Time Running Out for Energy in Mexico

By Marcela Sanchez
Special to washingtonpost.com
Friday, May 16, 2008; 12:00 AM

WASHINGTON -- Mexican Energy Secretary Georgina Kessel's warning to the Mexican Congress last week sounded ominous: If legislators did not approve reforms within the oil sector, the country would suffer a "severe energy crisis" within a decade.

That's probably an understatement.

Mexico's oil production is rapidly declining. The Cantarell oil field, one of the world's largest, is responsible for almost two-thirds of Mexico's production. In 2004, it brought up 2.1 million barrels a day; today it produces only half that. Unless new sources are found, Mexico -- up until last year the second-largest supplier to the United States -- will become a net oil importer by the year 2018.

For some countries, being a net oil importer is no big deal. But for Mexico, oil represents the single largest amount of revenue for the federal government -- about 40 percent. This looming "energy crisis" would be felt more than just at the pump. It would be across the board, impacting financial, social and political sectors as well.

Still, almost every expert on this issue I've interviewed or heard speak in recent months insists that it won't get that bad. They say Mexico will come to its senses and adopt the kind of overhaul that will give the country's state-run oil company, Petroleos Mexicanos -- Pemex -- enough flexibility to invest more of its profits in modernizing its operations. That way, the experts say, it could become more like Brazil's state-run Petrobras, regarded as one of Latin America's most well-run companies.

At the same time, Mexico's attitude about oil and Pemex's serious systemic flaws don't inspire much optimism. The energy proposals introduced last month by President Felipe Calderon offer some modest reforms, but probably not enough to stem the crisis. As Jeffrey Davidow, a former U.S. ambassador to Mexico, put it diplomatically, "the steps they are taking are not sufficient."

Calderon wants to allow outside investment in some areas of transportation, storage and refinement. Those steps alone would be of historic significance. Since the day in 1938 when President Lazaro Cardenas nationalized the oil industry and created Pemex, oil has become so sacrosanct that nobody outside Mexico can help get it out of the ground, refine it, or even move it. Such restrictions have led to unintended consequences -- Mexico today is a gasoline importer, with four out of every 10 gallons coming from refineries abroad.

Even if the door is cracked open for foreign investment, there may be little to attract it without fundamental changes to Pemex's business model. Pemex is weakened by mismanagement and its monopoly status. Calderon's reforms would provide some government oversight and performance reviews. Still, it seems obvious that a more fundamental shift is required for a company that "does not know how to behave in the private sector," said Jorge Pinon, president of Amoco in Latin America during the 1990s.

In particular, Pemex must learn to work collaboratively. George Baker, an energy consultant based in Houston, told me that if Mexico is to consider deep-water exploration in the Gulf of Mexico, it is going to have to have an attitude adjustment. According to Baker, it took at least 30 oil companies, sharing risks and expertise, to develop a similar area for the United States. "The validity of the one-company model is coming to an end," he said.

Pemex also needs to reform its workers' union, which historian Jonathan C. Brown in an interview called "one of the most powerful and most corrupt in Latin America." When Cardenas nationalized the oil industry, he did it largely to protect oil workers from abuse by foreign companies. But, as Jesus Silva Herzog, former Mexican ambassador to the United States, told me, "the union has abused Pemex" ever since. Union reform is not even on Calderon's reform agenda.

The common wisdom now is that Calderon's reform package will pass because it is modest and treads lightly. The hope is that deeper reforms will become possible later. Yet with Mexico holding legislative elections in July 2009, it is unclear whether there will be sufficient political will to do much more in the near term.

Oil, without a doubt, is crucial to Mexico's future. Considering the significant long-term planning and development the industry requires, Mexico seems to be running short of another important commodity -- time.

Marcela Sanchez's e-mail address is desdewash@washpost.com.

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