Mexico is considering rigid rules that would ensure a hefty cut of the spoils of a landmark energy overhaul go to Mexican firms, but that could jeopardize billions of dollars in investment from oil majors seen as key to future growth.
Late last year, Mexico's Congress approved a constitutional reform pushed by President Enrique Pena Nieto that ends state oil giant Pemex's 75-year monopoly, and aims to lure new investment into the sickly energy industry.
Secondary legislation that will flesh out the details of the reform are due any day, but one of the main sticking points has been the issue of local content purchasing rules.
Lawmakers are deciding whether to follow the example of Brazil, which opted for high levels when it liberalized its oil industry, or copy Norway and Colombia, which both rejected set percentages.
Pena Nieto says the energy reform could help drive economic growth to as much as 6 percent a year in Latin America's No.2 economy, which has long lagged regional peers.
A key aim of the overhaul is to attract oil majors to boost declining crude output, so policymakers must tread carefully or risk scaring off the same companies that have balked at Brazil's local content requirements.
"We are not in favor of prescriptive percentages," Alberto De La Fuente, Shell's top executive in Mexico, said at a recent energy forum in Mexico City.
The constitutional reform passed in December says the law should establish "minimum national content percentages" as a way to promote domestic supply chains, but gives no further detail.
Javier Trevino, a lawmaker with the ruling Institutional Revolutionary Party (PRI) on the lower house energy committee, left the door open for specific percentage content targets but also acknowledged tensions over which content path to take.
"It's the most controversial issue," he said referring to the debate over the energy reform's enabling legislation.
A senior congressional official told Reuters in February that the PRI proposed requiring that Pemex purchase 100 percent of goods and services from Mexican firms in onshore and shallow water contracts for up to three years, but proposed no such mandates on deep water developments.
Ruben Camarillo, an opposition lawmaker of the conservative National Action Party (PAN) who also sits on the lower house energy committee, said the PAN wants case-by-case content rules in individual contracts, not in the secondary laws due by the end of April.
The vast sums expected to arrive have raised the stakes in Mexico, where crude output has slid by a quarter over the last decade to settle at around 2.5 million barrels per day.
Foreign direct investment (FDI) in Mexico's oil sector will rise to up to $20 billion a year by 2016, bank Nomura estimates. Total FDI in Mexico's economy hit a record of $35 billion in 2013.
Barclays says the oilfield service sector could quadruple in size within six years to $80 billion, which "would rival the current massive investment cycle underway in the Middle East."
BRAZIL'S CAUTIONARY TALE
Mexican industry lobby Concamin wants content of 45 to 60 percent, said Regulo Salinas, the head of the chamber's energy committee, with still-higher levels for services like pipeline manufacturing but a much lower, rising level for services such as deep-water drilling where Mexican firms lack expertise.
A senior PRI lawmaker pitched a similar sliding-scale in January.
Mexico's main construction chamber CMIC took out a recent newspaper ad calling for a 50 percent local content level.
International comparisons are, however, guiding the debate
"We have to copy the good, not the bad," said Camarillo.
Norway was one of the first countries to set content rules as it began exploiting its massive North Sea reserves in 1971, encouraging foreign operators to partner with local firms.
Domestic firms got early access to tendering information and tie-ups between industry and state universities were privileged.
Those measures, which stopped short of specific percentages, helped Norway develop some of the world's top oilfield service companies like Seadrill and Aker Solutions.
Brazil, Latin America's largest economy, opened its state-run oil sector in 1997, ending Petrobras's monopoly.
But it wasn't until Brazil discovered its Santos Basin deepwater oil province in 2007, an up to 50-billion-barrel haul that then-President Luiz Inacio Lula da Silva called Brazil's "second independence," that appetite for local content exploded.
Many in Brazil saw local participation as a simple way of turning the country into a global oil and infrastructure player, and companies were encouraged to increase the amount of business bound for domestic firms to win bids.
Local content requirements are as high as 55 percent for the development phase of the pre-salt fields, according to Nomura.
Industry experts say rigid content rules often tie companies to unexpected cost spikes during multi-year contacts.
"The national content requirements in Brazil have easily delayed the overall development by a factor of several years and increased costs," said John Padilla, oil analyst with energy consulting firm IPD Latin America.
Nonetheless, Brazil's shipbuilding industry, which mainly serves the offshore oil sector, has grown dramatically due in large part to content rules. It now employs 60,000 workers, up 30-fold since 2000, according to shipbuilder union Sinaval.
Oil production has nearly doubled in Colombia since liberalizing its oil sector in 2003. Like Norway, the country has no set local content requirements.