Mexico oil giant Pemex has uncertain future
National oil company short on revenue, reserves.
By Jeremy Schwartz

MEXICO CITY BUREAU

Sunday, March 30, 2008

MEXICO CITY — These are grim days for Mexico’s state-owned oil monopoly, Petróleos Mexicanos, better known as Pemex.

After decades of mismanagement, corruption and use as a piggybank by the federal government, Pemex has plunged into a crisis marked by sharply declining oil reserves. Though global oil prices are at all-time highs, the state monopoly reported a $1.5 billion loss in 2007 as domestic production fell.

The urgent question facing Mexican officials is how to fix the world’s 10th-largest oil company. Pemex’s production fell 5.4 percent last year and exports dropped 6 percent, trends that are expected to worsen over the next decade.

President Felipe Calderón has stirred the passions of many Mexicans by suggesting that the solution is to open Pemex to foreign investment after 70 years of being a state-run enterprise.

The stakes are high not only for Mexico, but for the United States, which imports 10 percent of its oil from Mexico.

Many government and industry officials on both sides of the border are keen for a transformation of Pemex. But most experts expect only incremental changes and not changes to Mexico’s constitution that would allow foreigners a sizable stake in the enterprise.

Analysts expect that Calderón will seek to somehow give Pemex more financial independence, freeing it from some of its huge tax burden. Last year, Pemex gave 80 percent of its $100 billion in revenue to the federal government.

The aim is to allow Pemex to spend more of its money on new technologies and exploration and operate more like a company than a government bureaucracy.

Calderón’s National Action Party is expected to introduce a bill this week in the Mexican Congress, ending months of speculation about just how modest or far-reaching the proposals will be.

Private is unpopular

When it comes to Pemex, any kind of tinkering is hugely controversial.

The enterprise has been a symbol of nationalist pride since then-President Lázaro Cárdenas expropriated the Mexican oil industry from American and European companies in 1938. It was a bold move by Mexico’s fledgling revolutionary state, and it is still common to hear the refrain that “the oil belongs to all of us” in Mexico.

In recent weeks, opposition politicians have held large rallies against privatizing Pemex and warned that any such attempt could lead to violent confrontations.

Lawmakers within the president’s party say the proposal may call for private investment in pipelines and oil storage, as well as joint ventures to develop oil fields along the U.S.-Mexico border. But the bill, Calderón’s allies say, will not allow large-scale private investment in oil production.

The Mexican public is not prepared to accept radical change, analysts say. According to recent polls, only 37 percent of Mexicans favor allowing private investment in Pemex.

“So much of this is just about changing public perception,” said Duncan Wood, an international relations professor at Mexico City’s Autonomous Technological Institute and a member of the Mexican Energy Network. “We’ve known about the problem for five years, but it’s only in the last 12 months that the government has been able to get the issue into the public’s mind.”

For years, petroleum revenue has made up almost 40 percent of Mexico’s federal budget, paying for new roads, hospitals and poverty programs.

But the government didn’t leave Pemex enough money for exploration. That wasn’t a problem as the company tapped massive, easy-to-exploit oil fields.

But now that those fields are drying up, Pemex faces tough prospects: It lacks the money and technology to get at deep-water oil deposits in the Gulf of Mexico, potential windfalls that the Mexican government believes could keep Pemex oil flowing as before.

One solution, favored by Calderón, would be to open Pemex up to private investment and enlist the help of foreign companies.

The Calderón administration also has raised the possibility of joint ventures between Pemex and other state-owned oil companies, like Petrobras in Brazil and Statoil in Norway. Officials hope that might be a more palatable alternative to teaming up with private companies such as ExxonMobil.

But Mexico’s constitution bars direct private investment in Pemex.

“If you don’t change the constitution, there’s very little you can actually do,” said David Shields, a Mexico City energy analyst. “You can move pieces around, but they will hardly budge.”

Proven stores

According to government projections, Pemex is headed for disaster if it doesn’t act.

Nearly 12 billion barrels of proven reserves, most in the Cantarell field off the coast of the Yucatán peninsula, will run out in nine years, and Mexico could become an importer of crude oil by 2011. By comparison, Saudi Arabia has 260 billion barrels and the U.S. has 21 billion barrels of proven reserves.

Because Pemex has invested little in refining, it is in the perverse position of importing nearly 40 percent of its refined gasoline from the United States, a percentage that is expected to climb sharply if Mexico doesn’t build new refineries.

The U.S. also has a deep interest in Pemex’s fortunes.

Should Mexico be unable to export oil, the U.S. probably would end up buying more oil from places such as the Middle East to make up the difference.

At the same time, American oil companies stand to benefit if Mexico eventually opens Pemex to private investment.

“Mexico is seen potentially as a place with lots of opportunities for U.S. companies,” said George Baker, a Pemex expert at energia.com, a Houston-based online news service focusing on the oil industry. “Pemex has only explored about (25 percent) of the prospective oil fields so there is a lot out there to do.”

But experts say Washington is wary of meddling in Mexican affairs.

“The U.S. is incredibly interested in this,” Wood said. “But the American government isn’t stupid. It is treading very lightly; it doesn’t want to frighten anyone. The U.S. is always seen as the bogeyman in Mexico and never more so than on oil.”

Mexico’s leftist leaders charge that privatization has long been the goal of Mexican elites.

Opposition leader Andrés Manuel López Obrador, who nearly won the presidency two years ago, has led several large protests against energy reform and said privatization would bring social upheaval and possibly violence.

López Obrador argues that Pemex has the money and the technical know-how to do its own exploration without looking to outside help.

“Only technocrats and traitors can argue that Pemex can’t make it on its own and that the only salvation is handing it over to the private sector,” he told a crowd of protesters recently.

Many observers have criticized Calderón’s handling of the Pemex overhaul. His government offended many by preceding the reform with a media blitz extolling the virtues of deep-water exploration.

“I don’t think they ever did a serious analysis” of how to pass energy reform, Shields said. “They already have protests, and the proposal isn’t even on the table yet.”