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MEXICO: Oil Industry Reforms Face Uphill Battle

Diego Cevallos

MEXICO CITY, Apr 9 2008 (IPS) - The debate on the Mexican government’s proposed reforms of the state oil industry began Wednesday in a climate marked by threats of a social uprising by the leftwing opposition and uncertainty of the bill’s ultimate fate.

The draft law introduced by the government of conservative President Felipe Calderón would give the state oil company Pemex greater freedom with respect to making decisions on managing its budget, making purchases, reinvesting earnings in production and exploration and contracting out to private companies.

It would also allow Pemex to issue “citizens’ bonds” for 9.50 dollars each, through which Mexicans could invest in the company. A cap would be set on the number of such bonds – which could only be bought by Mexican citizens – that could be purchased.

There is one thing everyone agrees on: Mexico’s oil industry is facing a serious crisis. The country’s proven reserves are expected to run out in nine years, and Pemex, on the verge of bankruptcy, has neither the resources nor the technology needed to carry out further prospecting.

Nevertheless, the state continues to siphon off nearly all of the company’s revenues, which finance 40 percent of the government budget.

Legislative approval of the energy reform bill presented late Tuesday is far from certain.

“Emotional rather than rational arguments are dominating the discussion, and in that climate the opposition has been able to sell the idea that any reform is a betrayal of the fatherland, and the government has handled things in an inept manner and has reacted tardily in defending its positions,” Francisca Moreno, a negotiation and image strategy consultant, told IPS.

The Progressive Broad Front led by the leftwing Party of the Democratic Revolution (PRD), which is the second largest party in the Chamber of Deputies and the third largest in the Senate, has threatened to lead protests against the reforms, which it describes as “privatisation in disguise.”

PRD leader Andrés Manuel López Obrador, who lost the 2006 presidential elections to Calderón by a tiny margin, warned that his supporters and the representatives of the PRD and the small Labour and Convergence parties in the lower house of Congress could block debate on the bill.

Meanwhile, the governing National Action Party (PAN) announced its full support for the proposed overhaul of Pemex, and the Institutional Revolutionary Party (PRI), which has the second-largest number of seats in the Senate and the third-largest in the Chamber of Deputies, and has often backed the government’s initiatives, promised to study it.

A deal between the PAN and the PRI would ensure passage of the bill.

But it will be an uphill battle in the legislature. The draft law will have to make it through a Senate committee, the full Senate, a Chamber of Deputies committee and the full lower house before it can be signed into law by the president.

According to Moreno, who advises private companies, Calderón’s political strategists “will be subjected to a test of fire,” because if the bill is passed, it could go down in history as the most significant reform in recent Mexican history.

She predicted a fierce battle between the government and opponents on the left.

The government and oil experts consider reforms of the industry urgent due to the looming scarcity of reserves and growing imports of fuel, which already account for 40 percent of local consumption.

The government is not proposing an amendment to the constitution, which protects state control of the country’s oil resources and prohibits direct private investment in Pemex.

What Calderón is seeking is to modify legislation so that Pemex, which employs 154,761 people, would be able to establish flexible contracts with private firms, which would receive payments based on their performance, but not with revenues obtained from crude produced in Mexico.

The proposal would allow local and foreign private firms to take part in refining, transport, storage and distribution of crude and its by-products through a permit system.

Another element would be the inclusion of independent experts (who have no conflicts of interest) on Pemex’s board, which is currently made up of representatives of the government and the oil workers’ union.

An audit committee in charge of ensuring transparency would also be created.

The initiative does not represent privatisation of the company, “which belongs and will continue to belong to Mexicans,” said Calderón in an address to the nation Tuesday night.

López Obrador, however, said the bill undermined the constitution and national sovereignty.

In 1938, president Lázaro Cárdenas (1934-1940) nationalised Mexico’s oil industry and kicked out foreign companies. Since then, Pemex has been the country’s foremost symbol of national sovereignty.

The fact that Cárdenas himself was in favour of Pemex being allowed to enter into contracts with private firms has been erased from the official account of Mexican history that schoolchildren learn in their textbooks.

But in the last 20 years, under a model of nationalisation containing a few legal loopholes allowing a few private firms to be contracted under heavily restricted conditions, Pemex has taken a nosedive. The left blames the situation on corruption, mismanagement, lack of public investment in the company and a deliberate government strategy to weaken it.

Despite the current sky-high oil prices, the crisis has only gotten worse over the past few years because the windfall profits have also gone into the public coffers, and from there to state governments, to offset the low level of tax collection.

The proposed energy reforms do not include measures to reduce Pemex’s contributions to the government budget, but government spokesmen said they would later make a recommendation to that effect.

Studies show that time is running out for Mexico, because its crude reserves on land and in shallow waters will only last another 9.3 years.

If deep water reserves in the Gulf of Mexico are included, the future of Mexican oil production could be extended to 26 years or more. However, the state does not have the technology to exploit such reserves, and experts say it would take from 10 to 12 years for the deep sea reserves to begin to produce – by which time this country will be a net importer of oil.

Oil output now stands at 2.9 million barrels a day, 300,000 less than two years ago.