Oil and Energy

Mexico is struggling with a very important question about its future. Does the country want to be Brazil or Venezuela?

On the one hand, you have authoritarian rule and government-controlled natural resources. On the other, you have a liberalization of state control and a booming economy. Hmm. That’s a tough decision.

Right now, the president of Mexico is fighting to bring more autonomous control to the country’s nationalized oil company Petroleos Mexicanos (Pemex). But he may have trouble convincing his congress to make the changes.

Pemex is the single largest revenue source for the Mexican government. It produces 40% of the country ’s national budget each year. The country has used it as a one-way ATM, taking money out but rarely putting much back in.

And now Pemex is in trouble. Its major oil field is running low. It has hundreds of workers on staff who literally do nothing all day because they’re unionized and Pemex can’t fire them. And its only chance of expanding oil production is with deep sea drilling in the Gulf of Mexico.

Mexican President Felipe Calderon and the managers who actually run Pemex are telling the public that the company has to tap the oil field sitting under their country’s portion of the Gulf of Mexico or stand by and watch its production dwindle each year.

Last year saw an 18% drop in production from Cantarell, Pemex’s major oil field. Total production at the company has been falling for three years. And record oil prices were all that kept revenue from sliding in 2007.

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Loss of revenue would be bad enough for the Mexican government, but the country’s energy minister predicted Mexico will have to begin importing light crude oil in less than five years and oil exports will fall from 1.67 million barrels in 2007 to as little as 289,000 in 2016.

According to Calderon, Pemex needs more autonomy to make deals with other oil companies since it doesn’t have the expertise or the technology to drill offshore, where the oil is. Calderon wants to follow the lead of Brazil’s Petrobras, a government-controlled public oil company that saw its production more than double since the country took measures to privatize the industry and make Petrobras competitive.

But Calderon’s opposition is decrying him for trying to take the Pemex cash cow away from “the people of Mexico.” And that opposition is getting fairly loud.

Calderon’s former opponent for office Andres Manuel Lopez Obrador and his cronies are screaming to the rafters of public halls (and now even your living room since his group is selling a DVD denouncing Calderon’s plan) that Calderon wants to take Pemex private.

Assumably, Obrador is counting on the fact that no one in Mexico has heard of Petrobras or the economic boon it’s provided to the Brazilian people since it was reformed.

Removing government controls on Pemex may mean the company doesn’t have to employ as many Mexicans as it currently does, but it could also mean the government and “the people of Mexico” Obrador is so concerned about could see much higher returns from the company in coming years.

Let’s hope the people and Mexico’s congress look at Petrobras and don’t listen to Obrador.

Stephanie Grimmett
Todays Financial News