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Mexico needs deep reform to lure oil investment - Shell

David Alire Garcia and Adriana Barrera

MEXICO CITY (Reuters) - The legal framework governing Mexico's state-run energy sector will require major changes if the country is to boost production and attract significant private investment, a top official for oil major Royal Dutch Shell (Xetra: A0ET6Q - news) said.

Alberto de la Fuente, president of Shell Mexico, said far-reaching energy reforms are needed to maximize the domestic sector's potential as the government overhauls state oil monopoly Pemex .

Mexico nationalized its oil industry in 1938, and deep reform would require changes to the constitution.

"The more open the regime that's proposed, the broader and deeper the reform," de la Fuente told Reuters in an interview this week. "Without a doubt that will attract more investment to Mexico. In that sense, a constitutional reform would surely bring more investment," he said.

New President Enrique Pena Nieto of the centrist Institutional Revolutionary Party has said energy reform aimed at luring private capital will be a top priority this year. Mexico's government relies on oil revenues to fund about a third of the federal budget, and the heavy tax burden has limited Pemex's ability to fund new projects and raise output.

"I do believe that Mexico should hurry up," de la Fuente said, adding that if reforms are delayed for years the country's energy wealth could be squandered if energy prices fall.

Mexico, the world's No. 7 oil producer and a top exporter to the United States, has seen crude output decline about a quarter from a peak of 3.4 million barrels per day (bpd) in 2004 to around 2.6 million bpd last year.

Last month, Mexico's energy minister warned that Mexico could become a net oil importer as early as 2018 if major new oil finds cannot be developed. The country's oil consumption averaged around 2 million bpd over 2006 to 2011, according to BP (LSE: BP.L - news) 's Statistical Review of World Energy 2012.

The government wants Pemex to tap the expertise and technology of private companies in areas like deep sea exploration, in which the state company has little experience.

"Without a doubt, our competitive advantage is in deep waters," said Shell (LSE: RDSB.L - news) 's de la Fuente. "Difficult places are the ones we like."

Pemex estimates that there are up to 29 billion barrels of oil equivalent in its territorial waters in the Gulf of Mexico, more than half of the country's potential reserves and from which it has yet to extract any commercial quantities of oil.

Pemex has said it is interested in contracting private companies to help it tap the deepwater riches.

Mexico's constitution mandates that the state is the sole operator for exploration and production projects, and the sole owner of hydrocarbons, provisions widely viewed as inhibiting oil major participation in the sector.

Shell currently owns an interest in more than 423 licensed blocks in U.S. territorial waters in the Gulf of Mexico, including six major offshore facilities. In 2010, the company's Gulf of Mexico production totalled about 225,000 barrels of oil equivalent per day.

De la Fuente notes that Shell operates in Iraq, where the oil is also entirely owned by the state.

"We work in Iraq, where in the final analysis we receive payment per barrel of the petroleum we extract, but the reserves aren't ours, they belong to Iraq," he said. "In the (U.S.) Gulf of Mexico it's not like that, and we're in both places."

There is room to improve Mexico's legal framework for energy, even if constitutional reform proves politically elusive, he said, stressing he was not offering Mexico advice.

"If you don't reform the constitution but you have a structure of secondary laws that are well constructed and that bring clarity to the regime and make it competitive, that could also work," he said.

Pemex was shaken on January 31 when 37 people were killed in a basement gas blast at its Mexico City headquarters, the latest in a string of deadly accidents. Industry experts have said the safety won't put private companies off investing in the sector given the chance.

(Reporting by David Alire Garcia and Adriana Barrera; Editing by Simon Gardner and Tom Hogue)