Petroleos Mexicanos (Pemex), Mexico’s state-owned, nationalized petroleum company, is facing its most significant challenge. Its onshore fields are drying, and Pemex currently lacks the technical know-how to explore its seemingly ample offshore reserves. Moreover, the oil giant is taxed so heavily by the state that it remains deeply in debt. In recent years Pemex has been able to stay afloat only through massive borrowing, but now it owes over $40 billion, including over $20 billion in off-balance-sheet debt. Without major reform, the oil giant will deteriorate further, eroding Mexican economic growth.
With world oil prices at near-record highs, and Mexico pumping and exporting more crude than ever before, any drop in oil price could cause a crisis. But the problem is hardly the peak in oil, its politics. A sizable amount of the Mexican government and citizenry opposes anything hinting of the privatization of the oil sector, even though this may be the only way to save the oil giant. Tax reform is also critical, but President Felipe Calderon’s fiscal reform plan is met with staunch opposition in Congress. Thus, Pemex is at an impasse. Tax reform has chance of passing through the Legislature, but that alone will not solve the Pemex crisis. Only increased private investment into exploration and development will allow for survival of Mexico’s Petroleos Mexicanos.
Lofty Goals
Pemex, the third-largest oil supplier to the US, is seeking to maintain crude-oil production at 3.1 million barrels per day and add proven reserves equivalent to 100 percent of production over the next six years. The main problem is Pemex’s proven crude oil reserves at year-end 2006 were estimated at 15.5 billion barrels. That is 5.8 percent lower than in 2005, and a replacement of only 41 percent of production with new reserves. That’s up from 26.5 percent in 2005, but still 59 percent short from the goal needed to achieve complete replacement levels and sustain production capacity and recently established by Pemex’s Exploration and Production head Carlos Morales.
As previously discussed, an immediate boost to Pemex’s exploration activities, critical infrastructure development, debt relief, and tax and revenue sharing obligations are all needed if Pemex expects to make its goal of 100 percent replacement levels (Previous Report). Tax and revenue sharing obligations are currently being discussed in Congress but as far as exploration and infrastructure development, Pemex officials are still very much against private revenue-sharing partnerships. Pemex stated on June 29, 2007, much to the dismay of foreign analysts and business-savvy Mexicans, they will not pair up with foreign companies in risk and profit sharing alliances that would require legal changes. Instead, Pemex will limit itself to hiring private firms via fixed-fee service contracts that do not breach a constitutional article giving Pemex the sole right to drill for oil and gas (source).
Thus, as we predicted, Pemex began to enter into strategic initiatives with international companies to assist them in developing deep-water oil fields, but it will likely not be enough to the meet the goals that were ambitiously set. Since June 29, 2007, Pemex has entered into service contracts with both domestic and foreign companies to assist in exploration activities. However, no contracts thus far have been with major foreign oil companies who could truly make an impact because of their deepwater capacity. Those companies are unlikely to share their knowledge for anything less than a share of the profits, which is exactly what Pemex is unwilling to give, not to mention it would require changing laws that the Mexican government is unlikely to advocate and the Mexican citizenry unlikely to support. Both the government and citizenry remain highly critical and suspicious of profit sharing with private companies, especially foreign-based firms.
A Future for Pemex
Controversy is brewing in Mexico’s Congress as President Calderon seeks to pass his tax reforms and other fiscal polices. Pending a victory, he would potentially begin the fight for Pemex reform. Likely to be the most taxing political fight of his presidency; Calderon will face unwavering opposition in Congress.
As previously stated, Pemex is and will remain a subject of national pride for all Mexicans, and even with its rapid decline, many remain highly opposed to reforming the company by allowing increased foreign involvement, regardless of how necessary such reform might be. The reality is that if Mexico refuses to open its oil industry to substantial private investment, the government will have to come up with almost $100 billion in investment capital for Pemex in the coming decade to reach the production goal they have set.
Mexico does not currently have the fiscal resources to do this, and considerable reform is the only line of attack. President Calderon is in for a difficult battle, but Congress will eventually need to respond, because if oil production continues to stager and prices suddenly drop, the opposition politicians will be on the proverbial hot-seat with the Mexican citizenry, as well as foreign countries who depend on their Pemex oil.
