth largest oil exporter in the world. Petroleos Mexicanos (Pemex), is currently producing 4.7 Bcf/d of gas, but imports this year are averaging 577 MMcf/d.

Katrina "has made evident the vulnerability of our energy supply structure," said Fox. "The lack of deep reforms in the energy sector seriously limits the capability to take advantage of our underground natural gas." Under another proposal, Fox wants to set up a joint public-private investment scheme to rebuild the country's vast oil and gas pipeline network.

Since his election in 2000, Fox has pushed for legal reforms within Pemex to allow private companies to exploit reserves in Mexico's deepwater offshore, but his proposals have met with limited success. In 2003, Pemex began taking bids from Mexican and foreign oil companies for 15- and 20-year multiple service contracts (MSC), which allowed private companies to develop -- but not own -- reserves in the Burgos Basin of northeastern Mexico. The contracts were strongly opposed by Congress, and opposition members brought lawsuits, claiming that MSCs violated Mexico's constitution. Fox's latest proposal would allow private investments only in Mexico's nonassociated natural gas.

Mexico nationalized its oil industry in 1938 and its power industry in 1960, and under the constitution, foreign involvement in the exploration and production (E&P) and power sectors is prohibited. Although many energy laws have been eased in the past decade, Mexico still maintains a strict set of rules preventing foreign and private energy industry investments.

More than 60% of Pemex's annual revenue now is directed to the government through taxes and royalties, and it is limited in how much it can invest in E&P and infrastructure. Pemex also has an aging pipeline infrastructure, and in recent years, there have been several pipeline leaks resulting in deadly explosions across the country.

"Our energy supply structure is highly vulnerable," Fox said. "We need to remove all the obstacles that stop us from guaranteeing internal consumption of hydrocarbons, increase our exports, and reduce the imports and the dependence."

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