Mexico deal on expanded Gulf oil drilling still in limbo -U.S.

More than a year after the United States and Mexico signed a much-lauded deal that would remove obstacles to expanding deepwater drilling for oil in the Gulf of Mexico, the agreement still has not been finalized by the United States.

The delay, for which people close to the administration blame Congress while Republicans in Congress blame the administration, is certain to be discussed when President Barack Obama visits Mexican President Enrique Pena Nieto in Mexico City on Thursday.

Mexico immediately ratified the pact in April 2012, but the United States has so far been unable to pass a simply worded, one-page law to put the agreement into force.

The deal, formally known as the Transboundary Hydrocarbons Agreement, provides legal guidelines for deepwater drilling in the 1.5 million acres (600,000 hectares) of the Gulf that straddle the U.S.-Mexico boundary.

It is seen as the key to opening a new era of cooperation on oil production between the two countries. Mexico's state-owned oil company Pemex needs technology and investment to boost its stagnant production, and U.S. companies are eager to help.

"The U.S. has a real opportunity now to put energy back on the agenda with Mexico in a way that it really hasn't been able to be on the agenda for the last several years," said Neil Brown, who worked on the issue during the last Congress as lead Republican international energy aide in the Senate.

But the final step of implementing the deal has languished.

"I'm not aware of strong opposition to it. I think it's been a little more inertia," said Jason Bordoff, a top energy official at the White House until January who now runs Columbia University's Center on Global Energy Policy.

In the past several weeks, there have been some signs that the implementing legislation may move forward, but there also could be new complications related to disclosure requirements.

DEAL COULD OPEN THE DOOR

Oil is critical for the Mexican economy, paying for a third of the government's budget. But production peaked in 2004 at 3.4 million barrels per day and has slipped below 2.6 million bpd. PEMEX says it can revive production with deepwater wells in the Gulf, but needs technical and financial help.

The cross-border agreement would be the first step toward joint projects for reservoirs that cross the boundary, providing a way for PEMEX and other oil companies to share production and creating a framework to solve disputes that could arise.

"Without the agreement, it creates a barrier to investment," said Erik Melito, a director at the American Petroleum Institute, the oil industry's lobby group.

The agreement could help calm Mexico's fears about what is termed the "popote" or drinking-straw effect - fears that U.S. oil companies are going to drain reservoirs that extend into Mexico's side of the border, robbing Mexico of its share, said David Goldwyn, a former State Department official who helped launch negotiations.

"This has been an urban myth in Mexico for decades," said Goldwyn, now president of Goldwyn Global Strategies, a consulting firm.

Pena Nieto is working toward reforms for PEMEX that would allow for more production and cooperation in projects generally - a delicate issue in a country where PEMEX and oil are symbols of national pride.

"If they can see some success here (with the transboundary deal), that's going to change the political conversation in Mexico," Goldwyn said.

Failing to implement the deal, though, would be a major setback for U.S.-Mexico energy relations, former U.S. Senator Richard Lugar warned in December, in one of his final reports as the top Republican on the Senate Foreign Relations Committee before he left Congress.

NEW TWIST IN THE DEAL

To finalize the deal, Congress needs to pass legislation that gives the Interior Department the authority it needs to implement the technical aspects of the agreement.

But in the Senate last year, dissension over an unrelated Law of the Sea treaty and the heated politics of the U.S. presidential election effectively put the deal on hold.

In the waning days of the last Congress, Democrats in the Senate thought they had found a vehicle to move the bill, but they were foiled by procedural objections, said former Senator Jeff Bingaman, a Democrat who at the time was the chairman of the Senate Energy Committee.

The administration has sent its proposed text to the Republican-led House of Representatives, which is in favor of expanded oil drilling.

Lawmakers from two House committees, natural resources and foreign affairs, promptly crafted a bill.

"It was the administration that failed until five weeks ago to give us the guidance that we needed to implement the language," said Doug Lamborn, a Republican congressman from Colorado, at a House natural resources hearing with administration officials last week.

In a new twist, the bill includes a measure that would exempt U.S. oil companies drilling in the area from certain disclosure rules that were part of the 2010 Dodd-Frank financial reform law. Those disclosures are strongly backed by the White House and Democratic senators.

Aimed at curbing corruption, the rules require oil and mining companies to report payments to any foreign government to the Securities and Exchange Commission. Oil and business lobby groups are fighting the rules in court.

Interior and State Department officials did not directly comment on the provision at a hearing last week, saying only that the administration wants to work with the House on details of the bill so that the deal can be in place in time for the next sale of drilling leases for the Gulf, expected to be held in August.

Bingaman said the exemption "complicates things significantly" for quick passage of the bill. "They've added in some things that are going to make it difficult to pass in that form," he said, referring to the exemption.

Last week, the Senate energy committee quietly filed a one-page bill reflecting the administration's suggested language, word for word, with no mention of the disclosure exemption.

The timing of next steps is unclear.

"It would really be unfortunate if that process proved to be a protracted one," said Michael Bromwich, Obama's former U.S. offshore drilling regulator, who helped negotiate the deal. "There's no purpose that's served by further delaying."