COP: Future of PEMEX, Mexico’s Petroleum Monopoly, Being Debated Yet Again

ALLAN WALL September 4, 2013

Once again, the future of PEMEX (Petróleos Mexicanos ), the country's petroleum monopoly is being debated in Mexico.    The issue is very important economically, but it's more than an economic question. The question of how to handle PEMEX is closely tied to national sovereignty and Mexican identity. Any  politican who wants to reform it had better take that into consideration. 

The current politician attempting to reform PEMEX is Mexican President Enrique Pena Nieto. What is he up against?

PEMEX  is Mexico's state oil monopoly. PEMEX is protected from competition in Mexico, where it enjoys a legal monopoly on the exploration, processing and sale of petroleum. Its privileged status in national mythology affords it a certain immunity from criticism.

Nevertheless, PEMEX is in deep trouble. It's heavily indebted, in fact it's one of the world's most indebted oil companies.  It's not really managed as an oil company, but as a cash cow of the Mexican government, which makes it difficult to function as a normal oil company.

PEMEX is the source of a third of the Mexican government's revenue. Any reform that substantially reduces that share is going to be difficult to bring about.
Petroleum is Mexico's biggest revenue earner, but production is dropping. If present trends continue, Mexico will be an oil importer by 2020.
There's a lot more oil out there in Mexico's deep waters, but PEMEX lacks the funds and expertise to get it.


This wasn't the future envisioned by President Lazaro Cardenas, who expelled the foreign oil companies and founded PEMEX in 1938, to give Mexico's oil to "the people." (March 18th, the date of the Expropriación Petrolera - Petroleum Expropriation - is commemorated annually.)

The Mexican Constitution (Article 27) guarantees PEMEX's privileged position, a monopoly over the oil industry, from exploration to the sale of gasoline at the pump.
PEMEX service stations, with their familiar green signs, dispense gasoline nationwide to the captive Mexican consumer. Sometimes the fuel is watered down, but hey, it belongs "to the nation!"
PEMEX has an acute lack of refineries. The United States has 139 operable oil refineries. Mexico, with less than half of U.S. production, has only seven! 

PEMEX is prohibited from partnering with foreign companies within Mexico, but not abroad. So Mexican crude is shipped to Houston, Texas, where it is refined (in partnership with Shell) and then re-imported to Mexico. Is that bizarre or what?
And since its vast natural gas fields can't be properly exploited, Mexico is a net importer of natural gas from the United States.
Ironically, socialized petroleum makes Mexico more dependent - not less - on the United States.
Mexican pundit Sergio Sarmiento is not a big fan of Mexico's oil monopoly, which he describes thusly: "... PEMEX ... supposedly the property of all Mexicans ... has only served to benefit the government, the political elite and the petroleum [workers'] union."
Nevertheless, reforming PEMEX is very difficult. 
Article 27 of the Constitution proclaims that all Mexican natural resources are the property of the nation (which in the real world means the property of the government).
However, the article makes a distinction between petroleum and mineral resources such as silver (of which Mexico is the world's #1 producer), gold, lead, zinc, iron, etc.
Foreign investment is permitted in the mining industry, in fact foreign companies are actually able to buy and sell concessions to mining operations. But not in petroleum.
If the political will exists, it is easy to amend the Mexican Constitution. It's been amended almost 500 times since 1917. It can be amended rather rapidly if all the party bosses are on the same sheet of music.
The real barrier is psychological, not constitutional. Mexican politicians have been raised on the rhetoric of oil as property of the nation. Just mentioning privatization or even private investment elicits hysteria. 

Nevertheless, it's become obvious that something must be done. A full-fledged privatization is not in the works, and there's practically no demand for it. PEMEX does subcontract out some work to private (even foreign) companies but these companies  are not allowed to share profits. 
                        
But if Mexico wants its government to maintain control over its oil industry while simultaneously allowing more foreign investment that increases production, there ought to be a way to do that.  Otherwise, PEMEX  is headed down the tubes.
Can the Pena Nieto administration accomplish needed reform? This is an issue Mexico-watchers like to keep an eye on.  Stay tuned.....

Contributing Editor Allan Wall is an American who formerly resided in Mexico. Allan's website is located at http://www.allanwall.info/. He also writes at VDARE.com. He can be contacted at allan39@provalue.net.

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