AMLO Favors Cutting Red Tape on Pemex Partnerships

(Bloomberg) -- Petroleos Mexicanos will be free to choose its own partners if Mexico’s next government has its way.

President-Elect Andres Manuel Lopez Obrador may seek to change a part of the 2014 energy reforms requiring Pemex receive regulatory approval when choosing partners in oil blocks, according to people with knowledge of the situation. Previously, Lopez Obrador has said that he will review the 107 contracts already awarded for signs of corruption.

AMLO Favors Cutting Red Tape on Pemex Partnerships

The practice of requiring regulatory approval for partners has been a point of contention for some Pemex executives, who have compared it to an arranged marriage and say that the added bureaucracy bogs down the process. Proponents say it’s aimed at providing greater transparency to what is often an opaque state company.

“The original scheme was awkward in the sense that Pemex was unable to choose its partners and market practice is such that it’s normally the case,” John Padilla, managing director of energy consultant IPD Latin America LLC, said by phone from Denver. “That being said, what this is all going to boil down to is what kind of corporate governance is put in place.”

Finding Partners

Today, the rules require Pemex to partner with the highest bidder for blocks it puts out for farm-outs, or deals in which oil field stakes are exchanged for help developing them. While it’s Pemex’s decision to offer a farm-out and the company is responsible for the economic terms of the partnership and the terms and conditions of the joint operating agreement, other aspects are determined by regulators and the government. The Wall Street Journal reported earlier on the changes under consideration.

The Ministry of Finance is responsible for the fiscal terms of the contracts. The Ministry of Energy determines what type of contract it will be, such as license or production-sharing. And the National Hydrocarbons Commission is responsible for running the bidding process and approving the winners, according to the CNH.

“If licensing rounds are canceled and joint ventures are the only vehicle for entry to the country, it reflects a consolidation of power within” Pemex, Maria Cortez, Latin America Upstream Senior Research Manager at Wood Mackenzie, said in an email. ”That could be viewed negatively by outside investors.”

Lopez Obrador will take office in Dec. 1, and has named loyalist Octavio Romero Oropeza to lead and strengthen the struggling state company, whose production has declined every year since 2004. He has pledged to inject Pemex with an additional 75 billion pesos for exploration and production and plans to boost output by one-third over two years.

A spokesman for Pemex and media representatives of Lopez Obrador’s transition team declined to comment.

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