Why Mexico Passed a New Oil Law

Energy reform in Mexico triggered a series of passionate protests that went from people knocking incessantly at a barricade built around the Senate…

To this congressman taking off his clothes in protest, arguing that Mexico was being stripped of its oil wealth.

But what exactly does Mexico’s new energy bill do? And why did it come about? Here’s a breakdown of energy reform in Mexico and why it matters to the rest of the world.

1. The new energy reform will allow foreign companies to develop oil fields in Mexico

By amending the Mexican constitution, the reform enables foreign companies to enter into profit sharing contracts with the Mexican state, where companies invest in new oil fields and also get a significant share of the profits. This change in Mexican law is expected to bring in billions in foreign investment.

2. Mexico needs foreign companies to help it develop its oil fields

Currently Mexico’s state-owned oil company Pemex funds 35% of the government’s budget by selling oil and gas.

But oil production in Mexico has declined from 3.4 million barrels per day in 2003, to 2.5 million barrels per day in 2012. This is partly because oil is running out in sites that are easy to drill, and Pemex lacks the technology to develop offshore oil fields.

3. With foreign investment Mexico could tap into lots of oil

Mexico currently has proven oil reserves of around 14 billion barrels, but Pemex estimates that there are another 29 billion barrels that could be recovered from the gulf of Mexico, with the help of foreign companies. Good news for Chevron, Exxon and the like.

4. So why hasn’t this been done before

Oil nationalization is a big part of Mexican history. Many people in Mexico are concerned that opening the sector to foreign companies, will mean lots of cash for companies and few returns for the Mexican government, and by extension, the Mexican people.

A protester outside the Mexican senate gives us her take on foreign oil companies and the Mexican government

According to the reform passed on Thursday, Mexico’s Congress now has 120 days to spell out the details of how they will work with foreign oil companies. Laws that give too many advantages to companies could decrease the revenues of the Mexican state, and force taxpayers to pay for services that are currently paid for by oil income.

Laws that don’t allow companies to get a sufficient share of oil profits, might not encourage investment, and leave Mexican oil production where it’s at right now: stalled.

Manuel Rueda is a correspondent for Fusion, covering Mexico and South America. He travels from donkey festivals, to salsa clubs to steamy places with cartel activity.