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 Business News | June 2007 
Mexico's Pemex Hopes Tax Reform Will Free Up Cash To Invest
 Peter Millard - Dow Jones
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Veracruz, Mexico - Petroleos Mexicanos has high hopes an upcoming tax reform will free more money for its oil and gas operations, but some question whether the company can meet exploration and production targets without opening the industry to foreign capital.
The Mexican government relies on the state oil firm for around 40% of its revenue. This worked out when the company was producing easy-to-find oil at massive fields such as the Cantarell complex in the shallow waters of the Gulf of Mexico.
Now these traditional fields are declining, and Pemex needs more money to get at difficult-to-reach formations in deeper waters, reactivate aged oil fields on land, and tap other areas that have been too expensive to exploit in the past, such as the Chicontepec region.
Pemex's reserve replacement rate last year was 41%, and its proven reserves of 15.5 billion barrels of crude oil equivalent as of Jan. 1 were equivalent to 9.3 years of production.
Mexico relies on oil and gas for 90% of its energy needs, compared with 60% for the entire planet.
"Fiscal reform is the top priority," Pemex Chief Executive Jesus Reyes Heroles said this week at an oil conference in Veracruz.
If the central government can increase tax revenue from other sources and leave Pemex with more money from oil and gas sales, the company will be able to maintain current production and start finding enough new oil to replace yearly production by 2012, he said.
Reyes Heroles said he plans to do this "within the existing legal framework."
That framework includes a ban on oil and gas concessions which keeps Pemex from forming upstream joint-ventures with private or foreign capital.
Mexico nationalized the oil industry in 1938, kicking out U.S. and British oil firms, and it has proven politically impossible to invite them back since many Mexicans view control of oil as a matter of national sovereignty.
But many industry specialists, and even some Mexican politicians, say this oil nationalism could cause a fiscal crisis if output continues declining.
Furthermore, Mexico is importing increasing amounts of gasoline from the U.S., and will have to build new refineries to turn its oil reserves into the gasoline, diesel and jet fuel needed to support domestic economic growth.
Francisco Labastida, a senator for the opposition Institutional Revolutionary Party, or PRI, and head of the Senate energy committee, says the government can't continue drawing money from Pemex to resolve spending shortfalls.
"If we don't manage to halt the decline in oil production, we will enter a crisis of huge proportions," he told an audience of oil executives on Thursday.
President Felipe Calderon's proposed tax reform aims to increase revenue by nearly 3% of gross domestic product by 2012 to meet increased spending needs and reduce reliance on oil revenue. And while the bill doesn't include further changes in Pemex's tax rules, which were eased in 2006, PRI members say they'll insist on including Pemex in any fiscal reform.
"This is the window of opportunity to change Pemex's tax regime," said Labastida.
He said the current system is "designed to bankrupt Pemex" because the government increases its take of oil revenues when prices or production fall to meet short-term spending obligations, forcing Pemex to cut back on exploration spending.
Pemex's crude output has been slipping since reaching a record of 3.38 million barrels a day in 2004, largely because of the decline in production at the giant Cantarell field. Output so far this year has averaged 3.15 million barrels a day.
Pemex hopes to explore and produce oil in deeper waters to compensate, but many industry observers say more cash won't be enough. Pemex is currently drilling its fifth deep water well in the Gulf of Mexico, compared with over 500 such wells in U.S. waters.
The company claims it can overcome its lack of experience by hiring oil service companies to provide needed technology, thereby avoiding the politically difficult task of teaming up with international oil firms.
But these major oil firms express doubts that service companies, which provide technology but lack experience in managing such large projects, can fill Pemex&# 180;s knowledge deficit in deep water.
"The service companies don't have the integrated approach that the international oil companies have," said Lloyd Wenger, a senior research associate at Exxon Mobil Corp. (XOM).
He said Exxon will continue waiting on the sidelines to see if Mexico eventually decides to open up the industry to private capital.
"You just don't know what is going to happen," he said.
Peter Millard, Dow Jones Newswires; (52-55) 5080-3450; peter.millard@dowjones.com |
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