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By Robert Rapier on Jul 25, 2011 with 10 responses

PEMEX and the Long Road to Privatization

The following guest post is from OilPrice.com.

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Petroleos Mexicanos (PEMEX) is the state-owned oil company (and natural gas) of México, which since the 90′s has been discussed for privatization like many other state-owned companies in México. The policy of privatization is sometimes called liberalizing the company, however many aspects of privatization need to be taken into consideration when discussing such a lucrative portion of the federal budget for México. PEMEX has 41 divisions, and is a source of Mexican sovereignty, and any talk of privatization will not happen without a strong fight, not only from the left, but also Mexican nationalists who see it as a source of pride. This article will attempt to give a brief summary of these considerations and bring forth an argument on what will happen in the future of PEMEX and its worth for investors.

According to the Mexican constitution (Article 27) all subsurface minerals are the property of the Mexican government, and not the people who own the land where these minerals are found. This has led to 1/3rd of the federal budget being derived from the fossil fuels found and produced in México, and accounting for 10% of all export earnings for the country. However, over the past 5 years the amount of barrels per day being produced has been declining, mostly due to the difficulty that surrounds new oil exploration, the need for more advanced technology and risk taking investment. With the need for investment and most of the profit utilized as expenditures in the federal budget, PEMEX lacks the resources necessary to continue to produce optimally and also to reach its goal of 600,000 barrels of crude per day by 2021.

None of this means that there is no longer oil in México, with one set of fields, Chicontepec, having an estimated 9 billion barrels of oil if proper investment and technology existed. Instead, since the 90′s the problem has been the obstacles to liberalize the company, with some parts almost being liberalized (such as PEMEX Petroquímica) when the plans were met with a popular backlash, typically from the union movement. $2 billion of assets in PEMEX were sold off, but this is quite meager in comparison to its size of $80.6 billion in revenue. PEMEX has around 140,000 employees, which means it has a large and relatively powerful union, but that has come under attack as of late. It should also be taken into consideration that there are approximately 70,000 retired workers with a pension fund worth about 1,700,000,000 pesos ($145,299,145 dollars). With this sort of money, no one is going down without a fight, and on top of that in 2012 an election is coming with a resurgent Partido Revolucionario Institucional (PRI), who will be seeking the support of the PEMEX union in order to win the presidency.

This does not mean that PRI will not attempt to privatize or liberalize PEMEX, as it has tried before. The before mentioned example of PEMEX Petroquímica happened during the PRI years. But, the resurgence of PRI has led to worries by the US, who sees PRI as wanting to reattempt a recentralization program. Therefore in order to build support, PRI be in a position to maintain PEMEX as a state-owned company. Especially, when the Mexican Constitution (Article 27) give all rights to subsurface minerals to the governments, as well as (Article 28) prohibits any private driller from reaping profits from oil begotten from Mexican land. So, if privatization was to go forward, it would mean that Constitutional referendums would have to be passed with a larger majority then it seems like any political party would like to admit (except the PRD who vehemently oppose any form of privatization or liberalization). Therefore, the closest that liberalization or privatization of PEMEX has come is the utilization of sub-contracting, which is a form of going around the laws to utilize outside companies and investors, such as Halliburton.

The dilapidated condition of PEMEX production factories makes them sell their crude oil to US companies who then refine it and sell it back to México. It has not built new factories since the 70′s, and for being a crown jewel and representation of Mexican sovereignty, the government has looked as if it has wanted to sell it off for quite sometime. Even in 2006 when PEMEX had looked to have turned a corner, it went directly back into its decline, due to lack of reinvestment on the part of the company. PRD party member AMLO (Andres Manuel Lopez Obrador) has called this a “starving the beast” tactic, and whether people are against it or for it, it has been working in order to make PEMEX have to rely upon outside aid and resources in order to continue production.

México does have a history of nationalizing industries after the 1911 revolution, but this does not seem to be its history starting from the 90′s (or even 80′s) with a slow creep towards privatization of large state-owned monopolies. With a starved and deprived PEMEX, a union being busted, and a political climate focused more on the drug war, this might be the perfect time for PRI or PAN to pass what they have tried to for 20 years. However, the Mexican people are quite intelligent, and do not have amnesia, they remember the pesos crisis in ’94 because of foreign capital flight, and hopes and dreams built on foreigners have never brought their strongest support.

Source: http://oilprice.com/Energy/Energy-General/PEMEX-and-the-long-road-to-privatization.html

By Andrew Smolski of OilPrice.com

  1. By Kit P on July 25, 2011 at 6:51 am

     

    Excellent article, an example of journalism can be an informative tool.

     

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  2. By russ on July 25, 2011 at 9:29 am

    As anywhere else – get the government out of it and Pemex could run as efficiently as any other company.

    In the late 90′s I worked on a iron ore direct reduction plant startup on a site that had been privatized. The operators (all Mexican) soon had the plant running as well as any other around the world.

