Uncertain Future for Mexico's Oil Giant

MEXICO CITY — These are grim days for Mexico's state-owned oil monopoly, Petróleos Mexicanos, better known as Pemex.

After decades of mismanagement, corruption and being used as a piggybank by the federal government, Pemex has plunged into a crisis marked by sharply declining oil reserves. Despite global oil prices at all-time highs, the state monopoly reported a $1.5 billion loss in 2007 as domestic production fell.

The urgent question facing Mexican officials is how to fix the world's 10th largest oil company. Pemex's production fell 5.4 percent last year and exports dropped 6 percent, trends that are expected to worsen over the next decade.

President Felipe Calderón has stirred the passions of many Mexicans by suggesting that the solution is to open Pemex to foreign investment after 70 years of being a state-run enterprise.

The stakes are high not only for Mexico, but for the United States, which imports 10 percent of its oil from Mexico.

Many government and industry officials on both sides of the border are keen for a transformation of Pemex. But most experts expect only incremental changes, and not changes to Mexico's constitution that would allow foreigners a sizeable stake in the enterprise.

Analysts expect that Calderón will seek to somehow give Pemex more financial independence, freeing it from some of its huge tax burden. Last year, Pemex gave 80 percent of its $100 billion in revenues to the federal government.

The aim is to allow Pemex to spend more of its money on new technologies and exploration and operate more like a company than a government bureaucracy.

Calderon's National Action Party is expected to introduce a bill this week in the Mexican Congress, ending months of anticipation and speculation over just how modest or far-reaching the proposals will be.

When it comes to Pemex, any kind of tinkering is hugely controversial.

The enterprise has been a symbol of nationalist pride since then-President Lázaro Cárdenas expropriated the Mexican oil industry from American and European companies in 1938. It was a bold move by Mexico's fledgling revolutionary state and it is still common to hear the refrain that "the oil belongs to all of us" in Mexico.

In recent weeks, opposition politicians have held large rallies against privatizing Pemex and warned that any such attempt could lead to violent confrontations.

Lawmakers within the president's party say the proposal may call for private investment in pipelines and oil storage, as well as joint ventures to develop oil fields along the U.S.-Mexico border. But the bill, Calerdón's allies say, will not allow the large-scale private investment in oil production that conservatives in Mexico yearn for.

The Mexican public is not prepared to accept radical change, analysts say. According to recent polls, only 37 percent of Mexicans favor allowing private investment in Pemex.

"So much of this is just about changing public perception," said Duncan Wood, an international relations professor at Mexico City's Autonomous Technological Institute and member of the Mexican Energy Network. "We've known about the problem for five years, but it's only in the last 12 months that the government has been able to get the issue into the public's mind."

For years, petroleum revenues have made up almost 40 percent of Mexico's federal budget, paying for new roads, hospitals and poverty programs.

Unfortunately, the federal government didn't leave Pemex enough to look for the new sources of oil. That wasn't a problem as the company plundered massive, easy-to-get-at oil fields that gushed without much prodding.

But now that those fields are drying up, Pemex faces tough prospects: it lacks the money and technology to get at deepwater oil deposits in the Gulf of Mexico, potential windfalls that the Mexican government believes could keep Pemex oil flowing as before.

One solution, favored by Calderón, would be to open Pemex up to private investment and enlist the help of foreign companies.

The Calderon administration has also raised the possibility of joint ventures between Pemex and other state-owned oil companies, like Petrobras in Brazil and Statoil in Norway. Officials hope that might be a more palatable alternative to teaming up with private companies like Exxon.

But Mexico's constitution bars direct private investment in Pemex.

"If you don't change the constitution there's very little you can actually do," said David Shields, a Mexico City energy analyst. "You can move pieces around, but they will hardly budge."

According to government projections, Pemex is headed for disaster if it doesn't act.

Nearly 12 billion barrels of proven reserves, most in the Cantarell mega-field off the coast of the Yucatan peninsula, will run out in nine years and Mexico could become an importer of crude oil by 2011. By comparison, Saudi Arabia has 260 billion barrels and the U.S. has 21 billion barrels of proven reserves.

Because Pemex has invested little in refining, it is in the perverse position of importing nearly 40 percent of its refined gasoline from the U.S., a percentage that is expected to climb sharply if Mexico doesn't build new refineries.

The United States also has a deep interest in Pemex's fortunes.

Should Mexico be unable to export oil, the U.S. would most likely end up paying higher transportation costs from places like the Middle East to make up the difference.

At the same time, U.S. oil companies stand to benefit should Mexico eventually open up Pemex to private investment.

