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For Many, Control of State-Run Pemex Is About National Pride
Leftists Fear Privatization of Oil Giant

By Manuel Roig-Franzia
Washington Post Foreign Service
Wednesday, April 30, 2008

MEXICO CITY -- Mexico's giant state-run oil company was once a source of universal pride here. Ballads were sung in its honor, and the money gushed as much as the crude.

But the company -- Petróleos Mexicanos, or Pemex -- is not aging well, and it is fast eroding into a creaking, crippled behemoth that even its biggest defenders say must change to survive.

In a once-unthinkable move, President Felipe Calderón urged an overhaul of Pemex earlier this month, calling on the Mexican Congress to allow the company more freedom to sign contracts with foreign firms better equipped to build efficient refineries and conduct expensive deep-water drilling.

But the proposal -- being touted by its supporters as one of the most important economic reforms in recent Mexican history -- has drawn fierce resistance from a determined coalition of left-leaning opposition parties for whom outsider involvement in Pemex is anathema. They seized control of the Mexican congressional building for more than two weeks this month, with some members spending nights on the floor and leading rowdy protests during the day.

"This is the inheritance of my grandfather, this is our company, and we're not going to let them take it away from us," Congressman Alejandro Sánchez Camacho, of the opposition Democratic Revolutionary Party, or PRD, said in an interview.

The fight has major implications for the United States, which counts Mexico as one of its four largest foreign oil suppliers, along with Canada, Saudi Arabia and Venezuela. Here in Mexico, the titanic political battle could paralyze the government for months.

Mexico nationalized its oil industry in the late 1930s, seizing control of British and U.S. companies as part of a movement to bring large industries under state control. For decades, Mexicans bragged that their grandmothers had donated jewelry to help pay for the takeover.

The movement toward nationalization, though, has been steadily reversed. The government privatized its national telephone and railroad companies, and last year it sold off the state-run airline, Aeroméxico, at a price that Calderón's critics asserted was far too low.

Pemex has been untouched, in large part because of its extraordinary financial importance. Under the constitution, the company must turn over most of its revenue to the federal government, which relies on Pemex for 40 percent of its annual budget. After paying its huge tax obligation, Pemex must also pay salaries and pensions to members of the enormously powerful oil workers union.

The company has grown exponentially and generated more than $100 billion in revenue last year. But things have soured this year, with production dropping 8 percent and exports falling 12 percent in the first quarter compared with the comparable period a year earlier. At the Cantarell oil field in the Gulf of Campeche -- which was discovered in the 1970s and is frequently ranked as the second- or third-largest oil field in the world -- daily production has plummeted from 2 million barrels a day in recent years to 1.1 million.

The drop-off will almost surely accelerate in coming years, according to David Shields, an independent, Mexico City-based analyst and consultant. Calderón's energy officials have estimated that Mexico could run out of oil in nine years if major new fields are not found.

In the meantime, Pemex seems to be deteriorating fast. Its pipelines are in abominable condition, leaking profits daily, and its reserves are drying up. Pemex is by far Latin America's largest company -- and the 34th-biggest revenue-generating firm in the world. Despite the huge run-up in global oil prices, it is deep in debt.

Though Mexico is one of the world's top 10 oil producers, its refineries can't keep pace with domestic demand. The country actually has to import 40 percent of the gas it consumes, amounting to more than 300,000 barrels per day.

Reform plans have been percolating for months. According to sources not authorized to comment publicly, some in the Calderón administration pushed for a more ambitious proposal that would have allowed public sale of some shares in Pemex, an approach used by state-controlled oil firms in Brazil and Norway. But that would have required a national vote on a constitutional amendment; Calderón opted for a less audacious proposal.

Still, his plan has run into numerous roadblocks. In March, Interior Minister Juan Camilo Mouriño -- who was supposed to spearhead the reform effort -- was accused of steering government contracts to his oil baron father, dealing a setback to Calderón's proposal before it was even formally unveiled. Mouriño, who has denied wrongdoing, has resisted calls to resign.

Opponents have also held protests, with failed presidential candidate Andrés Manuel López Obrador calling thousands to Mexico City's downtown square, El Zocalo, in scenes reminiscent of the long fight over results of the 2006 election.

Meanwhile, the proposal has received a stony reception from independent analysts. Juan E. Pardinas, a Mexico City-based analyst, said in an interview that the measure "falls very short" of solving Pemex's problems.

Analysts say some of Pemex's greatest problems are related to the lack of flexibility it has with revenue. Rather than reinvest in technology that could boost production, the company is obligated to send much of its money to the government. The system has paralyzed Pemex managers, who fear their government overseers will criticize their every move and therefore are afraid to take even reasonable risks in exploring for new oil fields, Shields said.

"The Calderón bill doesn't solve any of the major problems that Pemex has," Shields said.

As a result, the proposal's supporters have had to spend almost as much time arguing that the measure is not a weak, watered-down initiative as they have arguing the perceived merits of the plan. "This is not 'reform lite,' " Congressman Alonso Lizaola de la Torre, of Calderón's National Action Party, or PAN, said in an interview.

The alternative being presented by the proposal's opponents centers on changing the way Pemex operates, rather than inviting foreign investors. Sánchez Camacho, the PRD lawmaker, said that his party is pushing for the federal government to invest more money in inexpensive searches for oil on land and in shallow waters, instead of focusing on pricier deep-water drilling. He and others in the PRD also are demanding that the federal government give a better accounting of the money it gets from Pemex. He alleges that millions are wasted, "gone down a black hole," each year.

Sánchez Camacho alleges that privatization proponents have purposely let Pemex deteriorate in order to convince Mexicans that the company is beyond hope as a national enterprise.

"They're trying to scare us," Sánchez Camacho said.

But it is the government that should be scared, he said.

"If they try to sneak this past us, we'll take the streets," Sánchez Camacho said. "This country will become ungovernable."

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