MEXICO CITY (AP) -- Mexico's Congress passed a watered-down energy industry reform Tuesday that enables private contractors to participate in the state-owned oil business but won't likely draw enough investment to reverse declining production in the third-largest oil supplier to the United States.
The lower house overwhelmingly approved the reforms despite protests by leftist lawmakers who stormed the podium to block a bill they said was a stealth privatization of an industry that was nationalized in 1938. The Senate approved the reform last week.
Falling oil prices and output threaten to slash Mexico's state oil income, which makes up 40 percent of the federal budget, just as the country sees falling remittances from U.S. migrants and a plunging peso rattles the long-stable economy.
So far this year, Mexico has produced an average of 2.8 million barrels of oil a day, down 10 percent from 2007 levels. At current production rates, experts say Mexico will blow through its proven reserves in 10 years.
State oil monopoly Petroleos Mexicanos, or Pemex, lacks the technology and expertise for deep-water exploration in the Gulf of Mexico, believed to hold many of the country's unproven reserves. But experts say the reform bill has few incentives for private companies to take on the risk and expense of such exploration.
"It's a big disappointment from the investor's perspective," said John Cogan, a Houston-based attorney for McDermott Will & Emery LLP, who focuses on the hydrocarbons industry. "It doesn't do what needs to be done if they are going to fully benefit from their hydrocarbons natural resources."
Leftists had rallied popular support to limit openings to private investment in the oil industry.
After months of arduous negotiations, the bill was stripped of many of the most significant changes in President Felipe Calderon's original proposal.
It allows deep-water exploration only on a straight contractual basis, instead of paying private companies based on the amount of oil found. It also would no longer allow private investment in the building and operating of oil refineries, or private ownership of storage and transport facilities.
Mexico has not built a new refinery in three decades, and now depends on U.S. refineries to convert much of its crude into gasoline.
The reform will let Pemex keep more of its profits for investment in exploration and development. And it does allow for incentivized contracts, including paying contractors bonuses for early completion of projects and for technological transfer to Pemex.
"Investors will wait and see how this reform translates into actual contracts," said David Shields, an independent energy expert in Mexico City who has written books on Pemex. "But what we won't be able to avoid is a major drop in oil production in the short term."
(Copyright ©2008 by The Associated Press. All Rights Reserved.)
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