Mexico's president proposes foreign investment in energy

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MEXICO CITY -- President Enrique Pena Nieto, pushing one of the most sweeping economic overhauls in Mexico in the past two decades, on Monday proposed opening his country's historically closed energy industry to foreign investment.

The president's plan, which would rewrite two amendments to the Constitution, challenges a bedrock assumption of Mexico's national identity -- its total sovereignty over its energy resources -- by inviting private companies to explore and pump for oil and natural gas.

Mr. Pena Nieto's goal, like those of presidents before him, is to recharge Mexico's economic growth by tackling areas of the economy that analysts agree hinder the nation's expansion. Mexico's economic growth has averaged less than 2 percent a year since 2000, according to the Organization for Economic Cooperation and Development.

Mexico, its energy sector creaky, could turn from an energy exporter to an energy importer by 2020, the government says. Already, Mexico must import almost half its gasoline -- mostly from the United States. Mexican companies pay 25 percent more for electricity than their competitors in other countries, the government says. Although Mexico has some of the world's largest reserves of shale gas, it imports one-third of its natural gas.

In advancing the plan, Mr. Pena Nieto is making a gamble that the support he has built with opposition parties to make deep-seated changes in education and telecommunications policy will carry over into the debate over energy and a related tax reform he will send to Congress next month.

Until now, Mr. Pena Nieto has proved astute at negotiating changes based on a broad list of commitments that all three major political parties agreed on in December. He has been helped by the two main opposition parties being weakened after the 2012 general election, which gave Mr. Peña Nieto's Institutional Revolutionary Party, or PRI, a majority in Congress.

But his two major victories so far in education and telecommunications were comparatively easy. There was already broad consensus on the need to rein in the power of the teachers' union and the powerful companies that control telecommunications and television broadcasting in Mexico.

In energy, the divisions are much deeper. In particular, Mexico's left-wing parties have been adamant that the Constitution's prohibition on private investment should remain ironclad. From the right, the National Action Party, or PAN, proposed an energy reform last month that would go even further than Mr. Pena Nieto to invite in private investment.

Public opinion is also suspicious about opening up the industry. A survey last year by CIDE, a Mexico City university, found that 65 percent of the public opposed private investment in Pemex, the state-owned oil monopoly.

"The entire energy reform is a potential source of conflict," said Luis Miguel Labardini, a consultant with Marcos y Asociados, a Mexican energy consulting firm. "Sometimes in Mexico we are conflict-averse. We have to take our chances because the reward is there."

The proposal will allow private companies to negotiate profit-sharing contracts with the government to drill for oil and gas. Under such a scheme, the reserves will continue to belong to the Mexican state, but investors will get a share of the profits.

Private investment will be allowed in refining, transport lines and petrochemical production. The proposal would also loosen restrictions on private investment in electricity generation.

Although most analysts believe that Mr. Pena Nieto has the votes in Congress to pass the reform if the PAN votes along with his party, the president appears to want to sway public opinion, as evidenced by his decision to make a prime-time televised address on the subject Monday night.

"It is fine to appeal to rationality, but when it is about these issues, it's indispensable to touch the audience's heart," an analyst, Maria Amparo Casar, wrote in the Excelsior newspaper last week.

The left-wing leader, Andrés Manuel López Obrador, who won more than 30 percent of the vote in last year's general election, is planning street marches to protest the change. If he succeeds in filling the streets of the capital, as he did when a much less sweeping change was proposed in 2008, it may be harder for party leaders to stand behind the plan.

Since the 1994 North American Free Trade Agreement exempted energy from Mexico's broad economic opening, presidents have attempted to loosen some prohibitions. Their proposals have often withered in Congress.

But this time, the precipitous decline of Mexico's energy industry may work in Mr. Pena Nieto's favor. Pemex, which was long an important source of crude exports to the United States, is spending more to pump less. As Mexico's giant Cantarell oil field in the shallow waters of the Gulf of Mexico has declined, production has dropped 25 percent from the peak in 2004, to just more than 2.5 million barrels of oil a day. At the same time, the amount the government has given to Pemex to invest has steadily climbed, and will reach $26 billion this year.

To increase production and reserves, Pemex needs to drill in the deep waters of the Gulf and in onshore deposits of shale oil and gas. But the company has neither the capital nor the expertise to increase production significantly, analysts say.

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