To power Mexico forward, Peña Nieto looks to energy reform

Susana Gonzalez/Bloomberg - An engineer opens valves on the Petroleos Mexicanos (PEMEX) Bicentennial deep sea crude oil platform in the waters off Tamaulipas, Mexico.

MEXICO CITY — It has been 75 years since President Lázaro ­Cárdenas seized the country’s ­foreign-dominated petroleum industry and placed every drop of oil under the everlasting domain of the Mexican people.

But while it once was a source of national pride, the state-run monopoly he created — known as Pemex — has become a dinosaur, sapped by debt, sagging output and dated technology. The Mexican government siphons off the company’s revenue to cover about one-third of the federal budget, leaving insufficient funds for what has become a critical task: finding more oil.

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Tapping hydrocarbon treasures
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Tapping hydrocarbon treasures

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Mexico remains the third-
largest source of foreign oil for the United States after Canada and Saudi Arabia. But the country’s easy-pump crude is quickly running dry, and the company lacks the technology and know-how to drill for the vast stores of tougher-to-reach deposits that are thought to exist beneath Mexico’s deserts and seas.

Fixing the company, formally known as Petroleos de Mexico, has become a top priority for Mexico’s new president, Enrique Peña ­Nieto. With an overhaul plan expected by late summer, U.S. and other global energy companies are waiting to see whether Mexico will once more give outsiders a crack at the country’s hydrocarbon treasures, including the massive, virtually untapped beds of shale gas south of the Texas border.

At issue is whether Mexico will embrace the prosperous state-managed model adopted by countries such as Norway and Brazil — where national oil companies can partner with foreign firms and sell shares to investors.

The U.S. Energy Information Administration calculates that Mexico’s gas deposits are the fourth largest in the world, with the potential to ensure decades of low-cost energy and give manufacturers an additional incentive to invest in Mexico over places such as China.

For now, though, Mexico’s oil exports to the United States are falling, dropping below the ­million-barrel-per-day mark for the first time since 1994.

For those pushing for change, the challenge is as much political as it is technical. The Mexican constitution essentially blocks the country from forming joint-
venture partnerships with outsiders, and analysts say such restrictions will need to be scrapped if the country wants to attract foreign drillers.

Priority for Peña Nieto

For Peña Nieto, who began his six-year term in December, opening up the energy industry is the most ambitious task on a hefty to-do list that includes fixing the education system, telecommunications and tax collection, areas viewed as major hurdles to Mexico’s development into a more modern, democratic, middle-class society.

Peña Nieto has placed a confidant, Emilio Lozoya, at the head of Pemex, even though the 38-year-old former investment fund manager had never run an oil business. And the president insists that the goal is the “modernization” of the company, not its privatization, as opponents allege.

“This is about a practical reform that will allow for the introduction of new technology, which we lack, and accelerate the growth of our energy resources in order to lower electricity costs for Mexican families and businesses and give us a more dynamic energy industry,” Peña Nieto said in a speech to commemorate the 75th anniversary of Oil Expropriation Day.

Lifting the restrictions on foreign oil companies through a constitutional amendment would require a two-thirds majority in Mexico’s Congress and the endorsement of more than half of the country’s state governors. Peña Nieto is expected to face considerable political wrangling from the powerful oil workers union, left-leaning lawmakers and interest groups, which are content with their slice of the status quo, even as overall production has slipped.

Analysts say that unless Mexico can offer foreign drillers a share of the crude, rather than the fee-per-service contracts that Pemex offers, the country will have a hard time attracting the capital and expertise it needs. Because multinational oil companies raise money from investors based on the estimated amount of oil they own the rights to, and Mexico’s prevailing model affords them no ability to claim, or “book,” reserves, there’s little incentive to drill there.

Then there is the problem of Pemex’s creaky infrastructure and poor safety record, underscored by a Jan. 31 explosion caused by a gas leak at the company’s Mexico City headquarters that killed 38 people and injured 120.

Ownership concerns

Mexico’s three major political parties have signed a broadly written “Pact for Mexico,” whose ­energy-related provisions concur that all hydrocarbons should remain state-controlled and that Pemex needs to be a competitive, modern and profitable company with ramped-up production.

It’s when the concept of state ownership comes into play that the “Pact” peels apart. Luring foreign companies by offering them a share of oil production is a form of privatization, according to congressman Luis Espinosa of the leftist Democratic Revolutionary Party, or PRD.

“Pemex needs fiscal and operational autonomy,” he said, “not private capital.”

For Espinosa and others wary of more sweeping changes, the central problem is that the government treats Pemex as a money tree, using oil revenue as a substitute for a more robust, progressive tax system that places higher burdens on the country’s wealthiest individuals and corporations.

But energy analysts say there is considerable room for foreign partners under the rubric of state ownership, noting that most oil-producing countries treat hydrocarbons as state property and reap royalties and other benefits by licensing private companies.

Top officials in the Peña Nieto administration say their long-term goal for Pemex would be to emulate other big national oil companies, such as Brazil’s Petrobras and Norway’s Statoil, that sell minority shares to private investors. But first, they say, they need to make the company valuable by teaming with foreign partners and boosting Mexico’s proven oil reserves.

The advantage of allowing some part of the company to be publicly traded is that “you get another level of accountability and another level of feedback for how the government is managing the oil,” said George Baker, a ­Houston-based energy consultant who has tracked Mexico’s oil industry for decades.

Baker said the Mexican government’s efforts will fall flat unless the company is entirely remade into a modern and global energy player. “If you only make Pemex more efficient in Mexico, that’s not enough,” he said.

Mexico also suffers from a shortage of refining capacity, sending nearly half of its crude production to the United States for processing. But again, analysts say Mexico won’t be able to attract foreign investment if it doesn’t allow retail-level competition in a country where there are no Chevron or Shell stations and every gas pump bears the green-and-white Pemex logo.

Then there is the matter of the massive deposits of shale gas that straddle the U.S.-Mexico border. Since 2008, nearly 10,000 drilling permits have been issued on the Texas side, in the area known as the Eagle Ford Play, while on the south side of the border, Mexico has drilled fewer than a dozen wells, with only 20 planned by 2016.

A glut of cheap natural gas from the United States and persistent drought in northern Mexico have hurt prospects for hydraulic fracturing, or fracking, to reach the shale deposits, because the method requires copious quantities of water.

But tapping the shale beds should be viewed as a strategic national goal whose ultimate purpose isn’t making money on gas sales but keeping electricity costs low for Mexican manufacturing, said former U.S. ambassador Tony Garza.

“It provides a good manufacturing platform, expands Mexico’s job base and grows the middle class,” he said.

John Padilla, an energy analyst at IPD Latin America who has been working in Mexico since 2001, said the country’s resources are too varied for any single company to handle.

“To say that Pemex or any ­private-sector company could do it all is completely false,” he said. “You don’t have the manpower or resources, and you want to diversify your risk.”

 
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