MEXICO CITY, Oct 30 (Reuters) - Saddled with a tax rate of almost 100 percent, Mexican state oil company Pemex hands over so much cash to the government that it has only a fraction of the money it needs to invest in production and exploration.
So hopes were high when President Enrique Pena Nieto announced last month that a government fiscal reform would ease the burden on Pemex and create a tax structure for the 75-year-old monopoly "just like any other oil firm in the world."
But as details of the reform emerged, a more sober view has set in: that it would take years before Pemex can free itself from the grip of the Mexican tax collector.
Mexico's fiscal reform is likely to generate significantly less revenue than originally planned, and the government would have leeway to continue taking as much as it needs from Pemex to make up shortfalls.
The Senate approved the broad outline of the fiscal bill, which is close to becoming law, late on Tuesday and is still debating sections that some lawmakers want to throw out or change.
From 2015, the reform aims to lower the finance ministry's main levy on the world's No. 5 oil company by sales, which reached $127 billion in 2012.
But the fiscal overhaul would also put also new charges on Pemex. They include a dividend to the government, which could adjust the amount to avoid any "imbalance in the public finances."
In effect, said former Pemex Chief Executive Officer Jesus Reyes Heroles, the plan was tantamount to maintaining the status quo under a different name.
"Actually, they don't reduce the tax burden on Pemex," he told Reuters. "They change the structure."
Pemex accounts for a third of the federal government's tax revenue and regularly operates at a heavy loss after taxes.
Last year, Pemex paid $69.4 billion in taxes on $69.6 billion in pretax profits, a 99.7 percent tax rate.
That compares with rates of 69 percent for Venezuelan state-owned oil company PDVSA, 25 percent for Brazil's Petrobras and 31 percent for Royal Dutch Shell Plc, according to the companies' 2012 annual reports.
If Pemex cannot keep more of its revenue to invest, it will struggle to reach untapped deepwater oil and shale gas reserves to lift output, which is down by a quarter from 2004.
The government hopes to boost production to 3 million barrels per day by 2018 from 2.5 million bpd today. That could add 1.1 percentage points to Mexico's economic growth, JPMorgan estimates.
Pena Nieto has also proposed energy reform that would bring in new capital to help exploit Latin America's third-largest proven oil reserves.
The president hopes that by offering profit-sharing contracts with oil companies, crude output will jump, generating additional tax revenues and spurring faster growth.
But that revenue will probably only come if companies like Exxon Mobil Corp and BP Plc return to a country that seized foreign-owned oil holdings in 1938.
Mexico is counting on big outlays by private and foreign companies. Pemex CEO Emilio Lozoya says $60 billion must be invested annually to maximize Mexico's oil and gas potential.
That sum is more than double the record $23.9 billion Pemex invested in 2012. The company itself expects to invest an extra $10 billion by 2018 if oil prices remain high and the government's proposed tax plan is implemented, Lozoya said.
Under the proposal, the finance ministry would set recoverable costs and crude sales prices for new contracts.
So far, big foreign oil companies have been biding their time about committing significant investment to Mexico.
There is still uncertainty over how much the government would levy from oil producers in the profit-sharing plan. Officials only say the rate will be internationally competitive.
Pena Nieto's proposal notes the government take is 78 percent of net profit in Norway, 75 percent in Colombia and just above 50 percent in the deep waters of the U.S. Gulf of Mexico.
Finance Minister Luis Videgaray has said a "reasonable" government take would be above 50 percent. The plan would allow the government to vary its share in each contract.
And the plan dictates every drop of oil from a new well must be turned over to a state-run sales agency, meaning companies will not be allowed to market the oil they produce.
"I think that will make it less attractive," said Nils Andersen, CEO of A.P. Moller-Maersk. The Danish oil and shipping group has signaled interest in deepwater drilling projects, depending on the outcome of the reform.
Oil companies had hoped Pena Nieto might propose production-sharing contracts so they could control and market the output.
But that would imply handing over the crude to foreigners in a country where ownership of oil wealth became a part of the national psyche when the industry was nationalized.
Vigorous leftist opposition to even profit-sharing contracts makes a more liberal reform a big political challenge, though not necessarily an insurmountable one.
Some government officials and lawmakers say privately that the door may still be open to production-sharing schemes.
Without more tax dollars from other companies, the government will probably keep seeing Pemex as its favorite cash cow.
The finance ministry estimates the additional tax revenue from fiscal reform at less than 2.7 percent of gross domestic product by 2018, significantly less than the 4 percent officials had targeted.
To help plug a projected shortfall in the 2014 budget, the government simply raised its expected oil price from $81 to $85 a barrel, underscoring its dependence on Pemex.
Compounding the problem for Mexican tax collectors has been weak growth since Pena Nieto took office, which has left analysts forecasting Latin America's second-largest economy will fall far short of GDP expansion of 2 percent in 2013.
On paper, though, Mexico is committed to lightening Pemex's load.
More than half of the company's current tax bill comes as an annual charge based on the value of oil and gas proceeds. The proposed reform would reduce the rate from 71.5 percent to 60 percent in 2015 and then to 10 percent in succeeding years.
But the reform aims to introduce a new royalty based on the value of the oil, gas or condensates produced, indexed to market fluctuations. Pemex would also have to pay Mexico's 30 percent corporate income tax.
Furthermore, the government would impose a new surface rental fee paid monthly on acreage of oil and gas fields sitting idle, as a way to stimulate production.
Then there is also the dividend payable to the government.
Although that payment is due to decrease from at least 30 percent of the company's after-tax earnings in 2016 to 15 percent in 2021 and then to zero in 2026, the government can demand more if it comes up short.
Because the final decision on how to adjust the payment would remain with the finance ministry, the government has Pemex on a short leash, said Luis Miguel Labardini, a partner in energy consultancy Marcos and Associates in Mexico City.
"The only thing that changes is the way you tax Pemex," Labardini said. "The government is making sure that this transition is not going to affect its ability to extract from Pemex what they are extracting now."