"Mexico is seen potentially as a place with lots of opportunities for U.S. companies," said George Baker, a Pemex expert at energia.com, a Houston-based online news service focusing on the oil industry. "Pemex has only explored about (25 percent) of the prospective oil fields so there is a lot out there to do."

But experts say Washington is wary of meddling in Mexican affairs.

"The U.S. is incredibly interested in this," Wood said. "But the American government isn't stupid — it is treading very lightly, it doesn't want to frighten anyone. The U.S. is always seen as the bogeyman in Mexico, and never more so than on oil. It doesn't want to be seen as interfering in any way."

Mexico's leftist leaders charge that privatization has long been the goal of Mexican elites. Opposition leader Andrés Manuel López Obrador, who nearly won the presidency two years ago, has led several large protests against energy reform and said privatization would bring social upheaval, and possibly violence.

López Obrador argues that Pemex has the money and the technical know-how to do its own exploration without looking to outside help.

"If they really want to strengthen Pemex it's a matter of reducing the bureaucratic costs," he told a crowd of protesters recently. "Only technocrats and traitors can argue that Pemex can't make it on its own and that the only salvation is handing it over to the private sector."

But internal divisions within López Obrador's Democratic Revolutionary Party, the PRD, could weaken its ability to mount an effective opposition. The party is riven by an internal debate between hardliners loyal to López Obrador, and a more moderate wing that believes in engaging Calderón's conservative government.

As usual when it comes to legislative showdowns in Mexico, the former ruling party, the Institutional Revolutionary Party, the PRI, holds the key as the deciding vote between Calderón's National Action Party and the PRD.

Francisco Rojas, the former director of Pemex and an influential voice within the PRI, said his party believes Pemex needs more financial flexibility, but doesn't believe in opening up the company to private investment.

Rojas also says that Pemex's situation is less dire than most experts say, arguing that Pemex can exploit easier-to-reach reserves as it builds up the money and technology it needs to venture into deep water.

"One of our great doubts is why the government is pushing so hard for deepwater exploration," Rojas said. "There's no justification for it."

Many are also criticizing Calderón's handling of the Pemex reform so far, calling it clumsy and a rare misstep for the normally savvy Calderón.

His government offended many by preceding the reform with a media blitz extolling the virtues of deepwater exploration.

"It was the worst way to open the debate," Rojas said. "It should have been conducted on a higher plane."

"I don't think they ever did a serious analysis of ... how (to pass energy reform)," said Shields. "They already have protests and the proposal isn't even on the table yet."

MEXICO'S OIL AND CANTARELL FIELD

Mexico's proven reserves pale in comparison to other oil-producing countries.

The massive Cantarell oil field accounted for 63 percent of Mexico's production four years ago. Not only was Cantarell plentiful, but it was easy to tap, lying in the shallow waters of Campeche Bay.

Experts say Cantarell may have contributed to Pemex's current disastrous state: being so easy to exploit, it didn't compel Pemex to innovate and gear up for more difficult oil exploration and production.

Such know-how has become crucial now that Cantarell has begun to show signs of exhaustion. In 2003, Pemex pulled 2.1 million barrels a day from Cantarell. Production is expected to fall to half of that in 2010 and to just 450,000 barrels per day by 2015.

GULF OF MEXICO OIL

Mexico has nearly 100 billion barrels of so-called prospective, possible and probable reserves, oil deposits with a 10 to 50 percent chance of being produced.

One of the biggest factors spurring the drive for costly and complicated deepwater exploration in Mexico is the presence of substantial reserves in the Gulf of Mexico that straddle the Texas and Mexico border.

In 2000, both countries agreed not to tap the reserves for a decade. But while oil companies on the U.S. side are ready to pump once the ban expires, Mexico has done little to prepare. Many in Mexico now fear the so-called "straw effect" and worry that U.S. drilling will also suck out underground reserves in Mexican territory.

For some though, the cross-border oil is a chance for Mexico to experiment with joint ventures with U.S. firms, since there is no way it can position itself for deepwater drilling by 2010.

While the Mexican government is eager to jump into the world of deepwater drilling, but some experts say the prospects may be overstated and there is no way it can be ready for deepwater drilling by 2010. President Felipe Calderon's reform proposal will likely call for some kind of joint operations in the border zone, although such partnerships would exist on the outer reaches of legality unless Mexico changes its Constitution.

"In the U.S. Gulf, deepwater fields provide little more than 1 million barrels per day of crude oil production despite almost 30 years of intense investment and development," said industry analyst David Shields. "Mexico cannot expect to achieve better results."