Can reform save Mexico's oil industry?

MEXICO CITY -- Amidst dwindling production, Mexico debates opening its state oil monopoly to foreign investment. But not everyone supports such a move.
Written by Lauren Villagran, Correspondent (Mexico City)

MEXICO CITY –- Mexico owns a gold mine of oil, much of it just out of its reach.

The country's national oil monopoly, Petroleos Mexicanos, lacks the technology and expertise to drill the deep waters of the Gulf of Mexico, where its latest oil finds lie. Historically, its hands have been tied: A prohibition on foreign partnerships and inadequate reinvestment in the business have prevented the company known best as Pemex from venturing beyond its shallow fields into the deep.

But the energy reform currently under debate could change that, opening Mexico's oil sector to foreign investment –- if the new government can amass the legislative support it needs and surmount substantial public opposition.

Mexican oil has been the property of the state since President Lazaro Cardenas expropriated the assets of foreign oil companies in 1938 and nationalized the industry. Although a 2008 reform loosened the tight, constitutional restrictions on foreign investment of any kind, the industry remains largely closed to the investment experts say it needs to modernize.

"Currently, (Pemex) has neither the capital nor the technology necessary for deep water exploration, for which alliances with the private sector are practically essential," the think tank Center of Research for Development (CIDAC) said in an analysis.

President Enrique Pena Nieto has promoted reform that would restructure the company and open refining, petrochemicals, and shale gas exploration to foreign capital, as well as limited participation in deep water projects –- provided the oil remains in Mexican hands. The administration hasn't released a timeline for introducing the reforms, but analysts say the president may need to move quickly to capitalize on the support he earned through a recent pact among the three major political parties establishing common ground on the energy issue.

Without reform, CIDAC said, "Mexico could be left without oil and without an industry."

Mexico's economic growth is at stake, say supporters.

Heavily taxed Pemex earnings account for roughly a third of the country’s budget, and its ability to exploit reserves is crucial to long-term growth. Crude production dropped 20 percent from a high point in 2004 of 3.3 million barrels per day to 2.55 million barrels per day last year.

An influx of investment could push the Mexican economy above 5 percent annual growth, according to Finance Secretary Luis Videgaray.

"No one is attempting to privatize or sell Pemex," Videgaray told Mexico City's Milenio newspaper. "It's about transforming it, modernizing it so it becomes a more productive company."

Public opposition to "privatization" –- a charged word in Mexico, where the sale of public assets has previously resulted in the creation of privately held monopolies –- is pervasive. Opponents point to the government's 1990 sale of Telefonos de Mexico to Carlos Slim, a deal that ultimately helped make him the world's richest person and left Mexicans paying higher prices than most for phone and Internet services.

"Traditionally, we've found that people reject a greater opening to investment in Pemex," said Jorge Buendia, director of Mexico City-based polling firm Buendia y Laredo.

"It's an issue because there exists a perception that Pemex earns a lot of money," he said, the idea being that "if you permit private investment, they are going to take the earnings."

In a survey last year, Buendia said 26 percent of respondents favored private investment, while 72 percent said they were against it.

Recently, protestors gathered in Mexico City's historic center to decry the reform, although nothing has yet been formally introduced in congress.

"It's a proposal that –- even though it isn't explicitly stated –- is going to modify the spirit and essence of the Constitution and the expropriation," said Andres Mendez as the protest wound down. "What they say isn't what they do. They don’t have credibility."

It remains to be seen how far Pena Nieto can push his reform agenda –- and how interested foreign companies will be in sharing their expertise without the promise of Mexico sharing its oil discoveries in return.

Photo: Flickr/Matthew Rutledge

This post was originally published on Smartplanet.com

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