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Memo From Mexico: PEMEX Fritters Away Mexico’s Oil Wealth

By Allan Wall

PEMEX Fritters Away Mexico’s Oil Wealth. Closing The Borders Would Help
Mexican poverty is constantly used to browbeat Americans into accepting mass immigration (legal and illegal) from Mexico.

After all, how could you refuse poor Mexicans from entering the United States—they are from a very poor country, right? They’ll starve to death otherwise, right?

Well. maybe Mexico is poor in comparison to the United States. But by world standards it’s certainly not among the poorest. And its people aren’t starving.

In fact, Mexico has some very rich individuals, including at least 10 billionaires, among them Carlos Slim, the world’s second-wealthiest man.

And Mexico also has vast economic potential. It’s just been spectacularly mismanaged.

A prime example: petroleum. If managed properly, Mexico’s oil could produce great wealth for the country, and could serve as the basis of myriad manufacturing industries.

Somehow, though, it just hasn’t worked out that way.

Mexico has one of the world’s most closed petroleum markets, controlled by the state oil company PEMEX (Petróleos Mexicanos), which is protected from all competition. PEMEX enjoys a legal monopoly on the exploration, processing and sale of petroleum

The peculiar privileged status of PEMEX in Mexico affords it immunity from criticism. Mexicans are taught that PEMEX represents Mexican sovereignty and the property of the nation, even Mexican identity itself. Every March 18th, the Petroleum Expropriation of 1938, when the oil was nationalized and foreign oil companies were kicked out, is celebrated in the schools.

Thus to talk about privatization, or even private investment in PEMEX, invites hysterical denunciations for “selling out" the fatherland. PEMEX is linked in the minds of some Mexicans with their reflexive anti-Americanism and the paranoid fear that Americans are going to steal Mexico’s oil.

In 2003, as reported in a previous VDARE.COM article, Republicans in the House International Relations Committee voted to link any "migratory accord" with Mexico with the opening of PEMEX to American investment. The proposal stated that Mexican petroleum reform could "fuel future economic growth, which can help curb illegal migration to the United States." [My emphasis]

Reaction in Mexico was a swift and harsh. President Fox rejected the proposal, affirming that PEMEX is "part of our history". Foreign minister Derbez even claimed that migration is a bilateral issue—but oil is a domestic Mexican issue! (Oh, you thought U.S. immigration policy was a domestic American issue? Mexicans don’t agree).

So how is PEMEX doing now, 70 years after the Great Petroleum Expropriation?

Oil prices are up, which ought to be good for the company. In fact, on April 28th, the price for Mexican crude reached a record high.

Nevertheless, PEMEX finds itself in dire straits. Its biggest petroleum source, the Cantarell Field in the Gulf of Mexico, has peaked and is in decline.

There’s probably lots more oil out there in the Gulf. But PEMEX lacks the expertise, the financing, and the equipment to find it. Only about 20% of Mexican territory has been properly surveyed to find oil.

Here’s one analysis of PEMEX’ inability to drill in deep waters

"PEMEX doesn’t currently have the technical, organizational, administrative capacity, nor the highly qualified personnel, to begin exploratory drilling in ultra-deep waters…..Its deficiencies would be even greater to the extent that drilling activities were successful, given that the development of fields requires even greater human and technical resources." [Ultraprofundas, by Sergio Sarmiento, El Siglo de Torreon, March 24th, 2008, my translation. ]

So who said that? Some capitalistic Big Oil magnate trying to steal Mexican oil?

No, that’s a quote from Adrian Lajous, former director general of PEMEX. He ought to know.

Other problems include the company’s massive debt, its thousands of miles of pipeline constantly being tapped by oil thieves, and its history of environmental disasters and dangers to the public.

PEMEX holds the dubious honor of having the largest accidental oil spill in history, in 1979, when an exploratory well exploded in the Gulf of Mexico. In 1984, explosions at a PEMEX storage facility in Mexico City killed 500 people. In 1992, explosions in Guadalajara killed over 200 people.

PEMEX service stations, with their familiar green signs, dispense gasoline nationwide to captive Mexican consumers. The stations are actually operated by private contractors who obtain concessions to operate them.

But many PEMEX stations are notorious for dispensing petrol by utilizing some special techniques. One example is what customers refer to as chiquilitros (little liters). That means if you purchase 10 liters, you might really be getting 9 pumped into your tank. Or the fuel may be diluted with water, typically in a 3 to 1 gasoline to water ratio.

