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Mexico's Energy Minister Suggests Some Pemex Restrictions Could Soon be Removed

If emotions about national sovereignty issues can be put aside, the Mexican government could begin removing the prohibitions against foreign investment in the country's state-owned oil company Petroleos Mexicanos (Pemex) by later this summer, the energy minister said Wednesday.

Mexico currently forbids direct foreign investment in Pemex, and its inefficiency is becoming more apparent, said Energy Secretary Fernando Canales Clariond, who spoke Wednesday at Cambridge Energy Research Associates' CERAWeek 2006 in Houston. However, he said the Congress, which is in session until Aug. 31, is poised to consider some reforms within Pemex. Many politicians -- including current president Vicente Fox -- have pushed for reform, but today, less than 40% of Pemex's revenue is used for operations, exploration and development; 62% of Pemex's revenue is returned to Mexico's tax base.

"Investment in Mexico has been insufficient for decades," he said. "There is a long-standing fear in Mexico that if we open our energy industry to foreign partners, we'll lose our sovereignty." But restrictions about foreign investments are "emotional arguments that are rooted in our 19th century experience."

Since he took office in 2001, Fox has been unable to convince Mexico's Congress to permit direct foreign investments in E&P, but his ability to enact even small changes appears to have paid off. Pemex established multiple service contracts (MSC) in 2003, which allow foreign companies to make investments in natural gas projects in the Burgos Basin, but legal challenges by dissident members of Congress have forced Pemex to call a halt to the joint ventures until the courts have completed their rulings. Still, Canales Clariond sees changes coming.

"The international companies don't want to be hired," said Canales Clariond. "They want to be partners." There are many companies that want to invest in Mexico's E&P, but they want to be treated equally, as they are in other countries.

Because Pemex is "run like a government bureau," it is failing to compete against a new generation of national energy companies, such as the China's Chinese National Offshore Oil Co. and Lukoil, based in Russia, which have established successful joint ventures with majors and independents. Those state-owned companies, he said, are run like international E&Ps, and they are able to take advantage of the efficiencies that investment offers.

Canales Clariond said the time was overdue for privatizing at least a portion of Pemex. With dwindling proven reserves, Mexico's deepwater areas remain relatively unexplored. The northern part of the Mexican shelf has seen less than 10% well penetrations, compared with its counterpart in the long explored U.S. portion of the western Gulf of Mexico. The reserves are there, said Canales Clariond. The country just has to find a way to come together to take advantage of its resources.

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