Mexico’s Congress approved a bill to end a 75-year state oil monopoly and generate as much as $20 billion in additional foreign investment a year.

The nation’s most significant economic reform since the North American Free Trade Agreement secured the required two-thirds majority in a 353-134 lower-house vote yesterday. The proposal must be ratified by state assemblies, the majority of which are controlled by the alliance backing the reform.

The bill will change Mexico’s charter to allow companies such as Exxon Mobil Corp. and Chevron Corp. to develop the largest unexplored crude area after the Arctic Circle. Supporters say the overhaul could propel Mexico into the top five crude exporting countries while opponents say it will funnel resource wealth to foreign investors. The peso gained.

“The reform will energize Mexico’s economy,” Carlos Capistran, chief Mexico economist at Bank of America Corp., said

in a telephone interview yesterday. “Congress was able to pass a better-than-expected constitutional reform.”

Producers will be offered production-sharing contracts or licenses where they get to own the pumped oil and will be allowed to log crude reserves for accounting purposes.

The reform could boost foreign investment by as much as $15 billion annually and potential economic growth by half a percentage point, JPMorgan Chase & Co. said in a Nov. 28 report. Capistran said the overhaul could bring an additional $20 billion foreign direct investment as soon as 2015 and further strengthen the peso as the market absorbs the news.

Eoin Treacy's view

The explosion in unconventional oil and gas development in Texas and the reality that geology pays no attention to national boundaries may have been the catalyst to a changing attitude to foreign investment in Mexico. As a result, the prospect of increased supply from such a major producer is an additional argument for lower to lateral ranging in crude oil prices over the next decade.

Mexico’s consumer dominated stock market should benefit from the knock-on effect of greater supply growth. The Mexbol Index posted a large upside weekly key reversal in June and has held a progression of higher reaction lows since. A sustained move below 40,000 would be required to begin to question medium-term scope for additional upside.