Mexico’s Oil

Updated on

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 there were mixed feelings in Mexico when a majority of states voted in 2013 to let foreign companies compete with the government oil monopoly and Congress approved related rules in 2014. 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

The Mexican government for the first time awarded rights to foreign companies to drill for oil in its territory in an auction in July 2015. Although Mexico is the world’s 10th-biggest producer of oil, its national oil company, Pemex, is struggling. Crude production is falling for the eleventh year in a row, a period in which the U.S. and Canada have experienced booms. Dwindling revenue and a heavy tax burden — Pemex paid almost 50 percent of its revenues in taxes in 2014, 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 allowing foreign companies to pump crude through licenses and production-sharing agreements for the first time in decades. In the July auction, contracts for just two of 14 shallow-water blocks in the Gulf of Mexico were awarded. After reducing its share of profits, the government sold three of five contracts in a September auction of less risky fields. An auction of deep-water fields is still to come.

Source: Pemex

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 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, Mexico 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.

Source: Data compiled by Bloomberg

The Argument

The government says opening the oil, gas and electricity monopolies to competition will attract $62 billion in foreign investment by 2018 and increase economic growth by at least 1 percent every year. Pena Nieto’s team says 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. 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. They say it 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 maintain, by reducing Pemex’s tax burden, increasing transparency and attacking persistent corruption. The opposition points to Saudi Aramco as an example of a successful state monopoly.

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
    Lisa Beyer at lbeyer3@bloomberg.net

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