    What I drew from that was that if given a chance (no politicians involved) things can go well there – it doesn’t have to be the land of tomorrow.

     

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  3. By Benny BND Cole on July 25, 2011 at 3:28 pm

    No telling how much oil Mexico could produce with a private-sector approach–or Iraq, Iran, Libya, Nigeria, Uganda, Russia, Saudi Arabia, Venezuela. Probably 20 mbd locked up now, maybe more, due to cruddy and corrupt thug-state government. The Oil Gods favor tin-pot dictators and fevered theocrats.

    Even so, I suspect $100 a barrel is a ceiling, long-term. Consumers start looking for options after all. I wouldn’t call making your product pricey and unreliable the way to build customer relations.

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  4. By JN2 on July 25, 2011 at 6:51 pm

    I find the anti-government, pro-privatization arguments shocking.

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  5. By russ-finley on July 25, 2011 at 8:13 pm

    Always fascinates me how I can walk across an arbitrary border and go from one of the wealthiest nations on Earth to one of the poorest …hard to explain but I suspect bad governance accounts for the lion’s share of it …now to account for the bad governance.

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  6. By Wendell Mercantile on July 25, 2011 at 9:36 pm

    That’s right Russ, and it is hard to explain. I lived for a number of years in Laredo, TX and used to regularly cross the border to Neuvo Laredo. Every time I crossed back into Texas it was like stepping through a magic screen, even though physically there was little difference in the physical appearance of the two.

    A few times I even rode my bicycle across the bridge into Neuvo Laredo, but finally decided to stop doing that — the traffic was too unpredictable, and I didn’t know what I would do if hit by a car. One time rode my bike across and it was only on the other side I realized I didn’t have my billfold or any identification with me. I sweated getting back into the U.S. but tried to play it cool, and no one stopped me or asked why I was riding a bicycle from Mexico to Texas dressed only in a T-shirt and biking shorts.

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  7. By mac on July 25, 2011 at 11:44 pm

    Wendell.

    Great on Mexico

    Last time I was in London, I developed a skin infection. The British doctor said it was “:Impetigo” and prescribed a medication which worked wonderfully.

    Cost ?

    Zero,,,,,,,,,,,,,,,,,,,,

    Zero for the doctor’s appointment and zero for the medication.

    Just to think, I was a rebellious American “Reprobate” with an American Passport.

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  8. By Andrew Smolski on July 26, 2011 at 12:28 am

    Well, I would not label either for or against, as the first post said, it is just information analysis on the situation. Part of the article actually gives room to a leftist presidential candidate from 2006 and his take on the government actually attempting to “starve the beast” in order to privatize it. Normally, in Mexico when things are privatize they just become monopolies (Slim and Telcel) which take awhile to have real competition. Also, I think it is not a realistic statement to state Mexico as one of the poorest nations. It has a higher per capita GDP than China, is the second largest economy south of the United States. The border region has been highly wrecked by the maquiladora system, but cities such as Cuernavaca, Guadalajara, DF, and others are quite modern as it goes for developing nations. Just some afterthoughts on the subject.

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  9. By rrapier on July 26, 2011 at 12:40 am

    Andrew Smolski said:

    Well, I would not label either for or against, as the first post said, it is just information analysis on the situation.


     

    Hi Andrew,

    I agree with that; I thought the article was very balanced and well-done. Nice work.

    RR

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  10. By paul-n on July 26, 2011 at 1:32 am

    I think are two separate issues for Pemex, and they can be dealt with separately.

     

    The first is the ownership structure – government monopolies are notorious for being inefficient, poor innovators etc  etc.  It is worth noting in this discussion that there is an alternative to full privatisation, which is partial privatisation, or “corporatisation”.

    Pemex could become a listed public company, with the government retaining a large, or even majority share.  This is the ownership structure of Norway’s Statoil, where the gov’t owns 67% of the company.  Admittedly, the fact that Statoil is one oft he worlds best run oil companies is likely more to do with the culture of Norway than the ownership structure per se.  Still, Mexico doesn’t have to sell off the whole thing, it just needs to get some outside investors.

     

    Which brings us to the second issue – the projects, outdated technology etc.  This could be solved by taking the normal oil industry approach – bring in joint venturers (partners) in future projects, and let the partner be the operator.  So, assuming they choose a leading company to be the partner, then they will have leading technology.

    The problem with this approach, is of course, that it is a true admission that existing technology and work practices etc are not up to standard.  The union representing Pemex employees would see this as a huge threat and insult, and do their best to ensure the joint venture fails, because if it succeeded, it would be rapidly replicated, and the union would be depleting faster than the oil.

    And there’s the rub, the union will  try to defeat any efforts to privatise/outsource, but that is the only way things will improve.  More of the status quo simply means less oil – I wonder if the Mexican people realise that?

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