By David Alire Garcia
MEXICO CITY, Oct 30 (Reuters) - Saddled with a tax rate ofalmost 100 percent, Mexican state oil company Pemex hands overso much cash to the government that it has only a fraction ofthe money it needs to invest in production and exploration.
So hopes were high when President Enrique Pena Nietoannounced last month that a government fiscal reform would easethe burden on Pemex and create a tax structure for the75-year-old monopoly "just like any other oil firm in theworld."
But as details of the reform emerged, a more sober view hasset in: that it would take years before Pemex can free itselffrom the grip of the Mexican tax collector.
Mexico's fiscal reform is likely to generate significantlyless revenue than originally planned, and the government wouldhave leeway to continue taking as much as it needs from Pemex tomake up shortfalls.
The Senate approved the broad outline of the fiscal bill,which is close to becoming law, late on Tuesday and is stilldebating sections that some lawmakers want to throw out orchange.
From 2015, the reform aims to lower the finance ministry'smain levy on the world's No. 5 oil company by sales, whichreached $127 billion in 2012.
But the fiscal overhaul would also put also new charges onPemex. They include a dividend to the government, which couldadjust the amount to avoid any "imbalance in the publicfinances."
In effect, said former Pemex Chief Executive Officer JesusReyes Heroles, the plan was tantamount to maintaining the statusquo under a different name.
"Actually, they don't reduce the tax burden on Pemex," hetold Reuters. "They change the structure."
Pemex accounts for a third of the federal government's taxrevenue and regularly operates at a heavy loss after taxes.
Last year, Pemex paid $69.4 billion in taxes on $69.6billion in pretax profits, a 99.7 percent tax rate.
That compares with rates of 69 percent for Venezuelanstate-owned oil company PDVSA, 25 percent forBrazil's Petrobras and 31 percent for Royal DutchShell Plc, according to the companies' 2012 annualreports.
If Pemex cannot keep more of its revenue to invest, it willstruggle to reach untapped deepwater oil and shale gas reservesto lift output, which is down by a quarter from 2004.
The government hopes to boost production to 3 millionbarrels per day by 2018 from 2.5 million bpd today. That couldadd 1.1 percentage points to Mexico's economic growth, JPMorganestimates.
BIDING TIME
Pena Nieto has also proposed energy reform that would bringin new capital to help exploit Latin America's third-largestproven oil reserves.
The president hopes that by offering profit-sharingcontracts with oil companies, crude output will jump, generatingadditional tax revenues and spurring faster growth.
But that revenue will probably only come if companies likeExxon Mobil Corp and BP Plc return to a countrythat seized foreign-owned oil holdings in 1938.
Mexico is counting on big outlays by private and foreigncompanies. Pemex CEO Emilio Lozoya says $60 billion must beinvested annually to maximize Mexico's oil and gas potential.
That sum is more than double the record $23.9 billion Pemexinvested in 2012. The company itself expects to invest an extra$10 billion by 2018 if oil prices remain high and thegovernment's proposed tax plan is implemented, Lozoya said.
Under the proposal, the finance ministry would setrecoverable costs and crude sales prices for new contracts.
So far, big foreign oil companies have been biding theirtime about committing significant investment to Mexico.
There is still uncertainty over how much the governmentwould levy from oil producers in the profit-sharing plan.Officials only say the rate will be internationally competitive.
Pena Nieto's proposal notes the government take is 78percent of net profit in Norway, 75 percent in Colombia and justabove 50 percent in the deep waters of the U.S. Gulf of Mexico.
Finance Minister Luis Videgaray has said a "reasonable"government take would be above 50 percent. The plan would allowthe government to vary its share in each contract.
And the plan dictates every drop of oil from a new well mustbe turned over to a state-run sales agency, meaning companieswill not be allowed to market the oil they produce.
"I think that will make it less attractive," said NilsAndersen, CEO of A.P. Moller-Maersk. The Danish oiland shipping group has signaled interest in deepwater drillingprojects, depending on the outcome of the reform.
Oil companies had hoped Pena Nieto might proposeproduction-sharing contracts so they could control and marketthe output.
But that would imply handing over the crude to foreigners ina country where ownership of oil wealth became a part of thenational psyche when the industry was nationalized.
Vigorous leftist opposition to even profit-sharing contractsmakes a more liberal reform a big political challenge, thoughnot necessarily an insurmountable one.
Some government officials and lawmakers say privately thatthe door may still be open to production-sharing schemes.
SHORT LEASH
Without more tax dollars from other companies, thegovernment will probably keep seeing Pemex as its favorite cashcow.
The finance ministry estimates the additional tax revenuefrom fiscal reform at less than 2.7 percent of gross domesticproduct by 2018, significantly less than the 4 percent officialshad targeted.
To help plug a projected shortfall in the 2014 budget, thegovernment simply raised its expected oil price from $81 to $85a barrel, underscoring its dependence on Pemex.
Compounding the problem for Mexican tax collectors has beenweak growth since Pena Nieto took office, which has leftanalysts forecasting Latin America's second-largest economy willfall far short of GDP expansion of 2 percent in 2013.
On paper, though, Mexico is committed to lightening Pemex'sload.
More than half of the company's current tax bill comes as anannual charge based on the value of oil and gas proceeds. Theproposed reform would reduce the rate from 71.5 percent to 60percent in 2015 and then to 10 percent in succeeding years.
But the reform aims to introduce a new royalty based on thevalue of the oil, gas or condensates produced, indexed to marketfluctuations. Pemex would also have to pay Mexico's 30 percentcorporate income tax.
Furthermore, the government would impose a new surfacerental fee paid monthly on acreage of oil and gas fields sittingidle, as a way to stimulate production.
Then there is also the dividend payable to the government.
Although that payment is due to decrease from at least 30percent of the company's after-tax earnings in 2016 to 15percent in 2021 and then to zero in 2026, the government candemand more if it comes up short.
Because the final decision on how to adjust the paymentwould remain with the finance ministry, the government has Pemexon a short leash, said Luis Miguel Labardini, a partner inenergy consultancy Marcos and Associates in Mexico City.
"The only thing that changes is the way you tax Pemex,"Labardini said. "The government is making sure that thistransition is not going to affect its ability to extract fromPemex what they are extracting now."
