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Mexico Strains to Lure World’s Oil Giants

CIUDAD DEL CARMEN, Mexico—The plunge in global crude prices has thrown workers out of jobs and cut Mexico’s revenues from dozens of fields off these shores.

But damage from low prices is vexing the capital Mexico City in less visible ways: It is thwarting its historic, much-anticipated opening of the country’s oil industry to foreign companies.

On Wednesday, Mexico will auction off nine fields in the shallow-water Gulf of Mexico in what analysts consider its best chance this year to attract private and foreign oil companies, which have been kept out for almost eight decades.

The fields have proven and probable reserves, meaning that commercial quantities of oil have already been found, and are in an area where production costs have traditionally been below $ 20 a barrel. Twenty oil firms and consortia are qualified to bid, including Chevron Corp. CVX 0.63 % , China’s Cnooc Ltd. CEO -1.13 % , Royal Dutch Shell RDS.A 1.48 % PLC, and deep-pocketed Mexican startups like billionaire Carlos Slim’s Carso Oil & Gas SA.

But so far, the sweeping energy reform has foundered as the entire industry frantically cuts back on the very sorts of projects Mexico is now offering them.

Mexico badly needs to boost its oil production—which until recently funded about one-third of the federal budget—after more than a decade of decline. Petróleos Mexicanos, or Pemex, the country’s de facto oil monopoly since the 1938 nationalization of the sector, has struggled to keep up after the “easy oil” fields it discovered in the 1970s and 1980s started to run dry. The company lacks the expertise to develop more complex, deep-water projects, and is seeking partners to explore blocks that will be auctioned off next year.

In 2013, as the country became on the verge of becoming a net petroleum importer, President Enrique Peña Nieto decided to open up the energy industry—which required amending the constitution—so that foreign companies could help recover oil and gas from aging fields and find new reserves in deep waters and in unconventional deposits such as shale.

At the time, oil was trading above $ 100 a barrel, and the government expected a massive windfall. Mexico set up a sovereign-wealth fund designed to channel money into education and other programs once the new oil contracts generated taxes and royalties in excess of budget needs. The country expected the energy reform to add one percentage point to its gross domestic product every year, beginning in 2018.

Things got off to a rocky start. When the Mexican government launched its first auction of exploratory rights in the shallow waters of the Gulf in July, oil prices had more than halved to under $ 50 a barrel. Of the 14 blocks it auctioned, only two found takers—and none to big foreign companies.

The government made a series of moves to avoid a similar fate at Wednesday’s auction, tweaking contract terms and making bidding rules more flexible. Officials see the Sept. 30 auction as crucial to keep the energy reform—which was supposed to boost oil production to 3 million barrels a day by 2018 from the current 2.3 million—on track.

But as oil prices keep plunging, oil companies world-wide have become far pickier about where they are willing to invest time and capital, and more demanding. A recent auction by U.S. officials of properties on the U.S. side of the border but similar to the ones Mexico is putting on the block Wednesday went poorly, with oil majors declining to even bid.

Wood Mackenzie, a consulting firm, figures that the industry has canceled more than $ 100 billion worth of such projects this year.

“Unfortunately, it’s very bad timing,” said Adrián Lajous, a former Pemex chief executive and a fellow at the Center on Global Energy Policy at Columbia University.

Supporters of the reforms note that they are focused on transforming the energy industry over the long haul. Juan Carlos Zepeda, president of the National Hydrocarbons Commission, says opening up Mexico’s energy industry at a time of low prices will make it more competitive in the long run.

Analysts and observers aren’t so sure. The competition for ever-scarcer investment spending by oil companies has ratcheted up dramatically. That has shifted the balance of power between those companies and producing countries, forcing producers to offer up better terms or face the prospect of falling production—and revenues.

Meanwhile, the Peña Nieto administration is facing domestic political headwinds, including the escape of a major drug kingpin from a maximum-security prison, and a government ethics probe that recently exonerated Mr. Peña Nieto and his finance minister. The gathering political storm has focused dissatisfaction on the high-profile energy reform effort and threatens to derail it.

In Ciudad del Carmen, a once-bustling center of Pemex activity in the state of Campeche, workers partly blame the energy overhaul for job cuts on offshore oil platforms that produce most of Mexico’s oil. They reason that Pemex and its subcontractors are pulling back in anticipation of the arrival of foreigners who will be awarded some of the fields once controlled by the former state monopoly.

“What we see now is a lot of people without work because of Peña Nieto’s reform,” said Enrique Rivera, 48, an unemployed oil-platform maintenance worker. He also blames the sharp drop in oil prices.

Government officials said low oil prices caused Pemex to cut $ 4 billion from its budget this year, which led to cancellation of service contracts.

It isn’t the landscape Mexican officials expected to face when they launched their heady reform in 2013. Pemex—which was created by President Lázaro Cárdenas after he nationalized the oil industry in 1938—was allowed to keep the bulk of the prospects it had discovered or begun to develop. But 17% of the country’s proven and probable reserves, which are estimated at 24.8 billion barrels of crude oil equivalent, were set aside for auction to private companies.

The reform plan won plaudits from foreign companies, and Mexican officials became the darlings of international industry conferences.

Then this July, as global oil prices had touched lows not seen in years, Mexico’s first auction failed to land a single foreign oil major—sparking a round of finger-pointing between the energy ministry, treasury, regulator and private companies over what went wrong.

Mr. Zepeda, the head of Mexico’s National Hydrocarbons Commission, said he is optimistic the Sept. 30 auction will fare better.

“There is no exploratory risk” in the fields auctioned Wednesday, he noted. “The projects themselves are more attractive, less risky, so on the basis of that, I believe we should get a good result.”

Write to Bill Spindle at bill.spindle@wsj.com and Laurence Iliff at laurence.iliff@wsj.com

WSJ.com: US Business

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