Mexico’s Oil

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 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.