May 01, 2008
Memo From Mexico,
By
Allan Wall
PEMEX Fritters Away Mexico’s Oil Wealth. Closing The Borders Would Help
Mexican poverty is constantly used to browbeat
Americans into accepting mass immigration (legal and
illegal) from Mexico.
After all, how could you refuse
poor Mexicans from entering the United States—they
are from a very
poor country, right? They’ll
starve to death otherwise, right?
Well, maybe Mexico is poor in
comparison to the United States. But by
world standards it’s certainly not among the
poorest. And
its people aren’t starving.
In fact, Mexico has some very rich
individuals, including
at least 10 billionaires, among them
Carlos Slim, the world’s second-wealthiest man.
And Mexico also has vast economic
potential. It’s just
been spectacularly mismanaged.
A prime example: petroleum. If
managed properly, Mexico’s oil could produce great
wealth for the country, and could serve as the basis of
myriad manufacturing industries.
Somehow, though, it just hasn’t
worked out that way.
Mexico has one of the world’s most
closed petroleum markets, controlled by the state oil
company PEMEX (Petróleos Mexicanos), which
is protected from all competition. PEMEX enjoys a legal
monopoly on the exploration, processing and sale of
petroleum
The
peculiar privileged status of PEMEX in Mexico
affords it immunity from criticism. Mexicans are taught
that PEMEX represents Mexican sovereignty and the
property of the nation, even Mexican identity itself.
Every March 18th, the Petroleum Expropriation
of 1938,
when the oil was nationalized and foreign oil
companies were kicked out, is
celebrated in the schools.
Thus to talk about privatization,
or even private investment in PEMEX, invites hysterical
denunciations for “selling out" the fatherland.
PEMEX is linked in the minds of some Mexicans with their
reflexive anti-Americanism and the
paranoid fear that Americans are going to steal
Mexico’s oil.
In 2003,
as reported in a previous VDARE.COM article,
Republicans in the House International Relations
Committee voted to link any "migratory accord"
with Mexico with the opening of PEMEX to American
investment. The proposal stated that Mexican petroleum
reform could "fuel future economic growth, which
can help curb illegal migration to the United States."
[My emphasis]
Reaction in Mexico was swift and
harsh. President Fox rejected the proposal, affirming
that PEMEX is "part of our history". Foreign
minister
Derbez even
claimed that migration is a bilateral issue—but oil
is a domestic Mexican issue! (Oh, you thought U.S.
immigration policy was a domestic American issue?
Mexicans
don’t agree).
So how is PEMEX doing now, 70 years
after the Great Petroleum Expropriation?
Oil prices are up, which ought to
be good for the company. In fact, on April 28th,
the price for Mexican crude
reached a record high.
Nevertheless, PEMEX finds itself in
dire straits. Its biggest petroleum source, the
Cantarell Field in the Gulf of Mexico, has
peaked and is in decline.
There’s probably lots more oil out
there in the Gulf. But PEMEX lacks the
expertise, the financing, and the equipment to find
it. Only about 20% of Mexican territory has been
properly surveyed to find oil.
Here’s one analysis of PEMEX’
inability to drill in deep waters
"PEMEX doesn’t currently have the technical,
organizational, administrative capacity, nor the highly
qualified personnel, to begin exploratory drilling in
ultra-deep waters…..Its deficiencies would be even
greater to the extent that drilling activities were
successful, given that the development of fields
requires even greater human and technical resources."
[Ultraprofundas,
by Sergio Sarmiento, El Siglo de Torreon, March
24th, 2008, my translation. ]
So who said that? Some capitalistic
Big Oil magnate trying to steal Mexican oil?
No, that’s a quote from Adrian
Lajous, former director general of PEMEX. He ought to
know.
Other problems include the
company’s massive debt, its thousands of miles of
pipeline constantly being tapped by oil thieves, and its
history of environmental disasters and dangers to the
public.
PEMEX holds the dubious honor of
having the
largest accidental oil spill in history, in 1979,
when an exploratory well exploded in the Gulf of Mexico.
In 1984,
explosions at a PEMEX storage facility in Mexico
City killed 500 people. In 1992,
explosions in Guadalajara killed over 200 people.
PEMEX service stations, with their
familiar green signs, dispense gasoline nationwide to
captive Mexican consumers. The stations are actually
operated by private contractors who obtain concessions
to operate them.
