Dirty Oil Company Clogs Mexican Energy Reform

The fallout from a fraud scandal involving a small Mexican oil services company is threatening to undo one of the most important thing Mexico has attempted in decades: reforming the energy business.
Photographer: Omar Torres/AFP/Getty Images

The fallout from a fraud scandal involving a small Mexican oil services company is threatening to undo one of the most important things Mexico has attempted in decades: reforming the energy business.

The story of corruption at Oceanografia, a contractor for Mexico's state oil giant Pemex, is not out of character in a billion-dollar industry such as energy, especially one accustomed to little oversight and treated as a national treasure, as it is in Mexico.

Oceanografia allegedly created as much as $400 million of phony bills for work it had not yet done and used those receipts to borrow money from Citibank's Mexican subsidiary, which was left holding the bag of useless paper. The company apparently has a history of booking phantom work and using political connections to obtain juicy contracts (including possibly the son of a former Mexican president).

And that's not all. Oceanografia has defaulted on debt, has a chief financial officer allegedly under investigation for laundering money, and a chief executive officer, Amado Yanez, who has become famous for tweeting about nothing important while the company faced a crisis.

The government seized control of Oceanografia, but the deeper the mess goes, the uglier it looks for Mexico's political establishment. It all came to a head on Tuesday when lawmakers for the opposition National Action Party threatened to hold up opening Mexico's energy business to private investment unless the government comes clean about how bad the case is. Robert Gil, a PAN lawmaker, displayed legislative brio when he said: "We can't assure Mexico that the law regulations will be comprehensive if we don't know what problem we need to solve: What happened with Oceanografia?"

Such concern is understandable. After all, several PAN politicians have been linked to Oceanografia's dealings. Worse, Mexico's attorney general's office has admitted delays in the investigation because it cannot yet say who's responsible for what in this scandal.

But holding up energy reform laws is reckless. Oceanografia's crony business, no matter how bad, is arguably the legacy of an inward-looking oil industry that was isolated for too long. Prolonging a status quo that breeds corruption on the grounds of investigating corruption is no solution. Mexico's leaders need to find a better response to energy industry graft. To put it another way: Oceanografia won't be the only rodent to come out of a cupboard that has been closed for more than 70 years.

The Oceanografia case is a test of how serious Mexicans are about revamping their energy industry. Mexico's Federal Audit Office didn't have the power to sanction a private company like Oceanografia when it investigated its dealings in 2006. For its part, Pemex needs to clean up its act in how it hires, pays and evaluates the work of its suppliers. In other words, Mexico needs tough regulations and a willingness to root out corruption if it wants to revolutionize energy.

Without reforms, Citigroup's troubles will become a red flag for investors and financiers eager to do business in Mexico. And the economic boom that many expect to come from Mexico's oil business could lead nowhere. If Mexicans need to be told about the disappointment that follows when an energy boom goes bust, they can ask Brazil.

(Raul Gallegos is the Latin American correspondent for the World View blog. Follow him on Twitter @raulgallegos.)

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