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Mexico edges toward letting foreign oil firms invest in Pemex

Mexico's ruling party changes its bylaws to clear the way for changes at the state oil company.

March 04, 2013|By Tracy Wilkinson and Shan Li, Los Angeles Times
  • The Petroleos Mexicanos (Pemex) administrative building stands in the distance past one of the company's gas stations in Mexico City, Mexico.
The Petroleos Mexicanos (Pemex) administrative building stands in the… (Susana Gonzalez / Bloomberg )

MEXICO CITY — Mexico's ruling party has taken a step toward opening its state oil company to outsiders, a move that could eventually allow U.S. oil firms to drill south of the border.

In an important test of Mexican President Enrique Peña Nieto's sway over resistant factions of his party, the Institutional Revolutionary Party has changed its bylaws to clear the way for changes at Petroleos Mexicanos, or Pemex.

Pemex, a symbol of nationalist pride, is the top source of tax revenue for the Mexican government. But its production of oil has been declining dramatically and the company is in dire need of outside expertise for deep-sea exploration.

On Sunday, PRI, as the party is known, passed several changes that Peña Nieto needed for the reforms he promised as a hallmark of his administration. Chief and most difficult among them is opening the behemoth Pemex to private and foreign investment, long a taboo in this country.

"It's a win-win situation" for Mexico and the U.S., said Fadel Gheit, a senior energy analyst at Oppenheimer & Co. "The Mexican government finally realized that banning international companies from participating in this sector was very ill-advised because they lack the technology, they lack the expertise, and they don't have enough money to put up the capital needed to grow production."

U.S. oil companies are already familiar with the Gulf of Mexico, where Mexico's offshore oil reserves lie, Gheit said. But companies may be skittish after run-ins with Venezuela's President Hugo Chavez, who nationalized the assets of some foreign oil giants in recent years.

"It will be larger oil companies — the Exxons, the Shells" that invest in Pemex, Gheit said. "But they want to make sure the government doesn't pull the plug in a year or two because these investments are long-term and cost millions of dollars."

Calls to Shell Oil Co. and Chevron Corp. were not immediately returned.

For Mexicans, the issue is deeply emotional as well as politically charged. The country nationalized its industry in 1938 in response to decades of perceived exploitation by foreign oil interests. Ever since, most Mexicans have considered public ownership of the country's most lucrative natural resource to be a cornerstone of their sovereignty.

Mexico is one of the 10 largest oil producers in the world and an important partner in the U.S. energy trade. But production has been sliding for nearly a decade because of steep declines in the country's main oil field, Cantarell, located in shallow waters off Campeche state. Pemex lacks the equipment and expertise to drill in deeper waters.

Other oil-rich countries have struck deals with outsiders to develop their oil in exchange for a percentage of production. But Mexico's constitution prohibits such arrangements.

Peña Nieto's plans for Pemex have already led the political left to accuse the government of trying to privatize the oil company. The government insists that overall ownership of the oil business will remain in state hands; the proposed changes are expected to be presented to Congress late this year.

"Let's show, with attitude, with action and with voice, that we are a new generation of PRI," Peña Nieto told his party. "This is an assembly of renewal and transformation."

If the reforms pass, U.S. oil companies are well positioned to both refine and consume the oil produced, said Bruce Bullock, executive director of Southern Methodist University's Maguire Energy Institute. In the long run, he said, such partnerships could help smooth big gyrations in gas prices.

"The more oil we can get out of friendly places like Canada and Mexico, and the less oil we can get out of places like Venezuela and the Middle East, certainly the less volatile oil prices will be," he said.

For Mexico, Sunday's vote was a significant gauge of whether Peña Nieto would be able to win the support of the more stubborn members of the party who remain wedded to old-style PRI nationalistic paternalism and who are not inclined to change the way Pemex is run.

PRI governed Mexico for seven decades until being ousted in 2000. With its return three months ago, the PRI government is seeking to reassert its authority over many aspects of Mexican political life while trying to convince observers that it is a more modern, less authoritarian party.

Wilkinson reported from Mexico City, Li from Los Angeles.

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