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Pena Nieto Confident 75-Year Pemex Oil Monopoly to End This Year

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By Eric Martin, Carlos Manuel Rodriguez and Helder Marinho: June 18, 2013

Mexican President Enrique Pena Nieto said he’s confident Congress will end the state oil monopoly this year, opening the way for companies such as Exxon Mobil Corp. and Royal Dutch Shell Plc (RDSA) to tap the nation’s reserves.

In the model envisioned by Pena Nieto, state-owned Petroleos Mexicanos would develop some fields, while others are tapped by foreign and private companies. He declined to discuss more details of the proposal, or whether it would require a change in the constitution.

Seven decades after his party seized fields from the predecessors to Exxon and Shell, Pena Nieto is preparing for the return of international oil companies to arrest eight years of decline in crude output. An opening would probably be broad, from offshore drilling to shale fields similar to those that have revived the U.S. petroleum industry, Pena Nieto said.

“It’s obvious that Pemex doesn’t have the financial capacity to be in every single front of energy generation,” the 46-year-old president said in an interview in London yesterday, before traveling to Northern Ireland for meetings with Group of Eight leaders. “Shale is one of the areas where there’s room for private companies, but not the only one.”

Pena Nieto said his administration will send the energy bill to congress by September, when regular sessions resume, along with a tax proposal. The support of the top three political parties in the Pact for Mexico should ensure the bill is approved by Congress before year end, he said.
Skeptical Investors

Mexico is seeking to attract capital for deep-water and shale deposits found in the past decade as reserves dwindle in Cantarell, the 1976 oil discovery that ranked among the world’s largest.

Investors became more skeptical about the depth of the energy reform after it wasn’t included in the schedule for special congressional sessions in July and August, leaving it for the final four months of the year along with a crowded agenda that includes the tax overhaul and next year’s budget.

Mexico’s peso pared its drop yesterday after Pena Nieto’s comments, falling 1 percent to 12.8361 per U.S. dollar after losing as much as 1.3 percent. Yields on peso-denominated fixed-rate government bonds due in 2024 increased 11 basis points, or 0.11 percentage point, to 5.31 percent. Yields on $2 billion Pemex bonds due in 2022 added one basis point to 3.98 percent.

Pena Nieto’s comments boosted confidence he’ll make good on his pledge to open the state-controlled energy industry, said Ramon Cordova, a currency trader at Banco Base SA.
‘Good Path’

“What the market wants is the reforms to pass,” Cordova said by phone from San Pedro Garza Garcia, Mexico. The comments indicate “the energy reform is on a good path and it gives some more information, because up until now it’s been very opaque.”

Opening oil and gas exploration for private investment would help Mexico revive oil production that is heading for its ninth year of decline. Crude output averaged 2.52 million barrels a day this month through June 9, compared with 3.38 million barrels a day in 2004.

When Pena Nieto took office in December, he inherited an economy that had started to grow faster than Brazil in the final two years of predecessor Felipe Calderon’s administration amid record Mexican auto exports and waning Chinese demand for Brazilian commodities. Mexico’s gross domestic product will expand 3.2 percent this year, faster than 3 percent for Brazil, according to the median estimate of analysts surveyed by Bloomberg.
Government Spending

While Mexican growth eased to 0.8 percent in the first quarter, the least since the 2009 recession, Finance Minister Luis Videgaray said in an interview yesterday that the expansion will quicken as the government increases spending in the second half of the year.

“We expect much more accelerated spending in the second semester,” Videgaray said. “The budget is there and the revenue is there.”

Pena Nieto said there’s political momentum to pass more reforms after the approval of sweeping education and telecommunications laws and the creation of the Pact for Mexico. His Institutional Revolutionary Party, or PRI, dropped its opposition to an oil-law overhaul in March.

“We’re approaching key deadlines,” Pena Nieto said. “I’m optimistic that this political climate of understanding and agreement will be maintained.”

The start of July will mark one year since Pena Nieto’s election returned the PRI to power after a 12-years hiatus. Opening the energy industry to more private investment would be the “signature issue” for judging his presidency, Pena Nieto said during the campaign.

Pact for Mexico

Pemex bondholders are losing confidence in his ability to achieve the needed changes after signs of fraying in the Pact for Mexico alliance that Pena Nieto engineered between his own PRI, the National Action Party, or PAN, of predecessor Felipe Calderon and the Democratic Revolution Party, or PRD.

“The PRD cannot sign on for an ambitious energy reform, and they’ve been quite explicit about that,” Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington, said in an interview. “It’s going to be very difficult for the elite of the PRD to continue working with the government if the government and the PAN push through an energy reform that they’re opposed to.”

Yields on $2 billion Pemex bonds due in 2022 jumped 72 basis points in the past month through last week to 3.97 percent. Yields on Brazilian oil producer Petroleo Brasileiro SA’s 2021 notes rose 63 basis points over the same period.
Changing Reputations

Pena Nieto has been working to overturn the country’s reputation for violence, while strengthening the economy. His administration passed a balanced budget and an education overhaul that created an independent institute to evaluate schools and foster competition for teaching jobs and promotions based on performance, a move that sparked violent protests. The government also arrested the powerful head of the teachers’ union, Elba Esther Gordillo, on corruption charges, taking on a leader long considered to be untouchable.

Some of his other goals, such as progress in the war against organized crime, have proved more elusive. While the Milenio newspaper reported a 2.5 percent drop in drug violence in the first four months of the administration, communities in southern Mexico have armed themselves and kidnapped law-enforcement officials, saying police can’t protect them from cartels.
‘Excellent Job’

Pena Nieto’s energy and tax pledges, and his early legislative success, helped attract overseas asset managers including Pacific Investment Management Co., the world’s biggest bond fund, and lift foreign holdings of peso bonds to record levels. Yields on government peso debt due in 2024 dropped to a record low and the currency climbed to the strongest level in almost two years against the dollar last month. Yields have since climbed and the currency weakened on the prospect that the Federal Reserve will scale back its stimulus program.

Pena Nieto’s energy initiative may be the industry’s biggest overhaul since then-President Lazaro Cardenas seized oil fields from British and U.S. companies in 1938, said James R. Jones, the U.S. ambassador to Mexico when the North American Free Trade Agreement, negotiated under U.S. President George H. W. Bush and Mexico’s Carlos Salinas de Gortari, took effect in 1994. The expropriation is celebrated March 18.

Pena Nieto has “done an excellent job in his first six months in office,” Jones said in a telephone interview from Washington on June 14. “He has the best political sensitivity and touch I’ve seen since President Salinas was able to marshal various factions of Mexico to pass Nafta.”

To contact the reporters on this story: Eric Martin in Mexico City at [email protected]; Carlos Manuel Rodriguez in Mexico City at [email protected]; Helder Marinho in São Paulo at [email protected]

To contact the editor responsible for this story: Andre Soliani at [email protected]

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