Long a state monopoly, Mexico's oil sector moves to embrace outside world

Analysts say Pemex – which has long been a symbol of national sovereignty – needs tens of billions of dollars in private investment to stay competitive.

It’s as entwined with Mexico's national identity as mariachi music, mole sauce, and the national soccer squad.

Pemex – the national oil monopoly Petroleos Mexicanos – has long been a powerful symbol of Mexico’s sovereignty in the face of foreign interests that would exploit the country’s energy resources. But it has also been isolated from foreign investment, making it difficult to keep up with technological advances or Mexico's growing energy needs.

President Enrique Peña Nieto proposed Monday to overhaul the regulatory plan that has forced that isolation, opening the door to deals with global energy companies. Analysts say Mexico’s economic future – and the competitiveness of North America in the global economy – is at stake.

“Without a different arrangement to exploit the hydrocarbons that we have, we’d be losing out on potential for growth,” says Montserrat Ramiro, director of energy projects at the think tank Mexican Institute for Competitiveness.

'The oil is ours!'

The reform comes at a critical moment for Mexico. The shallow-water deposits Mexico depends on are running dry. At current production rates – on the decline for nearly a decade – Pemex only has 10 years of reserves left. The company has made deepwater discoveries but doesn’t have the technological expertise to extract the hard-to-reach oil. The country is believed to store ample shale oil and gas, but Pemex doesn’t have the know-how to get at that energy, either.

Analysts say Pemex needs tens of billions of dollars in private investment to modernize. The reform would allow profit-sharing contracts in which outside players could explore for oil in partnership with Pemex.

But it stops short of letting outside companies own the oil they pump. It blocks the concessions that may be needed to lure the majors like Exxon Mobil or Chevron, but which amount to a nonstarter for many Mexicans who have grown up to the repetition of mantras like “Pemex won’t be sold!” and “The oil is ours!” 

Still, “if you have a contract that divides profit, it can be used to the same purpose as a concession,” says Ms. Ramiro. “My perspective is that it is definitely on the right track.”

The initiative presented to Mexico's Congress on proposed reforms cites Brazil, Colombia, and Norway as examples to follow; all three countries have a state-owned oil company that accepts varying degrees of partnership. 

Yet if Pemex must act as a partner in every production contract, “the problem is that you limit the expansion of your oil industry once Pemex capacity is maxed out,” says Duncan Wood, director of the Woodrow Wilson International Center for Scholars' Mexico Institute in Washington.

More flexibility?

Pemex’s inefficiencies are legendary, and the administration has said its goal is to create a nimbler, more efficient business than exists today. Energy Secretary Pedro Joaquin Coldwell cited one telling statistic while presenting the reform: Public investment in Pemex has increased sevenfold in 15 years to $20 billion annually, but production of crude oil and natural gas has fallen, suggesting waste in the system. 

The text of the reform proposal draws a comparison: Oil companies in the US drilled 137 deepwater wells in 2012, while Pemex drilled just six. More than 70 companies participated in the US drilling, while “in Mexico the risk and responsibility falls on just one.”

The reform “puts an end to these negative trends that threaten the country’s energy, the economy of families, and the competitiveness of businesses,” Mr. Coldwell said.

Mexico’s central bank recently reduced its expectations for growth this year to between 2 percent and 3 percent, down from 3 percent to 4 percent. Analysts note that energy is one of the sectors holding Mexico back.

There are other key elements to the reform. It would substantially reduce the company’s tax burden – Pemex currently supplies a third of the federal budget – and allow part of what it pays the government to be turned around and reinvested in operations. The reform would also break the national electricity monopoly’s grip on the distribution of electricity nationwide.

A political battlefield

Now weeks of legislative debate follow. While political parties fuss over how the reform is worded, US and foreign oil companies will want to know one thing when all is said and done, says Houston-based energy analyst George Baker: “Are you going to put a commercial deal on the table or not?”

Mr. Baker says that, should the reform pass, he expects the first contracts between Pemex and foreign players could be two to four years out.

The president’s Institutional Revolutionary Party, or PRI, can likely count on support for the reform from the opposition National Action Party, or PAN – providing the legislative majority it needs even without help from the left-leaning Democratic Revolution Party, or PRD, which has mostly opposed structural reform. However, it appears the PRI is competing to win the public relations battle as well.

The text of the reform underscores over and over again how it remains true to the spirit of what President Lázaro Cárdenas was trying to do when Pemex was founded, describing numerous tenets as inherently “cárdenista.” In linking the reform to Mr. Cárdenas – who became a national hero for expropriating foreign oil interests – Ramiro suggests the PRI has “inoculated” itself against political attacks.

And there may be many. Opinion polls suggest a majority of Mexicans – albeit much slimmer than it once was – rejects the idea of “privatizing” Pemex or permitting foreign investment.

The question for the PRI is: “Can you thread the public opinion needle and pass a reform that modernizes the sector but isn’t seen as privatization?” asks Shannon O'Neil, a senior fellow for Latin American studies at the Council on Foreign Relations.

Former PRD presidential candidate Andrés Manuel López Obrador – who opposes the proposed changes to the current regime – has called for a march to Mexico City’s Zocalo public square on Sept. 8 to protest the reform.

Curiously, back in 2008, when the PAN was trying to push through a similar reform of the energy sector, the PRI opposed it. Ramiro suggests that four years ago, “the political risks were much higher.” Not everyone knew that Mexico’s accessible reserves were running out.

Today, she says, “I think they are much more aware of the risks of inaction.”