http://www.csmonitor.com/2006/1027/p01s04-woam.html
As wells dry up, Mexico could be forced to privatize oil
By Sara Miller Llana | Staff writer of The Christian Science Monitor
MEXICO CITY
Even as popular pressure grows around Latin America for a stronger state
hand in developing natural resources such as oil and gas, Mexico's
president-elect Felipe Calderón may be forced to consider putting more
power in private hands.
The country's flagship oil company Pemex, has been a point of pride since
the industry was wrenched from foreign hands and nationalized in 1938. Its
revenues alone cover one-third of Mexico's budget.
But prosperity from years of record oil prices has allowed Mexico to
postpone what most agree are much-needed reforms. And now, as production at
Pemex's top oil field declines, pressure to find new fields is mounting.
But industry analysts say Mexico's constitutional restriction on foreign
direct investment will hamstring costly exploration efforts, and possibly
disrupt the flow of oil, 80 percent of which heads to the US.
Indeed, with his fragile political mandate, Mr. Calderón may find that oil
becomes the issue that will define his presidency.
"This is an important first battle," says Benito Nacif, a political
scientist at the Center for Research and Teaching in Economics (CRTE), a
Mexico City think tank. "In the industry sector, there is a consensus that
this reform is necessary, that you have to open it up [to the private
sector]. The question is: 'Will [Calderón] be able to build sufficient
[political] consensus?' "
Many industry analysts had hoped that outgoing President Vicente Fox would
be able to push through energy-sector reforms to open up Pemex to more
private direct investment, in order to boost exploration and production.
Mexico is the second-biggest supplier of oil to the US, favored because of
its proximity and relative political stability.
In the end, Mr. Fox didn't push through a consitutional change, largely
because trying to privative Pemex, even partially, is so politically unpopular.
Also, when Fox came to office in 2000, capacity at Cantarell, the world's
second-largest field and Mexico's most important, was not in question. The
complex, located in southern Gulf waters, actually increased production
during Fox's term, peaking in 2004 with 2.1 million barrels a day.
But since then, production has been dropping off at Cantarell. David
Shields, an independent energy expert in Mexico City, says production
declined by 10 percent in the first six months of 2006. He contends that
Pemex is in much worse shape than is publicly expressed. "Pemex says
everything is great," he says. "But [Cantarell] is going to run out, and
they [in the long-term] don't have other things to replace it."
Earlier this month, the state monopoly announced that crude output from
another offshore field, Ku-Maloob-Zaap, was expected to double in 2009.
That, Pemex officials said at a press conference, would help maintain oil
production at an average 3.2 million barrels a day, and offset losses from
Cantarell.
George Baker, an energy analyst at the consulting firm Energia.com in
Houston, says he is not surprised by Pemex's announcement. "Pemex has a way
of making magic," he says. Still, he says that potential finds in the Gulf
of Mexico, similar to Chevron's recent announcement of a big discovery in
US waters, are currently out of reach because Pemex does not have the
technical know-how or money to undertake such exploration. The issues have
been here all along, says Baker, but now that Cantarell is facing declines,
"the slope downward is slipperier."
US oil firms watching closely
Experts say that American companies are watching oil production in Mexico,
but because of politics, cannot interfere by pushing for more foreign
participation. If the US needed to purchase oil from more-distant
countries, additional transportation costs would be passed onto the
consumer, Baker says.
So far, Calderón has reiterated that he will not consider private direct
investment. "There will be deliberations that we Mexicans will have in
Congress to find the means by which Pemex can access the probable reserves,
particularly in the deep waters of the Gulf of Mexico," he said at a
September press conference. "But, for now, I will be very respectful of
national legislation on the matter, which doesn't permit foreign investment
in petroleum extraction...."
In its legislative agenda, his incoming administration has also remained
unclear when it comes to its energy plans, focusing on the need to
"modernize" and increase investment in Pemex.
"These things are very vague, one could interpret them as minor fiscal
reforms, or ... major constitutional reforms," says Allyson Benton, an
expert on economics and politics at the CRTE in Mexico City. "They want to
wait to see what kinds of coalitions can be built around these things."
Privatizing very unpopular
When it comes to obtaining gasoline here, drivers have only one, decidedly
Mexican, choice: the green and red pumps at Pemex. That's the way many want
it. Calderón barely squeaked out a victory in the July 2 election, winning
by just half a percentage point. While his rival, Andrés Manuel López
Obrador, disputed the race this summer, López Obrador used many of his
protest gatherings to rally supporters about keeping foreigners out of the
energy sector. Each appeal brought wild applause.
Indeed, the divided electorate means that Calderón is unlikely to find the
political capital to challenge nationalization, even partially. "It is too
much of a political danger for them under the conditions they won," says
Miguel Tinker-Salas, an oil and politics expert at Pomona College in
California.
Mr. Shields puts it more starkly, saying that allowing international
companies back into Mexico is tantamount to letting "the invader back in,"
he says. "There will be a revolution before there is foreign direct
investment."
Those against foreign investment received a boost this month when
businessman Carlos Slim, the third-richest man in the world according to
Forbes magazine, announced that Mexico did not need foreign help to reach
deep-sea oil.
Some analysts say that more foreign investment is not the only solution for
Pemex. Mr. Tinker-Salas, for example, says that with more oversight, Pemex
could become more efficient.
Ms. Benton says that Calderón might have the most room for change by
addressing fiscal reform. One option would be to lift the heavy tax burden
from Pemex, which sees nearly half of its earnings go to government
coffers, so that Pemex can focus on daily operations. The budget is so
stripped, she says, that Pemex has to import a significant portion of its
refined products.
But some still hope that Calderón will be able to open the industry to more
private participation, beyond the current flat-fee subcontracts that
foreign companies can participate in. The long-ruling Institutional
Revolutionary Party (PRI), for example, moved to the right of the spectrum
on the issue this election, says Mr. Nacif. The PRI is also more likely to
cooperate with the Calderón administration because it is in a weaker
position, having dropped to the third-largest party in Congress.
But more than anything, the reality of dwindling oil production may help to
change sentiments. "One of the factors that drives policy change everywhere
is the deterioration of the status quo," says Nacif, "and the perception is
that the status quo is worsening. It's going to help [Calderón]" move
toward opening the industry up to private firms.
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