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UPDATE 1-Mexico Senate panels debate energy reform; leftist PRD opposed

Monday, 9 Dec 2013 | 2:40 PM ET

MEXICO CITY, Dec 9 (Reuters) - Mexican Senate committees on Monday resumed debate of a draft energy bill that would open up the world's No. 10 oil producer to private investment by allowing lucrative contracts in what would be the sector's most dramatic revamp in 75 years. The bill, unveiled by senators from the ruling Institutional Revolutionary Party (PRI) and opposition conservatives on Saturday, would let private firms partner with ailing state oil firm Pemex via profit-sharing, risk-sharing and service contracts as well as licenses. The revised draft was a positive surprise for many in the oil industry, and the government hopes it will help stem a decade-long slide in crude oil output. Mexico's peso rallied on Monday to a seven-week high. The energy reform is seen helping drive economic growth in Mexico, something that would underpin the peso. Lawmakers from Senate committees had debated the bill on Sunday, but did not wrap up speeches in time for a vote. They restarted the session on Monday hoping to sign off the bill later in the day, though leftist lawmakers opposing the plan are trying to stall the process for as long as they can. After the session began, senators from the main leftist group, the Party of the Democratic Revolution (PRD), lined up in front of the podium in the upper chamber holding placards saying "no to privatization," then sang the Mexican national anthem. Shortly afterwards, the Senate temporarily suspended the session to attend complaints by the PRD. Delays are still possible depending on how many senators register to speak out against the bill, which the PRD has called "national treason." Once committees have passed the bill, it would head to the full Senate and lower chamber for votes. The reform is a cornerstone of an economic reform drive that President Enrique Pena Nieto hopes will boost long-lagging growth in Latin America's No. 2 economy.

It would allow private investors to drill for the country's crude, and although it stops short of full-blown concessions that oil majors had hoped for, the reform goes much further than many analysts had expected.

RIGHT TO BOOK RESERVES STILL MURKY Lawmakers say companies will not have rights to book oil reserves on their balance sheets but will be able to report projected benefits from agreed contracts for accounting purposes, which lawyers say is tantamount to the same thing. Jose Valera, a Houston-based energy expert with law firm Mayer Brown, stressed that booking reserves is not a function of ownership. "So long as the booking of reserves is not expressly prohibited by Mexican law, U.S. companies may book reserves in accordance with SEC guidelines," Valera said in an emailed statement. Other specialists say the proposal is vague on this point.

"The language... suffers from unnecessary ambiguity for not making it explicit that the lease-holder may post the expected economic benefit in volumetric units as well as in monetary units," George Baker, publisher of industry newsletter Mexico Energy Intelligence, said in a report. In a section setting out how risk-sharing contracts work internationally, the draft bill explains that production-sharing contracts let companies book crude reserves for accounting ends. The bill later says that "...the hydrocarbons beneath the surface are and will always be the property of the nation; in consequence, no participant in the oil industry will be able report the reserves of these products as assets." Jorge Jimenez, a Mexico City-based energy law expert at law firm Lopez Velarde, Heftye & Soria, said the bill was a "good compromise" on a difficult political issue but that secondary legislation expected next year would need to ensure there was no room for misinterpretation on the issue of reserves.

FINISH LINE The bill is a big step from the service contracts now on offer, under which companies are paid a fee and can recover costs. It also goes well beyond the proposal made by Pena Nieto in August, which was limited to profit-sharing contracts. Pena Nieto, who has pushed through overhauls of Mexico's tax rules, telecoms sector, bank lending regulations and education system, hopes to pass the energy reform before Christmas but lacks a majority in Congress. He needs the support of the center-right National Action Party (PAN) to pass the bill because the constitutional changes he wants to make require a two-thirds majority in Congress. But the PRD has vowed to fight the bill all the way to the finish line. The reform is a major break with tradition in Mexico, where assets of foreign oil companies were expropriated in 1938 to create Pemex, which is still a potent symbol of national pride.