A step forward in the modernization of Mexico's energy sector, the long-in-the-making Mexican Energy Reform, substantially diluted from its original to ensure passage through a divided Congress, is still considered by experts as sufficiently far-reaching to shore up the country’s flagging oil industry.

The Reform omits controversial risk-sharing alliances but allows sweetened-service contracts with the private sector by including performance-based incentives, leaving it up to PEMEX to come up with competitive terms to entice investment. Legislators appear to expect that not allowing foreign companies to book reserves will not be a deterrent.

The main purpose of the legislation is to give PEMEX more flexibility in contracting and in working with outside companies, and to have more control over budgets and investment. The key aspects of the Reform are:

1. The creation of a National Hydrocarbons Commission which will be responsible, among other things, for approval of all exploration and production projects, including levels of production and reserve restoration and technology use.

2. The strengthening of the authority of the federal Ministry of Energy as PEMEX's regulator and its role in the formulation of national energy policy. A National Energy Council will be set up with a mandate to devise an energy program to be submitted to Congress for approval every year.

3. A new structure for PEMEX's corporate governance intended to provide greater autonomy, independence and transparency. This should increase PEMEX's accountability and ability to implement projects.

4. Contracting with PEMEX will be excluded from the existing federal procurement law. PEMEX's Board of Directors will have discretion to set new rules and procedures for procurement and contracting based on general criteria set forth in the new PEMEX Law.

5. To authorize new schemes for incentive-based contracts regarding exploration and production. Compensation is to be set on the basis of performance criteria such as production enhancement, efficiency, early completion, under-budget completion, etc.

6. "Citizen bonds" will be issued by PEMEX and placed on the Mexican Stock Market with yield returns based on PEMEX's performance. In addition to creating a new market, the bonds are intended to improve PEMEX's accountability and disclosure of results and performance.

7. The creation of a Law for the Sustainable Use of Energy aimed at promoting energy efficiency and enhancing the use of alternative methods for energy generation and sustainability. There is a substantial emphasis on this part of the reform because current alternate power represents only 5% of the country's total. The government has set at least 25% as the five year target for the country.

8. Private companies will be allowed to participate in the developing of terminals and storing facilities, as well as in the transportation and processing of fuels and petroleum products.

The Reform was approved by the Mexican Senate last week and by the Lower House on October 28, 2008. The date of proclamation has not been announced but is expected to be shortly.