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Mexico's president on dangerous ground as he pushes Pemex reform

Mexican President Enrique Peña Nieto wants to open the Pemex oil monopoly to private and foreign investment. To many Mexicans, that's blasphemy.

August 05, 2013|By Tracy Wilkinson and Richard Fausset
  • Emmanuel Martinez, foreground, left, a 25-year-old government worker, sings the Mexican national anthem along with a crowd of hundreds to close a rally against opening the national oil company, Pemex, to foreign investment. "Oil is a treasure that belongs to the Mexican people," Martinez said.
Emmanuel Martinez, foreground, left, a 25-year-old government worker,… (Richard Fausset / Los Angeles…)

MEXICO CITY — If Mexico had a crown jewel, it would be the giant state oil monopoly Petroleos Mexicanos, or Pemex. Year after year, it has poured billions of dollars into the state treasury, historically paying for schools, hospitals, dams, highways, ports and more.

The seizure of foreign oil companies 75 years ago that created the company is a cause for annual celebrations affirming Mexico's fierce sense of independence from outside interference.

Yet even as the country's new president, Enrique Peña Nieto, credits Pemex with building the nation, his administration acknowledges that the notoriously inefficient conglomerate is in trouble: If it is not opened to private and foreign investment, Mexico, the world's ninth-largest oil producer, will become a net energy importer by 2020, officials say.

As Peña Nieto moves ahead with a plan to overhaul Pemex, he is navigating the most perilous political minefield of his young presidency. He is toying with taboos and challenging revered perceptions surrounding the nation's top revenue earner. And he is meeting with impassioned opposition.

At the back of a recent rally for Pemex, Jesus Castillo Sanchez, a 46-year-old handyman, waved a giant Mexican flag as if he'd just taken a hill in battle. Booting the foreign oil companies in 1938 "gave Mexico its true independence from the great powers," Castillo said. "After [the foreigners] bring their oil platforms, they will bring their armies and their troops."

The president is expected to introduce landmark energy reform legislation, including proposals addressing Pemex, as early as this week.

The government and industry experts contend that Mexico needs advanced technical expertise from outside companies to find and retrieve oil and gas from deep water and shale-rock formations that are believed to hold more than half the country's estimated 14 billion barrels of reserves.

But "Pemex is not allowed … to choose associations … to reduce the level of risk that you run" in deep-water exploration, Carlos Morales Gil, Pemex director of exploration and production, said in an interview. "What Pemex needs is budget autonomy and flexibility" to form joint ventures, he said.

Making that possible could require changing the constitution, and that could prove a bruising battle for Peña Nieto. The matter is so sensitive, so wrapped up in Mexico's ability to assert its independence from foreign meddling, that when Peña Nieto, speaking in London, suggested that the other major political parties had already agreed to reform, several politicians back in Mexico went ballistic.

Yet the problems plaguing Pemex are legendary. With corruption, poor management, a union that demands enormous benefits and a corporate structure that fosters duplicate jobs, Pemex is a model of how not to run an oil company.

According to a 2011 study by the Texas-based Baker Institute, Pemex, with about 140,000 employees, produced revenue of $585,000 per employee, a quarter of the per-employee revenue of British oil giant BP and about half that of the partially state-owned Brazilian oil company Petrobras.

Morales, the Pemex executive, acknowledged that Mexico was 30 years behind the industry standard in deep-water exploration. Pemex, he said, hadn't felt pressure to pursue the riskier search because it had so much readily accessible shallow-water and inland oil. Consequently, Mexican engineers did not keep up with the widening technological know-how that has benefited competitors.

A case in point is the Cantarell oil field, in the Bay of Campeche. It was discovered in 1976 by a fisherman who noticed his nets were being ruined by oil. Pemex engineers soon realized he had stumbled on one of the largest oil fields in the world.

But in the mid-2000s, production at Cantarell peaked, and it has declined rapidly, while a second big find, Ku-Maloob-Zaap, has already been bled of two-thirds of its reserves.

In all, Pemex's production of crude has declined steadily to 2.6 million barrels a day — from a high in 2004 of 3.5 million — stabilizing only in the last year or so.

There's plenty more out there, but experts say Mexico can't get to it without outside help.

"Mexico, outside of the U.S., probably has the widest array of energy plays that anybody has in the world: shallow water, deep water, shale gas, shale oil, tremendous marginal fields that have largely been neglected over the last 40 years," said John Padilla, managing director of the international energy consulting firm IPD Latin America. "It's too much for any one company to handle. There's nobody in the world that could do that."

The Mexican Constitution says that raw materials found in the land, like oil and gas, belong to the state, requiring a constitutional amendment for future agreements that might touch on ownership of resources.

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