Oil Reform

MEXICO CITY (Reuters) - A plan to shake up Mexico's flagging state-run oil sector met with muted reaction on Wednesday, with most seeing it as positive but not enough to restore declining output and reserves overnight.

The government's proposal, which was diluted to give it the best chance of passing through Congress, proposes more hiring of private companies across the oil industry through "incentive contracts" that offer bonuses for work well done.

Foreign oil majors, who want Mexico to join the rest of the world in offering risk-sharing joint ventures, especially in the huge deep-sea sector, mostly declined to comment as they huddled in meetings over the plan.

But analysts see the sweetened service contracts doing little more than drumming up more business for oilfield service companies such as Schlumberger (SLB.N: Quote, Profile, Research), which state oil monopoly Pemex hires to help with engineering work.

"My initial impression is that it's relatively modest," said RoseAnne Franco at PFC Energy. "For the international oil companies it comes down to being able to book reserves."

Pemex, a top U.S. oil supplier, has long complained about Mexico's barriers to private oil investment and says it needs partners to help it unlock huge deepwater reserves as yields decline at its shallow water and onshore fields.

But many question whether the proposed contracts will attract big players like BP (BP.L: Quote, Profile, Research) and Petrobras (PETR4.SA: Quote, Profile, Research) into deep-sea exploration, given such costly and risky ventures are repaid in other countries by giving the partner a share in reserves.

"The important aspect of any contract is the incentive part. If someone is doing a really good job they should be paid for it. But there are different types of incentive around the world so we'll have to wait and see what they are offering," said a Mexico-based executive for a foreign oil major.

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Importance: Calderon is finally acting on the nation's need for an alteration in their oil operations. Even though this proposed reform is watered down in order to be passed in the Mexican Congress, it is a start. The political culture of the country would rebel against a reform too radical because the majority of the population is still against foreign investment despite Pemex's dire need of a partner in oil welling.

Attempt at Oil Reform

CANTARELL, in the Gulf of Mexico, was once the world's biggest offshore oilfield, holding over 35 billion barrels of the black stuff. Now, after nearly three decades, it is running out. At its peak in 2004 it produced 2.1m barrels of oil per day (b/d), making up 60% of Mexico's total output. That figure has already fallen by more than 500,000 b/d and could fall by another 200,000 b/d by the spring.

This is a worry for both Mexico and the world. Although Mexico contains less than 1% of the world's proven oil reserves, it is the sixth-largest producer. Its output of 3.1m b/d is well above that of Venezuela or Kuwait. And although oil no longer dominates the Mexican economy—even at recent high prices it provided 16% of exports in 2006, down from 68% in 1982—it lubricates the public finances, contributing nearly 40% of federal revenues.

The obvious solution is to privatise the industry, but that is politically impossible. The state oil monopoly is both popular and constitutionally mandated. So Mr Calderón and other politicians have been searching for ways to loosen the monopoly while respecting the constitution.

The Senate's energy committee is holding a “private, technical debate” on how to do this, according to Rubén Camarillo, a senator from Mr Calderón's centre-right National Action Party. The purpose is to try to reach an all-party consensus by February. So far there is “agreement about what needs to be done, but not how to do it,” says Mr Camarillo.

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Importance: Reforming its oil production would be helpful to Mexico's economy as would increased privatization. Politically, President Calderon could risk his precarious legitimacy by implementing these reforms that could test the Mexican constitution as well as bring into conflict political parties.