Mexican Congress votes to open oil market to private capital

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MEXICO CITY -- The most dramatic overhaul of Mexico's oil industry in modern times came closer to fruition Thursday when Congress approved a proposal to end the state oil company's 75-year-old monopoly on the nation's oil and natural gas fields.

The vote marked President Enrique Pena Nieto's largest political triumph since he took office a year ago. After the 353-134 vote in the Chamber of Deputies, his supporters broke into sustained chants of "Mexico! Mexico!"

The proposal still must be approved by a majority of Mexico's 31 state legislatures and that of the federal district before it is enshrined in the constitution. That is expected to happen early next year; Mr. Pena Nieto's political party, the Institutional Revolutionary Party, or PRI, controls most of the state legislatures.

Once finally approved, the law would allow private capital, including foreign oil firms, to gain a foothold in the world's 10th-largest oil producer, an opportunity private companies have been denied since Mexico nationalized its oil industry in 1938.

In Twitter posts after the vote, Mr. Pena Nieto said it would "increase energy security of Mexico" and "boost productivity, economic growth and the generation of jobs."

"What we have approved will set the course for the country for the next 20 or 30 years," said Chamber of Deputies president Ricardo Anaya Cortes.

Nationalization of the oil industry has been a point of pride for Mexicans for decades, and Thursday's vote brought out high emotion, especially from nationalists who view the opening as an attack on a cornerstone of Mexican identity. Occasional cries of "traitor" interrupted the early-afternoon vote, which was taken not in the main chamber, but in an alternative hall because leftist opponents had piled up chairs and used chains to barricade entrances to the main chamber.

Mr. Pena Nieto made overhauling the energy industry his signature issue upon taking office late last year, when he ushered the PRI back to power. It was an unprecedented position for a politician from the party, which governed Mexico during most of the 20th century and under which the oil industry was nationalized. But Mr. Pena Nieto said allowing more participation by the private sector would inject the sagging energy sector with fresh capital and technology, and would quicken economic growth.

Still to be approved are secondary laws governing how foreign energy companies would work in Mexico. Nonetheless, the sweep of the changes is broader than Mr. Pena Nieto first laid out in an announcement in August, setting a path for foreign companies to share in production and profits and enter into licensing agreements to explore for and produce oil and natural gas.

Once that secondary legislation passes, U.S. experts said, Mexico and its state oil giant, Petroleos Mexicanos, or Pemex, would attract immediate foreign interest. "There will be dozens, if not hundreds, of companies that will be interested -- are interested -- in talking to Pemex," said energy consultant David Goldwyn, the State Department's former special envoy on energy.

Initial interest will come from independent and midsize companies, he said, but global companies eventually will seek to drill for crude in deep water in the Gulf of Mexico, near where they have rigs and teams on the U.S. maritime side. "It's going to be cheaper, safer, closer to market, and so I think that's going to be very attractive if they have the terms right," Mr. Goldwyn said.

"The constitutional change was better and more pro-market than what the government initially proposed," said Nomura Securities' senior Latin America analyst Benito Berber. "This, coupled with the strengthening of the regulators and more professional boards for the state-owned oil and electricity companies, heralds a positive outlook on the sector and the economy."

The overhaul encompasses changes to three articles of the Mexican Constitution, ending the monopoly of Pemex and the national electricity utility, known as CFE. It also establishes a set of autonomous regulators with independent funding, sets strict transparency for bidding and public access to contracts, and creates a special fund to be controlled by the central bank that would reserve revenues from outside contracts to fund education, technology development and other longer-term objectives.

The overhaul is expected to have political repercussions in Mexico, and it might also have social impact in the United States. It removes the powerful oil workers' union from seats on the administrative board of Pemex, which operates offshore oil rigs, refineries and thousands of gas stations across Mexico. That moves the PRI away from a political model that was in effect for much of the 20th century, in which it relied on mass social and labor groups for support.

Should the opening of the energy sector draw significant investment and boost the economy, it might keep poorer Mexicans from seeking their fortunes in the United States. "It will boost Mexico's economy significantly, and that will only put further downward pressure on Mexican migration to the United States," said Jason Marczak, deputy director of the Adrienne Arsht Latin America Center at the Atlantic Council, a Washington-based policy center.

The run-up to the final vote had moments of drama -- and wackiness. On Wednesday, legislator Antonio Garcia Conejo took off his clothes before astonished fellow lawmakers, saying he was baring himself just as the overhaul would fleece the nation's 118 million citizens of their most treasured public asset.

A ruling-party legislator got into a physical dustup with a leftist lawmaker and suffered a scratched retina. Wearing an eye patch, she still voted Thursday.

Some foes likened the energy action to 1980s moves to sell off public assets, such as the state phone utility, that gave rise to tycoons -- such as Carlos Slim Helu, sometimes ranked at the world's richest man -- while not offering average Mexicans much benefit.

Jesus Zambrano, president of the leftist Party of the Democratic Revolution, said his party was "in mourning" but would push ahead with a plan to gather signatures for a 2015 nationwide referendum to overturn the energy sector liberalization.

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