Mexico’s Senate has approved an energy reform package, which
now heads to the country’s lower house for a vote likely by the end of this
month. Analysts were impressed with the bill, saying
it is more aggressive than anticipated.

“The reform presented in
the senate is close to the bull case scenario,
and significantly more meaningful than the original proposal,” Morgan Stanley analysts said, calling it potentially
“transformational” for the sector and the country.

Proponents are hoping to move Mexico up the global oil
producer tables, by allowing foreign companies to drill for oil for the first
time since 1938. At present, only Pemex can do so.

The package is based on a concession structure, in which the
private parties would be licensed. The
licenses maintain the oil reserves as state
property, but allow outsiders to book expected future cash flows from the
reserves.

A sovereign oil fund would manage the
profits. The package also includes the development of a private electricity market. The bill will face some
opposition this month in the house, but the pace of other reform packages
forming part of the Pacto por México has encouraged lawmakers.

“We expect the bill to receive broad bipartisan support,”
Goldman Sachs analysts said, calling it “comprehensive and market-friendly”.

“The bill could attract sizeable foreign investment from
2015 onwards and help develop the significant potential of the oil and gas
sector in Mexico,” Goldman said. “It could
therefore make a visible contribution to Mexico’s oil production and overall
real GDP growth, and strengthen the outlook for its fiscal and external
accounts.”

Combined with the effects of the labor, media and financial
sector reforms, the energy reform could pave the way for Mexico to receive a
credit upgrade, Goldman said. Mexico is rated Baa1/BBB/BBB+.

The reform package could help shore up disappointing GDP
growth as well.

“The Mexican economy is in the midst of a gradual economic
recovery, although a new fiscal framework may negatively affect private
investments in H1 14,” Barclays said. However, an aggressive energy reform
“could set the stage for an improved growth outlook in the medium term.” The
shop expects 3.7% GDP growth in 2014.LF