The Mexican Senate has introduced a constitutional amendment that, if approved, would open the country’s oil market to foreign and private investors.  Currently, oil production is controlled exclusively by the state-owned Petroleos Mexicanos (Pemex).  The amendment, however, would encourage private and foreign investment by allowing companies to partner with Pemex through the use of production and profit-sharing contracts and licenses, among other things.

Sharing contracts allow companies to report projected revenue from planned projects on their books accounting purposes, although the oil itself would remain state property until it is pumped.  This system should facilitate project financing.  Licenses, on the other hand, which will be principally used for shale-gas exploration, would grant companies greater operational control by allowing them to manage oil directly.  Both, however, should help to encourage foreign and private investment in Mexico’s oil industry, which has seen eight years of falling output despite being the largest crude supplier to the United States, behind Canada and Saudi Arabia.

The amendment is a joint effort by the nation’s two biggest political parties, President Enrique Pena Nieto’s Institutional Revolutionary Party (PRI) and the National Action Party (PAN) and is considered by President Pena Nieto to be the cornerstone of his administration.  This reform follows a number of other pro-business initiatives by the President and the PRI, which have opened other sectors of Mexico’s economy to private and foreign investment.  A vote is expected soon, and will require a two-thirds majority in both houses to pass.  Assuming the bill is passed, congress will then have to pass secondary legislation to develop the framework by which outside partnerships will be allowed.  Such legislation will certainly take time to develop.  Similar regulations are still pending after the telecommunications reform legislation passed earlier this year.

Follow Sheppard Mullin’s Latin American blog for further updates about this historic legislation.