PEMEX refuses to take responsibility for such shenanigans, blaming the concessions themselves!

Of course, some PEMEX stations have better reputations than others. So Mexicans go to the more trustworthy establishments, hoping to get the full amount. Where I live, I know where the more reputable stations are located.

PEMEX has many problems. But the basic problem is that it serves as a giant piggy bank for the Mexican government. Most of the company’s profits are siphoned right into the Mexican government budget. Mexicans are "addicted to petroleum"—that’s how Agustin Carstens, Mexico’s Finance Minister, put it.

For the Mexican government, depending on petroleum is just the easy way out, rather than trying to tackle the high tax evasion rate and problems with the taxation system. There was a fiscal reform last year but it didn’t go very far. It’s just much easier to utilize the country’s oil monopoly as a cash cow. So oil revenues make up close to 40% of the Mexican government budget. (Alarming thought: what’s going to happen if oil prices drop?)

For PEMEX, being used as the government’s golden goose means the company can’t be run as a real oil company. There is not enough money left for oil exploration, exploitation and processing. Plus, PEMEX’s leaders are not chosen for their expertise in the petroleum industry, but their political connections.

Then there is the acute lack of refineries. The United States has about 150 operable oil refineries. Mexico, with about a third of U.S. production has a whopping total of 6 (aging) oil refineries!

Mexican law prohibits PEMEX from partnering with foreign companies within Mexico—but not outside Mexico. So Mexican crude is exported to Houston, Texas, where it is refined (in partnership with Shell), then imported back to Mexico.

Currently, about 40% of the gas at the pump in those PEMEX stations is imported. Mexico is a net importer of natural gas from the United States.

Ironically, its oil monopoly makes Mexico more dependent—not less—on the United States. But don’t bring up privatization, that’s taboo!

I’m not a big fan of state oil companies. I think the American oil industry has done quite well with private ownership of oil. (Full disclosure—my brother works in Oklahoma as a roughneck, and he enjoys it, and my family has mineral rights on the family farm).

Still, we can’t expect every country in the world to adopt our system. As a matter of fact, about 90% of the world’s oil is managed by some sort of state oil company. But most of them do it more sensibly than Mexico.

Just look at some of Mexico’s fellow Latin American countries. Venezuela has a state oil company, PDVSA (Petróleos de Venezuela, S.A.) which allows partnerships with foreign oil companies.

Even Cuba (!) allows private investment in oil exploration. Fidel signed a contract with Canada’s Sherritt International to explore Cuba’s offshore fields and split the profits. Such an arrangement would be legally impossible in Mexico. [Jaque Mate| Invertir en Pemex, By Sergio Sarmiento, El Siglo De Torreon, February 8, 2007.]

But maybe the best example, and most relevant in contrast with Mexico, is Brazil and its Petrobras. Like PEMEX, it is a state oil company. But Petrobras is no longer a monopoly, although the Brazilian government maintains majority ownership. Petrobras allows private investment and sells shares of stock on the New York Stock Exchange. Petrobras has become a leader in offshore drilling technology.

The recently-discovered Carioca Field, off Brazil’s coast, may be the world’s third-largest. Petrobras is well-situated to exploit it. In contrast, if Mexico found such a field, it would currently be unable to exploit—and even Petrobras, despite being a fellow government-owned company, would not be able to help.

Here’s a further irony. Despite all the paranoia about Americans stealing Mexico’s oil, thanks to Mexico’s Bizarro World petroleum law, the country is at risk of losing its oil on the U.S.-Mexican maritime border

This is the maritime borderline that extends outward, into the Gulf of Mexico, from the Texas-Mexico international boundary. In 2000, the U.S. and Mexico made an agreement to hold off exploration on that border area until 2010. So in two more years, if the U.S. allows drilling there and Mexico still can’t drill there, depending on the geological formation, some of that oil may be sucked over to the American side and lost to Mexico permanently.

All because Mexico won’t allow foreign investment!

