Since taking office in 2006, Mexican President Felipe Calderon has proven to be a far more astute politician than his predecessor, Vincente Fox. In response to an increasing drug cartel war, Calderon dispatched the army to quell mounting violence and police corruption. He has also successfully developed alliances with trade and teacher unions, and state governors from both the Institutional Revolutionary Party (PRI) and the Party of the Democratic Revolution (PRD). However, Calderon’s ability to form alliances of convenience with rival politicians from the PRI and PRD will not produce near-term reforms of Mexico’s troubled state oil monopoly, Petroleos Mexicanos (Pemex).
Pending an immediate boost to Pemex’s exploration activities, critical infrastructure development, debt relief, and tax and revenue sharing obligations, Pemex will be unable to replenish oil reserves that are currently set to last less than a decade.
Pemex’s proven crude oil reserves at year-end 2006 were estimated at 15.5 billion barrels, equivalent to 9.3 years of production and 5.8 percent lower than in 2005. Of significant note, daily output declined also in 2006 by 2.3 percent to an estimated 3.2 million barrels.
In 2006 Pemex replaced 41 percent of production with new reserves, up from 26.5 percent in 2005, but below the required 100 percent needed to achieve complete replacement levels and sustain production capacity.
Pemex Exploration and Limited Partnerships
During a public ceremony marking the 69th anniversary of Mexico’s oil nationalization, President Calderon again reiterated his administration’s commitment to keeping Pemex in, “the hands of all Mexicans.” Mexico’s constitution bans private or outside investment in Pemex. Private companies are only authorized to serve as outside contractors or suppliers to Pemex.
Mexican energy officials have not discounted the near-term possibility of entering into strategic initiatives with international companies to assist Pemex in developing deep-water oil fields. Pemex has a lack of experience in deep-water drilling and has been unable to fully develop the Cantarell and Lakach oil and natural gas fields. On March 2, 2007 Pemex expanded a technology agreement with Brazil’s Petroleo Brasileiro (Petrobras), which has abundant experience in deep-water drilling. Petrobras has drilled in deep waters more than 2 kilometers deep, including both the US Gulf of Mexico and West Africa.
Overcoming nationalist opposition to private investment and strategic limited partnerships will be difficult for Calderon as both PRI and PRD politicians have previously blocked Pemex reforms, fearing any constitutional changes, however limited, would eventually lead to full privatization of Mexico’s oil industry.
Moreover, the contentious 2006 presidential election and the narrow election victory mean that Calderon still lacks a solid presidential mandate. Although some 60 percent of the Mexican populace believes Calderon is an effective leader, Mexican citizens remain adverse to privatization proposals. Oil revenue accounts for a third of government revenues, although Mexico has no dividend payment system directed to Mexican citizenry.
Critical Infrastructure Development
Pemex’s revenue sharing commitments with the Mexican government limits the company’s ability to reinvest profits into developing technology, infrastructure maintenance and improvements and debt repayments.
Moreover, Mexico is forced to import some 40 percent of its gasoline, due to lack of refinery capacity, which is hampered by lack of infrastructure development. As a result, Mexicans generally pay more for gasoline than people in the US and other Latin American countries.
Pemex owes creditors an estimated US $107 billion, which it is unable to repay because of revenue sharing commitments with the Mexican government. Pemex funds the majority of its projects by assuming additional debt from US creditors. Pemex is the most indebted oil company in the world according to Pemex chief executive Jesus Reyes Heroles.
Deep-Water Oil Production
Pemex has identified 230 prospects for drilling in Mexico’s Gulf waters. However, Pemex only successfully drilled fours wells in 2006. Deep-water exploration will require continued outside assistance from Brazilian Petrobras and other international oil companies that have a greater capability to conduct deep-water exploration operations and production. Additionally, increased activities by US oil companies along the US controlled-area of the Gulf and Mexican waters may pressure the Calderon administration into approving private investment. A US well could theoretically draw oil from deep rock located on the Mexican side.
Pemex Future Development
Calderon lacks the necessary votes in Congress to push through required Pemex reforms. The Mexican government and Pemex will seek to form limited joint ventures with international oil industries but will stop short of any privatization initiatives in the near to mid-term. Both the Mexican government and Mexican citizenry remain deeply suspicious of any type of privatization initiatives. Although strategic partnerships with specialized contractors and suppliers will assist Pemex in recovering lost proven oil reserves, the company is likely to experience long-term deterioration if dramatic reforms, including possible privatization, elimination of revenue sharing commitments and debt restructuring, are not achieved.
