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 Business News | November 2006 
Will Mexico be Ready When Oil Runs Dry?
 Augusta Dwyer - The Globe and Mail
When a Yucatan fisherman named Rudecindo Cantarell first noticed oil bubbling up into the waters of Campeche Sound in 1976, Russia was still Communist, Rocky won the Oscar for best picture and the notion of a political party other than the Institutional Revolutionary Party running Mexico unimaginable.
Thirty years on, the Cantarell field - second in size to Saudi Arabia's Ghawar complex and source of 60 per cent of Mexico's total production - has begun to decline.
From a 2004 peak output of more than 2.1 million barrels of oil a day, Cantarell is down to 1.8 million b/d today, and will continue to diminish in the coming years. And its waning only seems to underscore the challenges facing the country's monopolistic state-run oil giant, Petroleos Mexicanos.
The world's third-largest oil producer, Pemex "has no real prospects to substitute for Cantarell," oil analyst David Shields says. In spite of booming oil prices and record sales worth $86-billion (U.S.), it ended last year $7.1-billion in the red and has debt of $54-billion.
Output fell 4.6 per cent in August from a year earlier, and proven reserves stand at 16.5 billion barrels, representing eight to 10 years of assured production.
What's more, as a state monopoly, Pemex has long been a sinecure for presidential cronies, loses an estimated $1-billion every year in corruption and suffers continual pipeline leaks and explosions.
The undersecretary for hydrocarbons at the Ministry of Energy, Hector Moreira, has been sounding the alarm bells recently, warning Pemex could go bankrupt within the next six years because of its debt.
In an interview, however, Mr. Moreira played down that scenario somewhat, but admitted "that doesn't negate the fact that Pemex's debt is increasing, and that we need to do something to stop and reverse that. We cannot keep on accumulating debt."
"The elements are there for such a collapse," Mr. Shields says. "That's not to say that it will definitely happen; it could be less dramatic than that."
The reason for the oil giant's woes is simple, says Celina Torres, head of investor relations at Pemex. "The company pays taxes on third-party sales, a percentage greater than its profit, about 68 per cent of its total revenue." While that amount went down to about 58 per cent at the beginning of 2006, saving Pemex approximately $2-billion, the federal government still siphons off what amounts to 35 to 40 per cent of its entire national budget from Pemex.
As a government body, Ms. Torres added: "Pemex is subject to the Public Works Law to acquire any equipment or service. The same process the Ministry of Education must follow to buy pencils, we have to follow to buy platforms."
The company also needs to get approval from the Ministry of Finance for investment spending. "That," Mr. Moreira says, "makes Pemex very slow in taking decisions. And sometimes the ministry says: 'Wait, the money flows are not right at this moment,' so they're taken with Finance criteria and not what Pemex needs."
Indeed, the only real autonomy the government has given Pemex is to incur debt. The vast majority is with foreign banks, which consider the loans sovereign debt to be paid back as projects come on stream. But because the government takes any earnings before the banks can, the debts have piled up.
Still needing as much as $18-billion a year to search for new reserves, Mr. Moreira says, a politically acrimonious discussion on opening up the company to foreign joint ventures has been waged ever since the National Action Party (PAN) won the presidency in 2000.
Alfredo Penalosa, a member of a left-leaning group of former petroleum industry workers and a Pemex critic, says the government is unduly emphasizing the need to go into deep waters to replace Cantarell's riches in order to make the necessary change to the Mexican constitution more palatable.
He agrees that Pemex has to explore. "But we don't have to spend vast amounts of money making alliances with multinationals to share the costs of paying for technology they don't have yet," he says. Rather, he thinks Pemex should move the emphasis back to shallow waters and invest in more refineries: Currently Mexico must import about a quarter of its gasoline supplies.
But Pemex prefers to avoid those kinds of expenditures and has already brought in many foreign companies, such as Halliburton Co., to explore and drill under so-called multiple-service contracts, which are the bane of ex-workers like Mr. Penalosa. He says Pemex is facing 27,000 unlawful dismissal suits because of it.
As production has fallen from 3.38 million barrels a day in 2004 to 3.31 million currently, Pemex has been promoting the virtues of deep-water fields such as Chicontepec or Noxal 1, where the company thinks it is on to a 10-billion-barrel reserve. They are further heartened by the recent discoveries on the United States side of the Gulf of Mexico, such as the Jack fields. But the technological challenge is awesome, Mr. Moreira says, and only by going in on a joint venture would Pemex be able to fully exploit the possibilities on their side.
But along with the number of years it will take to bring them on stream, analyst Mr. Shields says, areas such as Chicontepec have yet to prove anything. "The official discourse on possible mega-reserves in deep water apparently has the objective of calling attention to the option of their exploitation and opening it to international companies," he wrote recently.
Mr. Moreira denies that privatization is on the PAN government's agenda. "Nobody has proposed privation, no party has proposed that," he emphasized. "What we want is private investment."
Including probable and possible reserves, he says, Mexico has 46 billion barrels of oil "and we believe that in the Gulf of Mexico we have a similar amount. To develop those resources we need two things we don't have: money and technology."
The product belongs to the nation, he says. "That's non-negotiable - but that doesn't mean that no private company should have any role. . . . We have to find a way to say: 'Come and join me, let's develop it together and make the investment.' "
While the government needs a two-thirds vote in the Mexican Congress to amend the constitution and allow joint ventures, other modifications, requiring only a simple majority, are already being worked out. Among those are a change to the onerous tax structure, as well as the appointing of independent members to the company board, which is currently made up of six government ministers with contrasting portfolios and five trade union representatives. "Those people who are independent should be the ones who are controlling the auditing and the checking," Mr. Moreira says. "Make Pemex accountable to the Mexican population, not only to the Mexican government, as it is now."
The coming months will tell how likely Congress is to play along with the government's wish list. With Congress - and the country itself - more divided than ever after this year's extraordinarily tight presidential race, the possibility of Pemex being regarded as a viable operation, rather than a political football, is still very much up in the air. |
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