By Alexandra Alper and Dave Graham
MEXICO CITY (Reuters) - Mexico's Senate on Tuesday debated a landmark energy overhaul bill at the center of President Enrique Pena Nieto's economic reform drive, after the country's two biggest political parties hammered out a draft presented over the weekend.
The reform, backed by the ruling Institutional Revolutionary Party (PRI) and the opposition conservative National Action Party (PAN), would mark the biggest strategic shift since the world's No. 10 oil producer nationalized the sector in 1938.
The reforms are designed to lure private oil companies to either operate independently in Mexico, or partner with state oil monopoly Pemex through production- and profit-sharing, service contracts and licenses.
Pemex's crude production has slid by a quarter since hitting a peak of 3.4 million barrels per day in 2004, and export volumes have dropped by a third over the same period.
Senate committees overseeing the bill gave it general approval on Monday before beginning a protracted debate on reservations raised by leftist lawmakers trying to derail it. They then pushed the bill to the upper house.
As the Senate began debating the bill on Tuesday afternoon ahead of a vote, lawmakers from the leftist Party of the Democratic Revolution (PRD), which is fighting hard to stop the bill passing, held up signs reading "no to privatization."
The debate is expected to extend well into the night.
Lawmakers made some amendments to the draft bill on Tuesday, adding a paragraph that removes union members from the board of Pemex, a demand of the PAN, which argues that the union is a weight around the company's neck and breeds corruption.
The content of the bill was a positive surprise for many in the oil industry, and the government hopes it will help stem the decade-long slide in crude oil output.
The energy reform is seen helping drive economic growth in Mexico, which would underpin the peso. The currency rallied on Monday to a 7-week high.
Once the Senate has passed the bill, it must head to the lower house of Congress to be voted on.
The reform is a cornerstone of an economic program that Pena Nieto hopes will boost long-lagging growth in Latin America's No. 2 economy.
It would allow private companies to operate the country's oil fields, and though it stops short of full-blown concessions, it goes much further than many analysts had expected.
Lawmakers say companies will not have rights to book oil reserves on their balance sheets but will be able to report projected benefits from agreed contracts for accounting purposes, which lawyers say is tantamount to the same thing.
Other specialists say the proposal is vague on this point.
In a section setting out how risk-sharing contracts work internationally, the draft bill explains that production-sharing contracts let companies book crude reserves for accounting ends.
But "the hydrocarbons beneath the surface are and will always be the property of the nation; in consequence, no participant in the oil industry will be able report the reserves of these products as assets," it states.
The bill is a big departure from the service contracts now on offer, in which companies are paid a fee and can recover costs. It also goes well beyond the original proposal made by Pena Nieto in August, which was limited to profit-sharing contracts.
PRD lawmakers have said they hope to call for a binding referendum to overturn the energy bill. The lower house approved legislation on Tuesday setting out how the government has to carry out such referendums, but the measure must still pass the Senate.
"This is an element of uncertainty that could impact investment decisions," said Alberto Ramos, an economist at Goldman Sachs in New York.
Polls have shown a wide range of opinion on the issue. A survey published in June by the Mexico City-based CIDE university showed the 65 percent of Mexicans opposed foreign investment in the oil industry.
Another poll by the newspaper Excelsior in August showed 63 percent backed Pena Nieto's plans to change the constitution to allow more private investment in the energy industry.
(Additional reporting by Adriana Barrera, Michael O'Boyle, David Alire Garcia and Ana Isabel Martinez Editing by Simon Gardner and Mohammad Zargham)