Highlights
– Rapidly falling oil reserves are forcing Mexico to look to new sources
– Inaccessible reserve sites prompt President Calderon to propose liberalizing the national oil industry
– New, radicalized leadership in the opposition party will likely lead to greater conflict over energy reform
– Development of new hydrocarbon reserves will remain a long-term goal
March 18, 2008 marked Mexico’s 70th anniversary of the nationalization of oil fields once controlled by American and British companies. Hailed in 1938 as a victory of independence from foreign powers, recent decreasing oil reserves have forced Mexican state-run oil companies to once again consider partnering with foreign businesses. While Mexican President Felipe Calderon hails the opening of the oil market as a necessity, opposition leaders fear that the sharing of Mexico’s “black gold” may once again lead to too much foreign control.
The Mexican Oil Situation
Petroles Mexicanos (Pemex) is the nation’s state-owned petroleum company, and is responsible for oil discovery and production throughout the nation. Responsible for revenues that fund approximately 40 percent of the federal budget, it serves as the United States’ fourth largest source of oil by providing nearly 1.2 million barrels per day (bpd). The Cantarell field off of the Atlantic coast has long been Mexico’s largest producer since its discovery in 1979 and in its prime, accounted for nearly 60 percent of Mexican output at 2 million bpd.
However, oil reserves have been rapidly declining in recent years. Pemex announced on March 18, 2008 that it’s overall proven oil reserves fell for the sixth straight year in 2007. While reserves were tapped to be around 30.8 billion barrels in 2001, the numbers have fallen every year since then, placing current reserves closer to 14.7 billion barrels of crude oil. Output has declined by approximately 200,000 barrels per day, yet little investment has been made to search out new potential reserve locations. Further, Pemex is discovering one new barrel of crude for every two barrels it extracts, leaving Mexico in a precarious energy situation; if current trends continue in the next decade, it is possible that Mexico will be forced to import oil in the next nine to 15 years. Were this to occur, it would have an extreme negative impact on the economy, which is largely dependent on oil sales for incoming capital.
“Untapped” Potential
New discoveries of deepwater sites in the Gulf of Mexico could help solve the growing oil crisis. Preliminary testing by Pemex has estimated seven currently undeveloped sites to hold upwards of 30 billion barrels of hydrocarbon reserves. However, the deep underwater nature of these sites requires extensive exploration and highly technical equipment for mining. Due to a decrease in funding since 2001 for the express purpose of discovery technology, Pemex lacks the operational and technical capacity to access these sites to their full potential and thus maximize production.
Private Partnerships
Mexican President Felipe Calderon has proposed a solution. His plan centers on allowing private companies to invest and partner with Pemex to develop the deepwater sources. While it is not a call for the privatization of Pemex, Calderon believes that the only way for Mexico to access the oil in these sites is through partnerships with foreign oil companies. Despite their advanced technologies for developing such sites, it is unlikely large foreign oil companies will share their assets without a stake in a profit-sharing alliance with Pemex.
Calderon’s plan may be slow in coming as permitting foreign companies a chance to invest and partner with Pemex will require a constitutional amendment, as the federal constitution currently prohibits the oil industry from opening up to foreign or private ownership. Calderon and his supporters have pledged to push an energy reform bill through Congress before the current session ends on April 30, 2008. While little details of the bill have been discussed, Calderon and his deputies have stated publicly “more foreign investment is crucial”.
“Do Not Sell Our Homeland”
Opponents to the opening of the oil industry have voiced concern. Led primarily by the leftist Democratic Revolution Party (PRD), opponents believe that any deal involving foreign companies will equate to selling off Mexico’s patrimony (oil) to “the gringos”, a term for northern/American citizens. Leftist leader Andres Manuel Lopez Obrador, who lost the 2006 presidential election to Calderon by less than one percentage point, argues that any move towards foreign incursion is tantamount to privatization.
To coincide with the 70th anniversary of nationalization on March 18, 2008, Obrador hosted a large rally in one of Mexico City’s main squares, where he vowed to defend Mexico’s sovereignty. He promised to send “brigades” of volunteers to surround strategic facilities nationwide, including airports and roads, which could expand into strikes if Calderon continues on with plans for reform.
Yet supporters of energy reform remain confident that the energy bill will pass. Calderon’s conservative National Action Party cite their alliance with former ruling Institutional Revolutionary Party (PRI) has allowed them to pass previous controversial financial, social security and justice reforms. Adding to the debate, supporters believe that the PRD is focusing on the oil issue as a means to regain momentum after Obrador’s failed presidential run.
The Debate Goes On
Recent elections on March 16, 2008 for new PRD leadership will have a large impact on the future success of the energy reform. Though the final vote count remains somewhat disputed, it appears that Alejandro Encinas has defeated rival Jesus Ortega in the internal party election; Obrador supported Encinas, while Ortega advocated a more moderate approach to dealing with Calderon’s administration. Encinas’ election win indicates that Calderon’s energy reform will likely face increasing opposition in the near to mid-term. Both supporters and detractors of the reform are likely to launch widespread campaigns to garner support from key political figures as well as the public. Development of the deepwater reserves is vital to Mexico’s economy. If the reform bill fails to pass, it will be due to Obrador and Encina’s aggressive mobilization efforts of the people and not a decision that the sites are not worth pursuing.
Obrador is rumored to be considering a second attempt at the presidency in Mexico’s 2012 election, and it is likely that oil and energy reform will become the hot button issue in the mid to long-term. The development of the large-scale deepwater site is a lengthy process, and any controversy over the opening of the oil industry will only further delay what is already a long-term goal for Mexico.