Mexico's Senate approved an energy bill that supporters say will make the country the world's fifth-largest oil producer in about a decade, spurring growth in Latin America's second-biggest economy.

Mexican senators passed the bill in general terms near midnight to permit foreign companies such as Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) to drill for oil for the first time since 1938. Senators today sent the proposal to the lower house for approval, rejecting most changes after more than 20 hours of debate, according to an e-mailed statement from the Senate.

Mexico is the world's ninth-largest oil producer, according to the U.S. Energy Information Administration, and possesses the biggest unexplored crude area after the Arctic Circle. Industry analysts and the bill's authors say the overhaul will reverse eight years of oil output declines for Petroleos Mexicanos and increase production to as much as 4 million barrels per day by 2025. The plan would change the constitution to allow production sharing and licenses for outside companies that will also be able to log crude reserves for accounting purposes.

"With reform there will undoubtedly be a spurt of production growth as Mexico is a very rich hydrocarbon area both onshore and offshore," Ed Morse, the New York-based head of commodities research at Citigroup Inc., said in a phone interview before the vote. "Realistically, it could double the amount of oil that Mexico produces."

Falling Production

The bill drew its support from the Institutional Revolutionary Party, which President Enrique Pena Nieto returned to power one year ago; the National Action Party and the Green Party. Lawmakers from the Democratic Revolution Party and smaller allied parties opposed it, with some interrupting debate, first by draping a banner across the Senate podium and later by singing the national anthem.

Mexico's oil production has fallen 25 percent to 2.5 million barrels per day from a high of 3.3 million in 2004, according to the state-owned oil company known as Pemex. Should Mexican output reach 4 million daily barrels by 2025, it could surpass Canada to become the world's fifth-largest producer, given current production levels.

"It would put Mexico in the same level as the next tier of world producers," Morse said. "It could return Mexico to one of the top five oil exporting countries in the world, which is around the same level where they used to be."

Because the overhaul changes the constitution, it needs approval from at least two thirds of both the Senate and lower house. The floor debate in the lower house may begin on Dec. 14, according to Mexico City-based newspaper Reforma.

Truly Transformational

Pena Nieto's government forecasts the initiative will attract investment and spur production that will boost Mexico's annual gross domestic product growth by 1 percentage point by 2018. The Finance Ministry projects the economy will expand 1.3 percent this year, down from 3.9 percent in each of the past two years and the least since the 2009 recession.

"The bill could attract sizable foreign investment from 2015 onwards and help develop the significant potential of the oil and gas sector in Mexico," Alberto Ramos, chief Latin American economist for Goldman Sachs Group Inc., said in a Dec. 8 research report. "The potential impact on Mexico's widely-perceived inefficient and under-invested energy sector could be truly transformational."

Board Reduction

The bill also approves the removal of all five representatives of the Pemex workers' union from the company's board of directors. Under the new legislation, Pemex's board would be trimmed to 10 from 15. It would consist of five government members, including the energy minister as board president, and five professional advisers.

"We are promoting an energy model that strengthens Pemex in two ways: by internal reorganization and by creating an internal government that's more efficient and effective than what it currently has," said Institutional Revolutionary Party senator David Penchyna, who heads the Senate energy committee. "Both are included in the reform."

The removal of the Pemex union members from the board, which was proposed by the National Action Party, or PAN, would be another victory for Mexico's largest opposition party. The legislation also includes the creation of a sovereign fund to manage oil profits, which was part of the PAN's original proposal.

The energy overhaul includes 85 percent of the PAN's proposal, party President Gustavo Madero said yesterday in Mexico City.

Start Your Engines

The reform "will allow Mexico to set back into motion engines that have been shut down, to foment growth, to foment more investment and to foment more employment," Madero said.

The Democratic Revolution Party, or PRD, and allied parties argue the bill will funnel the nation's oil revenue to foreign companies and that Mexico doesn't have the regulatory framework to effectively oversee the industry.

Natural gas production would almost double to as much as 10.4 billion cubic feet by 2025 from current output of 5.7 billion feet, according to the bill. Approval of the overhaul could convert Mexico into a natural gas exporter, Morse said.

"The resource base for natural gas in Mexico is abundant, would be cheap if developed and would enable Mexico to resume a faster pace of industrial development and GDP growth," he said.

Wave of Exploration

Easing restrictions that have barred the largest international oil explorers from drilling in Mexico for three-quarters of a century will help Pemex revive output and crack vast shale formations, said Brian Youngberg, a St. Louis-based analyst at Edward Jones & Co. who covers oil producers including Chevron and Occidental Petroleum Corp. (OXY)

Opening the oil industry to foreign drillers could unleash a wave of exploration equaling Iraq in recent years, Youngberg said. Mexico's deep-water prospects in the Gulf of Mexico would be attractive to Exxon and Chevron, while shale tracts would interest EOG Resources Inc. (EOG) and ConocoPhillips, he said.

"It is looking better every day but it is not yet official," Youngberg said in a telephone interview on Dec. 9. Enticing foreign investment "should jump start production and get it moving back in the right direction," he said.

By Adam Williams and Eric Martin
www.bloomberg.com