| | |  Editorials | Issues | September 2008 
Mexico Investors Hurt as Calderon Fails to Loosen Grip on Oil
 Jens Erik Gould - Bloomberg
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Mexican President Felipe Calderon has taken his plans to loosen the government's grip on Petroleos Mexicanos about as far as he can. It isn't very far.
Mexico's Congress wouldn't even consider his idea of allowing private investment in the constitutionally protected oil industry. Instead, lawmakers this year are likely to pass only a measure making it easier for state-owned Pemex to hire outside service contractors.
Such a move would fall short of the president's aim to use investors' capital to expand exploration as output slides by 12 percent a year. Nor will it help Mexico, which relies on oil for 38 percent of its federal revenue, win a credit-rating upgrade that would lower borrowing costs as its stock, bond and currency markets lag behind Latin American peers.
"Mexico's not going to be the new Brazil any time soon," said Edwin Gutierrez, portfolio manager at Aberdeen Asset Management in London, which oversees $5.5 billion in emerging- market debt. "The home run requires constitutional reform" relaxing the government's oil monopoly, he said. "The potential could be substantial in Mexico."
The Americas' second-biggest oil producer in 2007 and the U.S.'s third-biggest supplier, Mexico saw output at its crucial Cantarell field plunge 29 percent in the first half of 2008 from a year earlier, a result of dropping pressure in its aging wells. Cantarell accounted for 35 percent of the company's total production of 2.78 million barrels a day in July.
Imports
Pemex's revenue, $104 billion last year, would be $20 billion higher in 2008 had the company managed to maintain output, according to Energy Ministry data. Slumping production may force Pemex to import light crude for its refineries by 2011.
"It's difficult to understand why there is so much resistance" to private capital "in the face of collapsing oil reserves," said Jaime Valdivia, who manages $1 billion in emerging market assets for Emerging Sovereign Group in New York.
If the country opened its oil industry to private capital and technology, Pemex and Mexican sovereign bonds would rally, said George Estes, the sovereign risk analyst for $5 billion of emerging market debt at Grantham Mayo Van Otterloo Co. in Boston.
Mexico and Brazil
In the past five years, the Mexican peso has gained 3.7 percent against the dollar while Brazil's real strengthened 64 percent. The Colombia Stock Exchange's IGBC Index soared 513 percent in dollar terms over that period, trouncing the Mexican Bolsa index's 243 percent gain.
Brazil's dollar bonds, once among the riskiest in Latin America, now are considered almost as safe as Mexico's, as measured by investors' yield demands. Today, Brazilian bonds yield 69 basis points more than Mexican bonds, down from a spread of 451 basis points five years earlier, according to JPMorgan Chase & Co. data.
"They aren't taking advantage of the fact that right now investors would want to participate," Estes said. "The energy reform is overdue, but the proposal doesn't go far enough."
Calderon, 46, has proved a savvier negotiator with Congress than his predecessor, Vicente Fox, whose legislative efforts were stymied by the opposition. Calderon has passed measures to cut spending on pensions, modernize the courts and wring more revenue from the tax code.
Tougher Sell
His Pemex legislation has been a tougher sell. The bill sent to Congress in April - after his initial, more ambitious idea to loosen constitutional protections was shot down - would let Pemex hire contractors to help produce, refine and transport oil as well as search for new deep-water deposits in the Gulf of Mexico that the government estimates hold 30 billion barrels of oil and gas.
Lawmakers say the bill will probably be watered down more. A final draft may be ready by the end of this month.
"This is going to be a light energy reform," said Alejandro Hernandez, who oversees 10 billion pesos ($965 million) in fixed-income assets at Grupo Financiero Interacciones SA in Mexico City. "It's not going to be what the country needs."
Winning support to relax the monopoly was difficult because mid-term elections are looming next year. No issue stirs more political emotion in Mexico than changing Pemex, which has had exclusive rights to the energy business since the country expropriated U.S. and U.K. assets in 1938.
Power Struggle
The debate comes during escalating power struggle involving the country's three main parties, none of which has a majority in either chamber - Calderon's pro-business National Action Party, or PAN; the populist Party of the Democratic Revolution, or PRD; and the Institutional Revolutionary Party, or PRI, which dominated Mexican politics from 1929 until the election of PAN's Fox as president in 2000.
The PRI led the opposition that forced Calderon to drop his original plan to change the constitution and let Pemex form partnerships with foreign and private oil companies, possibly allowing them to a own stake in newly discovered reserves, Pemex Chief Executive Officer Jesus Reyes Heroles said July 24 in an interview on Radio Formula.
After Calderon submitted his legislative proposal in April, PRD lawmakers opposed to the bill stormed the lower house podium, camped out in sleeping bags on the chamber's floor to close off debate, chained the building's doors shut, and mobilized women backers to form a human barricade around the Senate.
`Civil Resistance'
To placate opponents, Congress held two months of hearings on the bill. Since then, PRD lawmakers have threatened more "civil resistance" to stop any legislation they view as privatization.
The PRD has had little leverage beyond its power to disrupt since Calderon won the 2006 election by 0.57 percentage point against the PRD's Andres Manuel Lopez Obrador. The party still refuses to recognize Calderon as the legitimate president.
The PRI, the second-largest party in the 128-member Senate and sometimes a tactical ally for Calderon against the PRD, in July released its own oil proposal; it rejects a provision in the president's bill to allow private companies to own and operate refineries. The government says opening up refining to investment will help lower gasoline subsidies it estimates at $22.8 billion this year.
Investors may view a limited initiative as better than nothing and a first step toward broader changes.
"Hopefully it will be a signal to investors that things are moving forward," said Matias Silvani, who helps manage $12 billion of emerging-market debt at JPMorgan Asset Management in New York.
To contact the reporter on this story: Jens Erik Gould in Mexico City at jgould9(at)bloomberg.net. |
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