Oil - 1433

Mexico’s Oil

Inviting Foreigners to Boost Drilling Hits Nerve

By | Updated Aug. 7, 2014

In much of the world, oil lubricates political machinery as much as it greases the wheels of commerce. It’s also a source of national pride, and nowhere more so than in Latin America. Yet even Hugo Chavez allowed foreigners to pump oil from Venezuelan fields, as Brazil has since the 1990s. In Mexico, however, the question has been more emotional, since the fight to seize oil and gas resources from American and British companies is a treasured part of the country’s history. So the vote by Mexico’s Congress and a majority of its states to let foreign companies compete with the government oil monopoly was accompanied by mixed feelings, as economic self-interest clashed with patriotic ardor. This break from the past is expected to affect more than the energy sector. Many observers compare it to the signing of the North American Free Trade Agreement in 1994, a move that reshaped the country’s economy and culture.

The Situation

Mexico is the world’s 9th-biggest producer of oil but its national oil company, Pemex,  is struggling. For the ninth year in a row, crude production is falling even as it booms in the U.S. and Canada. Dwindling revenue and a heavy tax burden – in 2013 Pemex paid about 50 percent of its revenues in taxes, accounting for a third of the federal budget – has left the monopoly with limited funds for modernizing equipment, let alone for the new technology needed to squeeze oil from shale. As a result, Pemex has missed out on the shale boom north of the border and has been slow in drilling in the deeper waters of the Gulf of Mexico. That’s led to rising energy costs and budget worries. Feeling the squeeze, the two leading parties, PRI and PAN, struck a deal on constitutional amendments that will allow foreign companies develop the largest unexplored crude area outside the Arctic Circle. Companies like Chevron and Exxon Mobil will be able to pump crude through licenses and production-sharing agreements for the first time in decades. In return, Pemex will see its taxes cut by as much as $10 billion a year. The plan also ends the state’s monopoly on electricity distribution.

The Background

Being next door to the world’s most powerful country has made Mexico especially sensitive to sovereignty issues. The nation’s 1938 expropriation of the Mexican branches of Royal Dutch Shell and what’s now Chevron by President Lazaro Cardenas is still taught in history textbooks as one of its brightest moments, marked by a presidential ceremony every year on March 18. Pemex and its powerful union were key political players and the company long served as a piggy bank for the PRI party, which ruled Mexico in what amounted to a single-party state for decades. Its huge payroll compared to competitors is a sign of its patronage role. But Pemex’s special status presents a contrast with the rest of a national economy that has become one of the world’s most open, having negotiated free trade accords with 45 nations. President Enrique Pena Nieto of the PRI, which has rebounded after falling from power in 2000, now sees allowing private companies in as the only way to accelerate production without having the government foot the bill.

The Argument

Supporters of opening the oil, gas and electricity monopolies to competition say it will attract $20 billion a year in foreign investment and  increase economic growth by at least 1 percent every year. Opponents, led by former presidential candidate Andres Manuel Lopez Obrador, argue that letting foreigners bid and drill for oil is a violation of national sovereignty and will lead to corruption and a loss of control over the oil revenue that could be used to develop a more modern national economy. Mexico would be better served, they say, by reducing Pemex’s tax burden, increasing transparency and attacking persistent corruption –- Pemex is missing over 32 million barrels of oil this year, worth about $3 billion. The opposition points to Saudi Aramco as an example of a successful state monopoly. Pena Nieto’s team disagrees, saying that Mexico’s days of easy-to-access oil are over, and that the nation’s future as an oil producer depends on technology and know-how that private companies are best positioned to bring. To cushion the change, however, he assured Pemex workers that none of them would lose their job.

The Reference Shelf

  • The Brookings Institution provides insight into the oil debate.
  • The U.S. Energy Information Administration’s country analysis overview of Mexico.
  • A Baker Institute report says Mexico could become a net importer of oil within the next 10 years without more investment.
  • A report by the U.S. Congressional Research Service on the reforms sees potential benefit for American companies.

(First published Dec. 9, 2013)

To contact the writer of this QuickTake:

Jonathan Roeder in Mexico City at jroeder@bloomberg.net

 

To contact the editors responsible for this QuickTake:

Carlos M. Rodriguez at carlosmr@bloomberg.net

John O'Neil at joneil18@bloomberg.net