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Mexico lays out energy reform rules for private companies

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MEXICO CITY - The Mexican government on Wednesday unveiled its proposed rules for a historic opening of the state-owned oil and energy industry, saying contracts and production licenses should be put out for public bid and go to the company that offers the best return.

Energy Secretary Pedro Joaquin Coldwell said the service station monopoly of state-owned Petroleos Mexicanos would fade only gradually as the necessary distribution and other infrastructure is made ready. Private companies will not be allowed to immediately open gas stations to compete with it.

Joaquin Coldwell said that Mexican suppliers would be given preference in contracts over foreign firms in cases where both offer the same terms. And he said that Mexico would seek a goal of ensuring 25 per cent "national content" goal in energy projects.

The rules must still be approved by Congress.

Mexico nationalized the oil industry in 1938, but in recent years Petroleos Mexicanos has struggled with falling oil production and an inability to harness new gas and oil deposits in deep ocean water or in shale deposits. And more than seven decades of state ownership have neither ensured prosperity for Mexico nor provided low gas and oil prices. A bloated union, corruption within the state-owned oil company and the government's dependence on oil revenues to fund public spending have reduced any benefits that might have trickled down to the average citizen.

The proposed regulations aim to make the oil industry more transparent by make information on projects and bidding available to the public on the internet.

"I think it is viable to have everything on the internet. That's good. That's very important," said Mexico City oil analyst David Shields. "This has worked better than most people think."

Still, it remains to be seen whether foreign and private firms will rush to develop Mexico's underdeveloped fields.

"Once you see what's put up for bid, that's when you'll see how attractive it is," said Shields, who expects the Mexican government to offer a mix of deep-water exploration blocks, shale gas deposits and other types of fields in the opening rounds.

Shields said the automatic preference for Mexican contractors, suppliers and bidders didn't make much sense, since it is based on the concept of 'all other things being equal.'

"All other things are never equal," said Shields. "In a competitive bidding process it's almost unheard of for two companies to offer exactly the same thing."

A constitutional reform passed last year allows contracts for profit- and production-sharing, as well as licenses, in which companies pay royalties and taxes to the Mexican government for the right to explore and drill. Pemex would get first consideration for licenses.

Many Mexicans remain suspicious of the reforms. On Monday, Oscar-winning Mexican movie director Alfonso Cuaron published a full-page advertisement in Mexican newspapers questioning the energy reform, asking "when will prices for gas, gasoline, fuel oil and electricity come down?"

Coldwell said in answer to the questions from the "Gravity" director that energy prices in general would come down in "the middle term," but that Mexicans would see a decline in the country's relatively high gas and electricity rates within two years after the enabling legislation is passed. He noted that Mexico currently imports gas needed to run power plants at higher prices from abroad, because the state-owned company can't produce enough at home.

Caldwell said that, in cases where oil and gas deposits cross international boundaries, Petroleos Mexicanos would have to have a 20-per cent stake in any exploration or production deal.

Mexico's oil production peaked at 3.4 million barrels per day in 2004, and has since declined to about 2.5 million barrels of crude equivalent. The government hopes the reforms will boost production back to three million barrels by 2018 and 3.5 million by 2025.

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