Mexico Mired in Oil Debates

By Emilio Godoy

MEXICO CITY, Feb 20 2013 (IPS) - Oil, the symbol of modern Mexico, is once again stirring up local political waters, with turbulent debates on the fate of the state-owned oil monopoly and conflicts over the privatisation of key economic and strategic areas.

The leading issues of contention revolve around the reform of Mexico’s state oil company Pemex (Petróleos Mexicanos), pitting advocates of full state control, who call for only minor changes in the company’s administration, against proponents of opening the industry up to private capital in prospecting, crude refining, petrochemical and other activities.

“We have to get back to discussing these issues urgently, with a frank and open debate on the need to modernise, backed by solid arguments. Addressing safety, health, environmental and other practices in Pemex is a pressing matter,” Miriam Grunstein, a researcher with the state Economic Research and Teaching Centre, told IPS.

Mexican President Enrique Peña Nieto, of the traditional Institutional Revolutionary Party (PRI), is in favour of a constitutional reform, proposed last year as part of his campaign platform. The reform would allow Pemex to receive investments from individuals and to partner up with private companies for crude petroleum exploration and extraction, without privatising the company.

In December, after the new administration took office, all the parties with parliamentary representation signed seven agreements on oil-related matters, which included retaining government control over oil resources and implementing reforms to grant Pemex management autonomy.

One of these agreements, known as the Pact for Mexico, covers a number of issues ranging from human rights to the economy, as well as safety and justice, accountability and democratic governance.

“Necessary reforms will be implemented, both in parastatal regulations and in the energy sector and the fiscal system, with the aim of transforming Pemex into a productive public company, without relinquishing state ownership but allowing it to be competitive in the industry,” reads the agreement, which sets out a series of executive and legislative transformations.

In recent years, Mexico’s oil company –which currently yields an average of 2.5 million barrels of crude a day– has experienced a drop in performance, with a contraction in production, decreasing exports, a growing debt and increasing imports, revealing the need for substantial changes.

According to a book on Mexico’s oil industry published in 2012 by industry expert Roberto Ortega, Pemex was the sixth largest oil company in the world in 2004 and by 2011 it had dropped five places to number 11. In crude reserves it went from number nine to number 17 in the world, and in gas reserves it plummeted from number 21 to number 35.

Hydrocarbon imports, including gasoline and other fuels, represent a great burden, as the company’s numbers reveal that in 2012 it imported more than 600,000 barrels a day.

The situation with natural gas is no better, with foreign purchases above one billion cubic feet per day last year.

In 1938, Pemex became Mexico’s most emblematic company when then-president Lázaro Cárdenas nationalised the oil industry, forever linking it to the PRI as a symbol of the country’s sovereignty, and later to the left-wing Party of the Democratic Revolution formed in the late 1980s from a PRI breakaway group.

“The ban on oil exploration concessions, reserve sharing and any form of competition with other prospectors won’t be lifted,” Ortega, a former Pemex general manager, said.

“The fiscal reforms in Pemex go hand in hand with a general reform. There’s no sense in separating them. But these will be the most debated reforms and differences may lead parties to withdraw from the pact,” the expert told IPS, in reference to Peña Nieto’s announcement that he would propose changes in the tax regime.

Pemex is the world’s fourth largest oil producer and the third largest exporter of crude oil to the United States, according to the company’s information. It ranked 34th in the 2012 Global Fortune 500, the annual ranking of top corporations worldwide as measured by revenue, compiled and published by Fortune magazine.

Pemex, which reported 127 billion dollars in revenue in 2012, is subject to a special tax regime, channelling a large part of its income to the state, with little funds left over to invest in prospecting and technological and infrastructure development. The company also represents a source of income that finances 33 percent of the national budget.

The left-wing National Regeneration Movement, headed by former presidential candidate Andrés López Obrador and on its way to becoming a full-fledged political party, has launched a plan of action to defend crude oil, including demonstrations, forums and campaigns to raise awareness on the value of Pemex.

The tension in political and business circles was aggravated by an explosion on Jan. 31 in Pemex headquarters in Mexico City, which killed 37 people and left 120 injured. The authorities have yet to determine the cause of this accident.

“Private investments will prove a healthy injection provided competition and transparency mechanisms are changed. Private is not necessarily good, just as public is not necessarily bad,” Grunstein noted.

In 2008, a much debated oil industry reform was implemented to improve the state company’s administration and strengthen accountability and transparency. Among the measures introduced then were the reorganisation of its Managing Board and the establishment of monitoring and auditing committees to supervise the awarding of contracts and other business deals.

For analysts like Ortega, one of the effects of these changes was the imposition of even more regulations. The state company is governed by some 2,000 rules and procedures and approving a new management project involves a seven-stage procedure.

“If we want to turn Pemex into a competitive company, we need to see if we can do it with the current infrastructure. It can’t be modernised if we don’t first analyse its production capacity and it won’t autonomous while it’s tied to the national budget,” Ortega said.

A report issued in November 2012, under the title “A New Beginning for Mexican Oil: Guiding Principles and Recommendations for a Reform in Mexico’s National Interest”, concluded that “the current oil industry model, in terms of its legal, regulatory and organisational structure, has run its course”, and suggests a legal and regulatory reform for the sector.