Mexico Oil Opening First Time Since 1938 Shows Revival: Energy

Mexico Oil Opening First Time Since 1938 Shows Revival
Gas is flared off from Petroleos Mexicanos offshore platforms producing oil in the Gulf of Mexico. Photographer: Susana Gonzalez/Bloomberg

For the first time in 74 years, Mexico may allow private investment in its oil and gas, the third-largest reserves in Latin America.

Enrique Pena Nieto, the leader in all major polls to win the July 1 presidential election and a member of the party that nationalized the industry in 1938, said April 12 that Mexico’s oil production “can outperform and grow” through private investment. The same day, his closest rival, Josefina Vazquez Mota, proposed to list “a minority stake” in state oil monopoly Petroleos Mexicanos, which has $126 billion in revenue.

Selling shares in the largest oil supplier to the U.S. will open a Mexican industry experiencing an eighth year of declining output, hurt by faltering investment and lack of technology and experience for the deepest offshore wells. The cash can fund Gulf of Mexico and shale gas production using techniques Brazil and the U.S. employed to revolutionize their energy markets.

“The taboo has been broken” on private investment, Pemex board member Hector Moreira said in an interview. “People talking about private stakes -- it’s a first step. And it’s a step that’s not prompting a negative reaction from the public.”

From school murals to speeches in Congress, state-run Pemex has been promoted as a symbol of sovereignty and national pride. That image is waning as fuel imports and prices increase, crude production goals go unmet and Pemex strikes out with drilling.

While the company more than quadrupled investments during the past decade to about $23 billion a year and expanded exploration, none of its 18 deepwater exploration projects in the Gulf of Mexico has discovered commercially viable crude. Without enough investment Mexico may become an oil importer by 2020, according to a study by Rice University in Houston.

Schlumberger, Petrofac

An oil reform in 2008 opened exploration and production projects to private and foreign companies for the first time since the expropriation without giving ownership or rights over the crude reserves. Last year, Pemex awarded two blocks to Petrofac Ltd. and one to Schlumberger Ltd. to produce crude from aging fields. The state monopoly is now offering six more developments, including offshore fields, to private developers.

The performance-based contracts may not attract enough private investment to reverse output declines, said Antonio Szabo, chief executive officer of Houston-based research company Stone Bond Technologies and a former head of supply for state-owned Petroleos de Venezuela.

“These incentives are not as attractive as joint ventures,” Szabo said in an interview.

27 IPOs

A potential public offer of Pemex shares may attract new investors and issuers to Mexico’s stock exchange. In the past 10 years Mexico had 27 IPOs, compared with 134 in Brazil.

Petroleo Brasileiro SA first sold shares to the public in December 1957 on the Rio de Janeiro stock exchange, which no longer exists, and has soared more than sixfold in the past decade. The company raised as much as $70 billion in 2010 to help finance its $224 billion investment plan, intended to tap the largest oil finds in the Americas in three decades.

Pemex output slumped to 2.55 million barrels a day on average, compared with as much as 3.38 million barrels a day at its peak in 2004. The country has the third-biggest proven oil reserves in Latin America after Venezuela and Brazil, with 13.81 billion barrels, and shale-gas resources that may be as high as 460 trillion cubic feet, the company has said.

Pena wrote in an opinion column published March 18, the expropriation anniversary day, that today’s reality is different to the one seven decades ago, and that the country lacks the required capital and technology.

Insufficient Budget

Energy Minister Jordy Herrera said last month that the company’s budget to tackle all the challenges is “notoriously insufficient.” Pemex needs to change the law to get more funds and create a “model similar to Petrobras or whatever we decide,” he said, referring to the state-backed oil company in Brazil.

While Pemex wanted to invest more than $30 billion this year, the federal government cut its plans to about $23 billion, and even those funds are not available at the speed or with the flexibility that the company requires. Pemex paid almost 60 percent of its revenue in taxes, cash used to finance a third of the nation’s public budget.

Moreira said that any plan to make Pemex perform more like a corporation than a government agency will require tax law changes first.

A March 30 poll, by research firm Gabinete de Comunicacion Estrategica, or GCA, showed that 47 percent of those surveyed support a sale of a stake in Pemex on the stock exchange, while 36 percent oppose the option.

‘Explicit Discussion’

“This is the first time the topic is discussed in a presidential campaign, at least in such as explicit way,” said Jorge Chabat, a political science professor at the Center for Economic Research and Teaching known as CIDE, in Mexico City. If the new president arrives with a mandate, it should be enough to mitigate any opposition in Congress, he said.

Herrera, the energy minister, said that lawmakers may proceed with tax changes for Pemex even before the new president starts Dec. 1.

The weight of Pemex’s problems may be proving heavier than the nationalistic sentiment against any privatization, Chabat said.

Pena Nieto, from the Institutional Revolutionary Party, or PRI, is preferred over Vazquez Mota, the candidate from the ruling National Action Party by about 15 percentage points -- 36.7 percent to 21.7 percent -- a nationwide survey by Grupo Economistas Asociados-ISA shows.

‘Terrible Paradox’

“It’s a terrible paradox, that despite the large size of the energy sector in Mexico there is not a single energy company listed at the Bolsa,” Jesus Reyes Heroles, a former chief executive officer of Pemex, said last month in an interview.

Pena met this year with the head of the country’s exchange, Luis Tellez, said two people familiar with the meeting who asked not to be identified because they were not authorized to discuss it. The topic of a Pemex listing was addressed, one of the people said.

Assuming Pemex pension liabilities are not transferred to the Federal government as some company executives propose, the equity value of the firm may be about $47.8 billion, according to data compiled by Bloomberg. If the government takes up some of the pension liabilities and subsidies currently funded by Pemex, the value may be higher.

Pemex’s challenges are accumulating by the day. The country’s output is falling to a 12-year low, its previous quarterly loss was the biggest since 2008.

Changing the law to allow the sale of any stake in a crude-production project or Pemex will require a constitutional change. Such amendments must be approved by two-thirds of Congress, by 16 of the 32 Mexican state legislatures and subsequently signed by the president.

‘Signature Issue’

Changing the rules to open Pemex to more private investment “would be my signature issue,” Pena said in a Nov. 16 interview. “We can do what Brazil did for its oil company, not at the beginning but later, if we open shares to the public,” he said.

Andres Manuel Lopez Obrador, the presidential candidate of the Party of the Democratic Revolution who narrowly lost the 2006 presidential election, opposes most privatizations in the oil industry. He said that the proposals from his opponents “will deteriorate the sector in every sense.”

Pemex Trading

Credit-default swap contracts for Pemex traded at 158 basis points yesterday, or 23 below those for Brazil’s state-controlled crude producer, according to data provider CMA. The gap is the biggest since March 21.

Credit-default swaps pay the buyer face value if a borrower fails to meets its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

President Felipe Calderon’s attempts to open more of the energy business to private investments, such us breaking Pemex’s monopoly in refining and pipeline distribution, have been diluted by opposition led by PRI lawmakers.

A comment last year from Calderon that selling shares of Pemex “could be an alternative” in an upcoming energy bill prompted demands from Pena Nieto’s party members for a special hearing with the energy minister to explain the president’s statement. A new energy bill has so far not been filed.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE