Mexican President Submits Tax Regime for Deepwater Exploration; Energy Reform Debate Begins

President Submits Tax Proposal

President Felipe Calderón yesterday submitted a proposal to the permanent session in the Senate to modify PEMEX's tax regime. The aim of the proposal is to offer a more favourable fiscal regime for exploration and production (E&P) in the onshore Chicontepec fields and in deepwaters of the Gulf of Mexico (GOM) in order to reflect the higher levels of investment that will be needed to extract oil from these areas. The proposal also recommends modifying the tax regime for areas that have been abandoned because production costs are higher.

This will be the third major reform of PEMEX's tax regime in recent years. Earlier legislative initiatives introduced by Calderón and his predecessor Vicente Fox reduced the company's fiscal burden in order to free up more funds for investment in the hydrocarbons sector (see Mexico: 17 September 2007: Fiscal Reform Gets Through Mexican Congress and 9 November 2005: Senate Approves Revised Reform of PEMEX's Fiscal Regime). Despite these reforms, the government's share of PEMEX's revenue remains high and continues to reduce the availability of financing from the company's own resources for E&P. This has forced PEMEX to borrow money in order to fund its ambitious exploration programme, prompting several international ratings agencies to express concerns during the Fox administration regarding the company's increasing debt. PEMEX's debt levels have stabilised since then, but additional resources are needed as oil production from Chicontepec and deepwaters will be more costly to produce than oil from the Cantarell field.

Energy Reform Debate Begins

The new tax reform proposal follows the earlier submission of a modest energy reform proposal by the president (see Mexico: 9 April 2008: Mexican President Submits Watered-Down Energy Bill to Congress). Mexico's Energy Secretary Georgina Kessel Martínez and PEMEX chief Jesús Reyes Heroles last week made the case for reform to the Congress and the government has been conducting a media campaign in a bid to win public support. However, it has yet to convince many sectors of the population that reform to strengthen the oil sector would reinforce Mexico's national sovereignty as Calderón claims, rather than threaten it as his opponents argue. Any opening of the oil sector to foreign participation, however limited, is politically sensitive in a country that widely regards the 1938 nationalisation of the oil industry as a landmark in its history and PEMEX's constitutional monopoly over the holding of oil exploration concessions as untouchable.

Debate on the reform began in the Senate on Tuesday (13 May) with opinions still divided on the subject and the “privatisation” debate refusing to go away. A poll published in El Universal this week found that 29% of Mexicans were in favour of reform and 27% against with the remainder undecided. According to a Dow Jones report, a separate poll by Parametria published last week but conducted more recently showed 47% in favour and 38% against, indicating that support has increased since March, although support was lower among those that considered it a privatisation bill. Mexico's parties are also split on the reform with the leftist Democratic Revolution Party (PRD) staunchly opposed and the country's other main opposition party the Institutional Revolutionary Party (PRI) in favour of reform in principle, but unsure on some areas of Calderón's proposal. Comments by the head of the PRI Beatriz Paredes during the first day of debate, revealed two areas in which the party's full support cannot be relied upon. She referred to the service contracts proposed for deepwater exploration as "suspect, confusing, and open to interpretation" and also criticised a proposal to allow greater private participation in the refining sector. The ruling National Action Party (PAN) needs the backing of the PRI in order to get the reform through Congress, but with mid-term elections scheduled next year, the PRI is unwilling publicly to endorse any elements of the proposal that are considered unpopular. The debate is set to last for 71 days.

The national debate was regarded as a victory by the PRD which staged a two week sit-in in the Congress calling for a wider debate that includes industry specialists, academics, and others. A total of 22 public debates are due to be held between now and 22 July. The worry for the government is that the delay caused by the national debate may make it harder for it to secure the approval of the reform in Congress.

Outlook and Implications

With reserves falling and the output decline from the huge Cantarell field accelerating, the Chicontepec and deepwater projects are seen as key to raising production and allowing the country to retain its status as a net oil exporter. The government believes that deepwaters of the GOM alone contain up to 30 billion barrels of prospective reserves, but PEMEX lacks the technical knowledge to develop these reserves on its own. Meanwhile, the Chicontepec reservoir in the states of Puebla and Veracruz is thought to hold 18 billion barrels of oil equivalent of recoverable reserves, but its development has proved elusive because of its complex geological formations and the need for greater investment in new technology in order to improve oil recovery.

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