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RPT-INSIGHT-Mexico's rural landowners pose threat to foreign energy investors

Wed, 18th Jun 2014 11:00

(Repeating to additional subscribers)

By Gabriel Stargardter

EMILIANO ZAPATA, Mexico, June 18 (Reuters) - When foreigninvestors begin to pour into Mexico's overhauled energy sectorin the coming months, they will face a potent force well-knownto miners: Mexico's ejidos, or rural landowner groups.

The product of revolutionary land reform - almost a centuryago - that redistributed more than 100 million hectares fromlarge landowners to small farming groups, the ejidos controlsurface rights to large swaths of Mexico.

The ejidos are often poor but they can be powerful:machete-wielding landowners shuttered government plans for a newMexico City airport in 2002.

For years, foreign companies have owned concessions to minemetals in Mexico, leading them into delicate negotiations withthe ejidos, who often block mines for months when they feel theyare getting a raw deal.

But until last year, when Congress approved a reform to endstate oil giant Pemex's 75-year monopoly, foreignfirms were blocked from exploiting the oil and gas reserves ofthe world's 10th largest oil producer.

Now, they too will have to get along with the ejidos,forging long-term relationships that will help define thesuccess of Mexico's efforts to boost economic growth and lurenew investment to stem a decade of declining crude oil output.

"If you don't manage it well, this can be a real challenge,"said Gustavo Nieves, a project manager for Mexican oil servicescompany Grupo Diavaz, which operates on behalf of Pemex in theChicontepec region in central Mexico and pumps up to 13,000barrels of crude a day. "It can get really complicated."

Leftist lawmakers and agrarian groups, many of whom opposedthe reform, have raised the temperature for foreign investors byaccusing them of planning land grabs.

"This is the total destruction of property in this countryin the service of international companies," said Labor PartySenator Manuel Bartlett.

LAND UNCERTAINTY

Unlike in Mexico, where the state owns all oil and gas inthe ground, U.S. mineral rights are privately owned. Suchclearly defined land rights are one of the reasons some believethe U.S. shale oil and gas revolution has been so successful,and will be hard to replicate overseas.

Oil majors like BP and Exxon Mobil have beenquietly building up their presence in Mexico City, but they havenot disclosed specific investment plans. Last month Chevron said it saw "tremendous opportunity" in Latin America'ssecond-largest economy.

But, experts say, investors in Mexico's energy sector facetroubling questions.

"Who do we deal with, what kinds of arrangement can we make,and third, can they be enforced and will they be respected?"said Jim Rice, a Houston energy lawyer at global law firm SidleyAustin.

The Mexican government is trying to bring some clarity tothese questions. Under the terms of the reform, whose fine printis still being hashed out in Congress, surface rights holderswill be incentivized to reach a quick and amicable agreement ata fair price or face the prospect of expropriation.

But the previous experience of miners suggests the realityis far more complicated, with costly shutdowns a fact of life.

"The land tenancy issues are the biggest piece ofuncertainty you have to deal with as a foreign mining companyand I would foresee energy companies having the same issue inthe future," said Michael Harvey, director of corporate affairsat Canadian gold miner Goldcorp.

The company's Los Filos mine was blocked by an ejido formore than a month earlier this year, and it has faced weeks oflegal uncertainty at its giant Penasquito mine.

In 2012, Canadian silver miner Excellon saw itsshare price fall by nearly 50 percent during a 99-day blockadeat its La Platosa mine in northern Mexico.

Miners complain of outlandish demands.

In the case of Excellon, it said the ejido wanted aconcession to truck silver from the mine but was unwilling toinsure the cargo, a charge the ejido disputes.

Harvey recommended engaging landowners from the outset anddealing with them directly rather than through middlemen.

OIL AND TOIL

Experts say much of the initial investment resulting fromthe energy reform will head to areas like Chicontepec, whichholds about a third of Mexico's reserves and where mid-sizecompanies can forge relationships with Pemex or operate alone.

Emiliano Zapata, a sweltering citrus-growing village in theChicontepec oil basin, is one of the 3,631 ejidos in the easternstate of Veracruz. It has the highest number of landowner groupsin Mexico, making up 40 percent of the area of the state.

As such, it is a testing ground for whether foreign oilcompanies can make nice with local landowner groups.

On March 2, an eight-inch Pemex oil pipe burst into a streamthat provides water to the village, which is named after arevolutionary peasant leader who fought for land redistribution.

Pemex took responsibility for the leak, but months passeduntil the stream was this week finally declared clean. Duringthat time, residents relied on tanked-in water supplies, andthey said up to eight days would pass without a delivery.

Exasperated by the lack of water and a perception they weresaddled with all the costs of oil extraction, but saw none ofthe benefits, members of the 2,000-strong ejido blocked the mainroad into the oil-producing zone.

"The government's slogan is that the oil belongs to usMexicans," said laborer Josue Sanchez. "But us Mexicans, wholive the reality, haven't seen half a peso of that wealth."

Faced with the prospect of more investors arriving, localsin an area where half the population lives on food handouts, saythey are left with few options to make themselves heard.

"We're looking at the prospect of blockades, because nobodywants to take responsibility for these problems," saidGumercindo Gonzalez, the head of the ejido.

A Pemex spokesperson said the company took care of the leakin Emiliano Zapata, but added that a lot of ejido complaintslacked substance, and that the groups were usually looking forfinancial gain.

According to Gustavo Hernandez, the head of Pemexexploration and production, Mexico's extractive industries generally enjoy a fruitful relationship with the ejidos.

"The ejidos collaborate closely with the mining industry,with the oil industry, with Pemex, and with the energy companiesworking there extracting gas," he said.

But the experience of energy firms already operating inMexico provides a different perspective.

"For foreign companies it's a real nightmare," said thesecurity manager of an international oil services firm operatingin the state of Tabasco who declined to be identified because hewasn't authorized to speak to the media.

He spoke of widespread oil theft and impromptu blockades.

"You can't blame them really," he added. "(Oil servicescompanies) make all these promises, 'Oh yeah, we'll build you anew school, we'll build you a new clinic.' But a lot of the timeit doesn't really come to fruition." (Additional reporting by David Alire Garcia; Editing by SimonGardner and Martin Howell)

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