That possibility provoked Universal, Mexico’s paper of record, to opine in an editorial that

"What PEMEX needs is money. If it’s impossible to stop taking a great part of its profits – to fill what’s lacking in the coffers – then it is necessary to permit its association with private capital without ceding the national ownership of the petroleum, as the rest of the world does." [¿Más Petróleo Nuestro a EU?, El Universal Feb. 18th, 2008]

Actually, since about 1980, PEMEX has been forced to bring in private companies, even foreign ones, to carry out certain operations, under arrangements known as multiple service contracts. In such a contract, the company is paid a set fee for the service, but does not share in the profits if it helps locate a gusher.

But that also means that, if a foreign company under such a contract fails to find oil, PEMEX has to take all the loss. If the private company were to receive part of the profits, it could shoulder some of the risk.

If PEMEX were to liberalize its petroleum law, to allow partnership with private companies, it could attract more investment and arrive at mutually profitable arrangements. After all, the private companies want to find oil too, and such arrangements would provide even more incentive to do so.

But to hidebound Mexican socialists, profit is a dirty word.

And, I get the impression that most Mexicans don’t know much about the petroleum business. Schoolchildren are taught about how great the Oil Expropriation was, and how the oil is the "property of the nation", but not much about how the oil business really works.

The way oil is discussed, you’d get the impression that Mexico’s oil is just sitting there in a big tank with a spigot on it, where it must be protected from theft by nefarious private enterprisers who constantly want to steal it.

In reality the petroleum industry is a complicated one, requiring specialized equipment, skilled geologists, engineers and other specialists, and workers that know what they’re doing. Even then you might not strike oil.

And it requires financing. British Petroleum, for example, is drilling over 10,000 feet in the Gulf of Mexico in U.S. waters. For every deep-water discovery, it costs BP more than a billion dollars. That’s almost as large as PEMEX’s 2007 net losses.

Of course, there are plenty of influential Mexicans who recognize the problems with PEMEX. Hopefully they can help solve these problems. But it involves struggling with this Mexican psychological aversion to allowing private money into PEMEX.

President Felipe Calderon delivered a PEMEX reform to the Mexican Congress on April 8th. It’s really reform "lite". It does propose to grant more autonomy to PEMEX, to sell PEMEX bonds to citizens, and to try to run it a little more like an oil company. But the reform would not allow private companies to partner with PEMEX in Gulf oil exploration; they could only be paid a bonus if their work is considered successful.

But despite the fact that the proposal is not a privatization, and really doesn’t go very far, it was enough to provoke plenty of opposition, including thousands of street protestors and a two-week takeover of the podiums in the Mexican Congress legislative chambers.

The principal opponent to Calderon’s proposal is Andres Manuel Lopez Obrador (known as AMLO), who barely lost the 2006 presidential election and who has never officially recognized the Calderon Administration. AMLO opposes any form of private money, foreign or domestic, going to PEMEX. He threatens to unleash more mass street demonstrations to support his point of view.

Nevertheless, a deal has been struck with the major political parties to conduct a formal debate, from May to July, over the issues of PEMEX reform.

Who knows, after all the wrangling in the Mexican Congress, what kind of reform will be carried out? It might possibly be a step in the right direction. But it may be too little, too late.

Personally, I’d like to see Mexico reform its petroleum industry and increase its output. If managed properly (that’s the big "IF") it would be advantageous to both Mexico and the U.S.

I’d rather the U.S. buy more oil from Mexico and less from the Middle East.

But, if the Mexican government is unable to reform PEMEX, that might not be possible.

What can we do about it? Directly, nothing. After all, any American involvement or pressure would be counter-productive, bringing forth howls of hysteria about gringos attempting to steal Mexican oil.

Mexico is very defensive about its oil. It’s almost as if Mexicans would rather limp along with an inefficient system than allow foreigners to make money off of it.

Well, OK, it’s their country. Let them run PEMEX into the ground if they want.

But the U.S. should be just as protective of its own sovereignty—in relation to immigration and naturalization law.

And we shouldn’t be conned into thinking that Mexico is a poor country that has no resources. Mexico has many resources. Its leaders have just chosen to use them badly.

But what if we closed the border, thus eliminating the emigration safety valve upon which Mexico’s elite depends? Maybe then Mexico’s leaders would pull out all the stops to reform their petroleum industry.

There is no alternative. It’s worth a try.

Allan Wall is an American citizen and resides in Mexico. Allan recently returned from a tour of duty in Iraq with the Texas Army National Guard, he is the editor of Vdare.com blog. Petroleumworld does not necessarily share these views

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Petroleumworld News 05/01/08

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