Latin America: Beating The Oil Curse

Mexico's troubled national oil company could siphon some good ideas from Brazil's petroleum success story

With oil prices as high as they are, you'd think Mexico's state-run oil company, Petróleos Mexicanos (Pemex), would be awash in cash. But it lost money five out of the past six years and racked up just $3.9 billion in profits in 2006 on a record $97 billion in sales. Why? Because it had to hand almost $54 billion in taxes and royalties to the national treasury last year, accounting for nearly 40% of the government's revenues.

Pemex is Mexico's piñata. Politicians are so accustomed to the steady flow of cash from the company that they've never mustered the discipline to cut government spending or carry out major tax reform. Now, after years of underinvesting in exploration, Pemex is watching helplessly as output from its biggest oil field, Cantarell, declines by 20% a year. At current production rates, Mexico's oil reserves will last less than 10 years, meaning the world's sixth-largest oil-producing country runs the risk of becoming an oil importer.

Contrast Pemex's woes with the situation in Brazil. At the time of the price shocks of the 1970s, Brazil imported all its crude and the economy nearly collapsed. Since then, state oil company Petróleo Brásileiro (PBR ) (Petrobras) has been driven with a missionary zeal that led the country to become self-sufficient in oil last year. The richest deposits were offshore, at depths that hadn't been attempted even by Big Oil multinationals. But Petrobras' engineers developed innovative techniques and equipment that allowed them to pump crude in more than 6,000 feet of water—a record at the time and still among the deepest operations worldwide. To help pay for the effort, Brazil's political leaders floated Petrobras shares on the New York Stock Exchange (NYX ) in 2000, raising $4.1 billion while keeping 56% of voting power under government control. Investors have been rewarded: The stock has since quadrupled in value.

Two state-owned oil companies, two different stories. Pemex and Mexico represent a classic example of what economists call the "oil curse" that plagues countries endowed with so much of the valuable resource that they become complacent—and dependent. Mexico, which nationalized its oil industry in 1938, has spent decades "administering the abundance," as one former President put it, with little planning for the future. The result: By some estimates, production could fall as low as 2 million barrels daily by 2012 from a peak of 3.8 million barrels a day in 2004. Petrobras, in contrast, started from scratch in 1954, pumping just 2,700 barrels of oil daily. Today it produces 1.9 million. "Pemex is like a well-fed dog that has never needed to search for its next meal," says John Albuquerque Forman, a Brazilian energy consultant. "Petrobras is that lean, scrawny dog that has to rummage through the trash cans to survive."

Now Pemex is turning to the hungry hound for help. With 60% of its reserves in deep water, Mexico needs Petrobras' knowhow. The companies signed a broad cooperation agreement last year that may give Pemex a helping hand. "The situation in Mexico is desperate—they are losing their reserves very quickly," says Guilherme Estrella, Petrobras' chief of exploration and production.


Reviving Pemex's fortunes is important not only to Mexico but also to the U.S., which gets 14% of its imported oil from its neighbor to the south. With Venezuelan President Hugo Chávez threatening to reduce oil shipments to the U.S., the last thing Washington needs is for Mexico's oil patch to dry up. "We face the urgent challenge of taking advantage of our reservesParagraph especially in deep water, because the country's oil future depends on it," Mexican President Felipe Calderón told Pemex workers on a March visit to an offshore oil rig.

Mexican officials have sought a Pemex shakeup for years, but it's slow going. Some politicians have suggested floating Pemex shares to spur reforms at the hidebound institution of nearly 150,000 employees, but the company's $53.4 billion in debt would be an obstacle. "Pemex's tragedy is that it's not a company—it's a distorted bureaucracy," says David Shields, a Mexico City-based author who has written two books on Pemex.

One possible way to spur change—greater competition—won't happen due to a Mexican constitutional ban on private investment in oil. And nationalist sentiment makes it virtually impossible to remove that prohibition, as hard- liners fear it might be a back-door effort at privatizing Pemex. Consensus is building for tax reform to reduce the burden on the oil company, though hammering out a deal could take years. "We will be alert to any moves to pry Pemex open for private investors," says Manuel Bartlett, an influential former senator.

Pemex isn't waiting for legislators to act. It hopes to dispatch engineers to observe operations on Brazil's deepwater platforms. "We finally woke up and realized we have to do battle with this," says Pemex's exploration chief, Carlos A. Morales Gil. But what Pemex really needs is a technology-sharing joint venture with Petrobras. As a publicly traded company, Petrobras may only want to do that if it can share in the oil finds—something Mexico's constitution bars. For now, the Brazilian company says it may provide Mexico with some technology to get its foot in the door. "If they decide to change the constitution, we want to be present," says Luis Carlos Moreira da Silva, Petrobras' executive manager for international business development.

Petrobras' expertise is on display at a giant floating platform moored in 4,000 feet of water about 80 miles off Brazil's Atlantic coast. The company each day produces gas and crude equivalent to 218,000 barrels of oil at the platform, a converted supertanker. Petrobras was one of the first oil companies worldwide to use floating platforms to reach oil that conventional fixed rigs couldn't. Company engineers designed torpedo-like anchors that are fired into the ocean bottom to secure the vessel. Petrobras is awaiting permission from the U.S. government to be the first company to use such a rig in the Gulf of Mexico, where it plans to invest $15 billion over the next decade.

While just 10% of Petrobras' revenues now come from its international operations, the company is eyeing opportunities for expansion worldwide. Petrobras has an ambitious five-year investment plan and hopes to boost oil production to 2.4 million barrels per day by 2011. With three-fourths of the world's oil reserves held by state-run companies, Petrobras' hybrid status as a government-controlled company managed like a private one could help it win contracts in countries such as Iran and Venezuela that view Big Oil with suspicion. "Sometimes we visit a country and say, We're state-owned,' and other times we say We are independent, private,'" says Moreira da Silva.


That approach might work in Mexico, too. But it remains to be seen just how much deepwater expertise Petrobras is willing to hand over. And Pemex needs more than technology. It would do well to emulate Petrobras' emphasis on worker training and innovation, and its managers want to be freed from heavy taxes, meddling politicians, and a powerful labor union that blocks change. "We must carry out profound reforms," says Morales, the Pemex exploration chief. "Pemex needs to be given more autonomy. We need to pay much more attention to research, technological development, and training. We're taking steps now to make up for lost time." The challenge will be to become more like Petrobras before Mexico's oil flow slows to a trickle.

By Geri Smith

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