Mexico's Obsolete Oil Nationalism

Raul Gallegos is a Bloomberg View contributor, who covers Latin American politics, business and finance. He was a columnist for Reuters and a correspondent for Dow Jones and the Wall Street Journal. He is a graduate of the University of California at Berkeley and Columbia University. He grew up in El Salvador and is based in Colombia.
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Mexico's belief in the sanctity of state control over energy has set the country's oil business back several decades. Oil output has declined by a quarter since 2004, and the country's oil reserves have fallen 41 percent over the past 13 years. The U.S. shale-oil revolution is an example of what is possible by embracing top-notch technology. But last week, when the National Action Party, or PAN, announced an energy-reform proposalmany Mexicans reacted with knee-jerk rejection. Such a response shows they don't understand what's at stake.

Despite widespreadagreementamong Mexico's three leading political parties that something needs to be done to revamp the oil business, how to do it is a touchy subject. The leftist Party of the Democratic Revolution, PRD, rejectsprivatizing any part of the state-owned oil company, Pemex, or opening the sector to private investment. In their minds, the ideas of the late 1930s -- Mexico nationalized oil in March 1938 -- remain valid.

The problem is reality has a way of changing faster than ideas do. For starters, Mexico's easily tapped oil reserves have become dangerously depleted. Daily output has dwindled to a 22-year low at the country's top producing Cantarell oil field, with production falling 74 percent since 2006. Pemex must now look for oil deeper offshore, but it lacks the expertise to do so. It needs the help of global oil companies, notably those in the U.S., which have developed technology to tap deep-water oil fields and extract shale oil as well.

Second, Mexico's slowing economy and its increasing dependence on crude -- oil salesmake up almost a third of the government's budget -- mean the country needs to increase production. A recent study by Mexico's Competitiveness Institute, IMCO, estimates that allowing private investment in Mexico's energy business might raise economic growth by as much as 1.7 percentage points annually until 2030.

The PAN's proposal tochangethe constitution to allow oil concessions so state-owned and private companies can explore and pump oil is a step in the right direction. Attracting international oil companies will require giving them a stake in the projects they develop or a high enough rate of return to make investment attractive. This can be done through concessions or joint ventures with the state, without giving up ownership of the oil. Most Mexicans may disagree with opening Pemex to private investment, but neither the PAN nor the ruling Institutional Revolutionary Party, PRI, have suggested that. At any rate, privatizing Pemex isn't needed.

Opponents of reform like to point to Brazil's Petroleo Brasileiro SA, Petrobras, or Colombia's Ecopetrol SA -- both of which sold shares to the public -- as examples of what they want Pemex to avoid. Fair enough. Mexicans intent on defending the country's oil riches would do well to look at Venezuela instead. Petroleos de Venezuela, or PDVSA, is state owned. But even the leftist and ultra-nationalist President Hugo Chavez welcomed foreign oil companies. Although PDVSA's decision to sacrifice oil investment to populist spending is hardly worth emulating, Venezuela's openness to foreign investment is viable. The country'smassive energy resources and its joint-venture-like contracts have been enough to keep the interest of companies such as the U.S.'s Chevron Corp., Norway's Statoil ASA and Spain's Repsol SA.

President Enrique Pena Nieto's PRI and the like-minded PAN have the congressional votes to pass an energy reform. Doing so without preparing Mexicans for the change could be counterproductive. The PRI has also vowed to unveil its own proposal later this year. But pushing a little-known reform on Mexicans at the very last minute may be as troublesome as not having a reform at all. Mexico has a historic opportunity to change its energy future. The country's politicians will make history if they educate their citizens about why their insular oil nationalism is no longer an option.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.