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Pemex rig workers in the Gulf of Mexico. Bloomberg News
Pemex rig workers in the Gulf of Mexico. Bloomberg News

Mexico has chance to show how to turn round ailing oil giant

A private sector-led turnaround of the oil industry in Mexico would also give a nudge to Venezuela and Argentina - and other countries with monopoly oil sectors, such as Kuwait.

It was the first great nationalisation of oil outside the Soviet Union and created the first major national oil company. Women queued to donate jewellery and chickens to pay the bill. It shaped the nation's evolution, with oil sustaining a near one-party state for 71 years. But now Mexico's March 18, 1938, nationalisation may be on its way out.

Mexico, almost uniquely, has forbidden private investment - foreign or domestic - in its oil and gas industry. This is run by the state company Pemex - a national icon but also a byword for cronyism, overstaffing, corruption and accidents.

Indeed, an unaccountable state within a state, providing a third of government revenues, Pemex arguably distorted the whole course of Mexican democracy.

Now Enrique Peņa Nieto, the president for just seven months, is hoping to end Pemex's monopoly before the year is out. It's essential he succeeds as the company's failings are holding back the whole economy.

Production has dropped every year since 2004 as Pemex's flagship, Cantarell, once the world's second-biggest producing field, went into steep decline.

Falling Mexican output helped to undermine non-Opec production and drive the price boom of the past decade.

On present trends, the country, still a major supplier to the United States, could be a net oil importer by 2020, while despite its hydrocarbon riches, it imports a third of its gas, mostly from its northern neighbour.

The famous Eagle Ford formation, one of the US's two leading shale oil plays, extends across the border from Texas. Yet Mexico, which could have the world's sixth-largest shale gas resources, has drilled just 15 wells; more than 4,000 wells were permitted in the Texas Eagle Ford alone last year.

The country's most promising new exploration province is the Gulf of Mexico. Shell and others have found oil in 3,000 metres of water, the deepest producing wells in the world, just over the US side of the border, but Mexico has barely ventured into these deep waters.

Meanwhile, drugs cartels, including the infamous Zetas and Sinaloa groups, diversify their income by stealing oil from Pemex's pipelines, costing it an estimated US$475 million in 2011.

The case for reform has long been clear, but was blocked by Pemex's powerful trade unions, the company's ties to state governments, and by the constitution's commitment - still passionately backed by many Mexicans - to national ownership of mineral resources.

Mr Peņa Nieto has to keep a tricky coalition of Mexico's three largest parties together to pass reform of oil and the voting system.

It's likely under his plans that the state would still own the oil, while sharing profits with private investors in shale and deep-water exploration. He has already steered through big shake-ups of education and telecoms, but leftist factions of his party still cling to the symbolism of 1938.

Successful reform would spread the shale revolution south of the Rio Grande, and revive an important non-Opec oil producer.

That would put further pressure on Saudi Arabia and its allies, already concerned about growing US and Iraqi output.

A private sector-led turnaround in Mexico would also give a nudge to Venezuela and Argentina - and other countries with monopoly oil sectors, such as Kuwait.

With the right incentives, Pemex might even be able to turn itself into a truly competitive national oil company like Brazil's Petrobras. But foreign investors will be wary. Repeatedly in Latin America, oil privatisations and openings to foreign investment have been reversed - in Venezuela, Ecuador, Bolivia, Argentina and even partly in Brazil.

Oil companies should have learnt that contracts and international arbitration are not much protection against a charismatic populist leader, or when people feel they got a raw deal from privatisation.

Those taking the plunge into Mexican oil will feel nervous every time the March 18 celebrations come around.

 

Robin Mills is the head of consulting at Manaar Energy and the author of The Myth of the Oil Crisis and Capturing Carbon

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