But many PEMEX stations are
notorious for dispensing petrol by utilizing some
special techniques. One example is what customers refer
to as chiquilitros (little
liters). That means if you purchase 10 liters, you might
really be getting 9 pumped into your tank. Or the fuel
may be diluted with water, typically in a 3 to 1
gasoline to water ratio.
PEMEX refuses to take
responsibility for such shenanigans, blaming the
concessions themselves!
Of course, some PEMEX stations have
better reputations than others. So Mexicans go to the
more trustworthy establishments, hoping to get the full
amount. Where I live, I know where the more reputable
stations are located.
PEMEX has many problems. But the
basic problem is that it serves as a giant piggy bank
for the Mexican government. Most of the company’s
profits are siphoned right into the Mexican government
budget. Mexicans are
"addicted to petroleum"—that’s how
Agustin Carstens, Mexico’s Finance Minister, put it.
For the Mexican government,
depending on petroleum is just the easy way out, rather
than trying to tackle the high tax evasion rate and
problems with the taxation system. There was
a fiscal reform last year but it didn’t go very far.
It’s just much easier to utilize the country’s oil
monopoly as a cash cow. So oil revenues make up close to
40% of the Mexican government budget. (Alarming thought:
what’s going to happen if oil prices drop?)
For PEMEX, being used as the
government’s golden goose means the company can’t be run
as a real oil company. There is not enough money left
for oil exploration, exploitation and processing. Plus,
PEMEX’s leaders are not chosen for their expertise in
the petroleum industry, but their political connections.
Then there is the acute lack of
refineries. The United States has about 150 operable oil
refineries. Mexico, with about a third of U.S.
production has a whopping total of 6 (aging) oil
refineries!
Mexican law prohibits PEMEX from
partnering with foreign companies within Mexico—but not
outside Mexico. So Mexican crude is exported to
Houston, Texas, where it is refined (in partnership with
Shell), then imported back to Mexico.
Currently, about 40% of the gas at
the pump in those PEMEX stations is imported. Mexico is
a net importer of natural gas from the United States.
Ironically, its oil monopoly makes
Mexico more dependent—not less—on the United States. But
don’t bring up privatization,
that’s taboo!
I’m not a big fan of state oil
companies. I think the American oil industry has done
quite well with private ownership of oil. (Full
disclosure—my brother works in
Oklahoma as a roughneck, and he enjoys it, and my
family has mineral rights on the family farm).
Still, we can’t expect every
country in the world to adopt our system. As a matter of
fact, about 90% of the world’s oil is managed by some
sort of state oil company. But most of them do it more
sensibly than Mexico.
Just look at some of Mexico’s
fellow Latin American countries.
Venezuela has a state oil company, PDVSA (Petróleos
de Venezuela, S.A.)
which allows partnerships with foreign oil companies.
Even
Cuba (!) allows private investment in oil
exploration.
Fidel signed a contract with Canada’s Sherritt
International to explore Cuba’s offshore fields and
split the profits. Such an arrangement would be legally
impossible in Mexico. [Jaque
Mate| Invertir en Pemex, By Sergio Sarmiento,
El Siglo De Torreon, February 8, 2007.]
But maybe the best example, and
most relevant in contrast with Mexico, is Brazil and its
Petrobras. Like PEMEX, it is a state oil company. But
Petrobras is no longer a monopoly, although the
Brazilian government maintains majority ownership.
Petrobras allows private investment and sells shares of
stock on the New York Stock Exchange. Petrobras has
become a leader in offshore drilling technology.
The recently-discovered
Carioca Field, off Brazil’s coast, may be the
world’s third-largest. Petrobras is well-situated to
exploit it. In contrast, if Mexico found such a field,
it would currently be unable to exploit—and even
Petrobras, despite being a fellow government-owned
company, would not be able to help.
Here’s a further irony. Despite all
the paranoia about Americans stealing Mexico’s oil,
thanks to Mexico’s
Bizarro World petroleum law, the country is at risk
of losing its oil on the U.S.-Mexican maritime border
This is the maritime borderline
that extends outward, into the Gulf of Mexico, from the
Texas-Mexico international boundary. In 2000, the U.S.
and Mexico made an agreement to hold off exploration on
that border area until 2010. So in two more years, if
the U.S. allows drilling there and Mexico still can’t
drill there, depending on the geological formation, some
of that oil may be sucked over to the American side and
lost to Mexico permanently.
All because Mexico won’t allow
foreign investment!
