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Mexico opens new era as Peña Nieto signs energy legislation

August 11, 2014

MEXICO CITY – President Enrique Peña Nieto on Monday formally opened Mexico’s state-controlled energy industry to private investment, saying the nation will accelerate steps for the first round of private contracts.

Peña Nieto signed legislation Monday that completes steps to end the monopoly on energy production held by state-owned Petroleos Mexicanos since 1938. The law sets guidelines for private companies seeking to produce oil and electricity, and allows the government to assume pension liabilities from Pemex and the state-owned utility Comisión Federal de Electricidad.

The government is moving up by one month announcing which fields Pemex will retain for production in an oil auction known as round zero. The fields will be announced on Aug. 13 instead of Sept. 17, Peña Nieto said. That will help clear the way for the first private contracts to be revealed in the first quarter of 2015, he said. Pemex in March asked to retain fields that hold Mexico’s 13.44 billion barrels of proven oil reserves.

“The energy reform opens a great opportunity for Mexico, and we need to seize it with complete and fast implementation,” Peña Nieto said in a speech Monday at the National Palace in Mexico City. “I’ve told different areas of the government to accelerate all of the measures necessary to put this reform into action for the good of Mexico.”

The legislation, which gained final approval from Congress last week, guides the implementation of last year’s constitutional changes opening the energy industry to private investment. It’s designed to reverse nine years of declining oil output and boost economic growth that missed analysts’ forecasts in seven of the past eight quarters.

“These laws are important because they very clearly define the rules of the game for competition in the industry,” Alejandro Padilla, a strategist at Grupo Financiero Banorte, the country’s biggest publicly traded bank, said in a telephone interview from Mexico City. “The energy reform can generate much faster growth for Mexico.”

Pemex cut its 2014 production forecast to the lowest level in at least 24 years, trimming estimates to 2.44 million barrels a day from 2.5 million, Gustavo Hernández, Pemex’s head of exploration and production, said on July 25.

Peña Nieto has called the oil overhaul the cornerstone of his administration, which has also passed legislation to boost competition in telecommunications and lending. Private investment in the energy industry is forecast to add at least 1 percentage point to Mexico’s gross domestic product by 2018, according to the government.

Opening Mexico’s energy industry to private investment is “perhaps the most important structural reform of the last 30 years” and on par with the North American Free Trade Agreement, or Nafta, in 1994, Alberto Ramos, chief Latin America economist at Goldman Sachs, said in an Aug. 7 research note. The entrance of foreign producers such as Exxon Mobil and Chevron will bring $50 billion of annual private investment by 2020, Gabriel Casillas, chief economist at Grupo Financiero Banorte, said in a July 16 research note.

© 2014, Bloomberg News

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