Mexican president proposes historic changes to state-owned Pemex oil monopoly

August 12, 2013

Mexican President Enrique Peña Nieto proposed historic changes to this nation’s state-run energy sector Monday, cracking open the door for global oil giants such as Exxon Mobil and Shell to invest in Mexico’s lethargic 75-year-old state oil monopoly, Pemex, the eighth-largest oil company in the world and a symbol of deep nationalist pride.

In an address that was highly anticipated in oil capitals from Houston to Rio de Janeiro, Peña Nieto stopped short of offering foreign oil firms what they really want: a right to own and sell the oil they drill in Mexico.

Instead, he proposed constitutional changes that would allow for risk- and profit-sharing partnerships between foreign firms and Pemex, a move aimed at luring the money and technology necessary to exploit Mexico’s immense but hard-to-reach deep-water and shale oil fields. At the same time, Peña Nieto emphasized that Pemex would remain the sole owner and manager of Mexico’s oil.

“Pemex will not be sold, nor privatized,” Peña Nieto said in an address that did not offer many details on how investors would partner with Pemex, which funds about 30 percent of Mexico’s national budget even as production has started to lag. “The spirit of this reform recovers the best of our past to conquer the future.”

It remains to be seen whether Peña Nieto’s offer of risk- and profit-sharing will be enough to lure companies such as Shell, BP, Exxon Mobil and Brazil’s Petrobras, which have the kind of expertise needed to modernize the Mexican oil industry.

It also is unclear how the reforms will be greeted by a Mexican public that views the nation’s oil as a quasi-sacred national treasure. Mexicans celebrate March 18, 1938 — the date President Lázaro Cárdenas kicked out foreign companies — as national “oil expropriation day,” recalling citizens who offered their own jewelry, goats and chickens to pay off debt owed to foreign firms.

Recent polls show that some 65 percent of Mexicans oppose constitutional changes such as the ones Peña Nieto has proposed, viewing them as tantamount to selling off the nation’s most valuable resource.

“For Mexicans, Pemex is like the Virgin of Guadalupe — it has the magic of symbolism,” said political analyst Sergio Aguayo. “It’s like apple pie for Americans.”

At the same time, most Mexicans also see Pemex as drenched in corruption. Any reform plan is doomed, Aguayo said, unless it addresses an entrenched culture in which politically connected Mexican firms get lucrative contracts and jobs are obtained by literally paying for them — “paying jobs,” as they are known. Pemex’s union leader is known for his love of yachts, luxury watches and private jets.

Peña Nieto alluded to “transparency” in his speech but otherwise left the matter untouched, and he went out of his way to assure Pemex workers that their labor rights would be protected.

However unpopular the reforms may be across the country, Peña Nieto’s ruling Institutional Revolutionary Party and the conservative National Action Party — which had proposed even deeper reforms — appear to have the majorities needed to pass the reforms.

That calculation leaves out Mexico’s leftist parties, which have agreed that Pemex desperately needs reform but have remained deeply skeptical of any constitutional changes that touch on the matter of ownership.

“Why share Mexico’s riches?” said Luis Espinosa Cházaro, a congressman with the leftist Democratic Revolutionary Party. “We know there is a long line of investors waiting for these reforms . . . but we need this money for hospitals, for schools. We don’t agree to share these riches because Mexicans can’t do it; Mexicans can do it.”

Speaking before Peña Nieto unveiled his plan, Espinosa said that his party would “stand with the people” if the reforms went too far. Leftist leader Andrés Manuel López Obrador, who has parted ways with the Democratic Revolutionary Party, has promised large-scale street protests as debate on the reforms gets underway in September.

The last time oil reform was attempted in 2008, it failed amid protests that drew thousands to the streets of Mexico City. But Peña Nieto said Monday that the future of the Mexican economy depends on reform working this time.

For decades, the Mexican government has lived off the largess of shallow-water fields such as the massive Cantarell field in the Gulf of Mexico, where production peaked at 2 million barrels a day but has now plummeted to less than 400,000. Overall oil production in Mexico has dropped 25 percent as wells have dried up over the past decade.

Meanwhile, the rigidly run state oil giant has failed to develop the specialized technology or expertise needed to explore and drill in deeper waters in the gulf and more geologically complicated shale oil fields in the north of the country.

The question remains how companies will perceive the president’s reforms.

“For global oil companies, the bottom line here can be expressed as, do we have a serious business opportunity or not?” said George Baker, a Houston-based oil industry analyst and publisher of a newsletter about Mexico’s oil sector.

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