That possibility provoked
Universal, Mexico’s paper of record, to opine in an
editorial that
"What
PEMEX needs is money. If it’s impossible to stop taking
a great part of its profits – to fill what’s lacking in
the coffers – then it is necessary to permit its
association with private capital without ceding the
national ownership of the petroleum, as the rest of the
world does."
[¿Más Petróleo
Nuestro a EU?, El Universal
Feb. 18th, 2008]
Actually, since about 1980, PEMEX
has been forced to bring in private companies, even
foreign ones, to carry out certain operations, under
arrangements known as multiple service contracts. In
such a contract, the company is paid a set fee for the
service, but does not share in the profits if it helps
locate a gusher.
But that also means that, if a
foreign company under such a contract fails to find oil,
PEMEX has to take all the loss. If the private company
were to receive part of the profits, it could shoulder
some of the risk.
If PEMEX were to liberalize its
petroleum law, to allow partnership with private
companies, it could attract more investment and arrive
at mutually profitable arrangements. After all, the
private companies want to find oil too, and such
arrangements would provide even more incentive to do so.
But to hidebound
Mexican socialists, profit is a dirty word.
And, I get the impression that most
Mexicans don’t know much about the petroleum business.
Schoolchildren are taught about how great the Oil
Expropriation was, and how the oil is the "property
of the nation", but not much about how the
oil business really works.
The way oil is discussed, you’d get
the impression that Mexico’s oil is just sitting there
in a big tank with a spigot on it, where it must be
protected from theft by nefarious private enterprisers
who constantly want to steal it.
In reality the petroleum industry
is a complicated one, requiring specialized equipment,
skilled
geologists, engineers and other specialists, and
workers that know what they’re doing. Even then you
might not strike oil.
And it requires financing. British
Petroleum, for example, is drilling over 10,000 feet in
the Gulf of Mexico in U.S. waters. For every deep-water
discovery,
it costs BP more than a billion dollars. That’s
almost as large as PEMEX’s 2007 net losses.
Of course, there are plenty of
influential Mexicans who recognize the problems with
PEMEX. Hopefully they can help solve these problems. But
it involves struggling with this Mexican psychological
aversion to allowing private money into PEMEX.
President Felipe Calderon delivered
a PEMEX reform to the Mexican Congress on April 8th.
It’s really reform "lite". It does propose to
grant more autonomy to PEMEX, to sell PEMEX bonds to
citizens, and to try to run it a little more like an oil
company. But the reform would not allow private
companies to partner with PEMEX in Gulf oil exploration;
they could only be paid a bonus if their work is
considered successful.
But despite the fact that the
proposal is not a privatization, and really doesn’t go
very far, it was enough to provoke plenty of opposition,
including thousands of
street protestors and
a two-week takeover of the podiums in the Mexican
Congress legislative chambers.
The principal opponent to
Calderon’s proposal is Andres Manuel Lopez Obrador
(known as
AMLO), who
barely lost the 2006 presidential election and who
has never officially recognized the Calderon
Administration. AMLO opposes any form of private money,
foreign or domestic, going to PEMEX. He threatens to
unleash more mass street demonstrations to support his
point of view.
Nevertheless, a deal has been
struck with the major political parties to conduct a
formal debate, from May to July, over the issues of
PEMEX reform.
Who knows, after all the wrangling
in the Mexican Congress, what kind of reform will be
carried out? It might possibly be a step in the right
direction. But it may be too little, too late.
Personally, I’d like to see Mexico
reform its petroleum industry and increase its output.
If managed properly (that’s the big "IF") it
would be advantageous to both Mexico and the U.S.
I’d rather the U.S. buy more oil
from Mexico and
less from the Middle East.
But, if the Mexican government is
unable to reform PEMEX, that might not be possible.
What can we do about it? Directly,
nothing. After all, any American involvement or pressure
would be counter-productive, bringing forth howls of
hysteria about gringos attempting to steal Mexican oil.
Mexico is very defensive about its
oil. It’s almost as if Mexicans would rather limp along
with an inefficient system than allow foreigners to make
money off of it.
Well, OK,
it’s their country. Let them run PEMEX into the
ground if they want.
But the U.S. should be
just as protective of its
own sovereignty—in relation to immigration and
naturalization law.
And we shouldn’t be conned into
thinking that Mexico is a poor country that has no
resources. Mexico has many resources.
Its leaders have just chosen to use them badly.
But what if we
closed the border, thus eliminating the
emigration safety valve upon which
Mexico’s elite depends? Maybe then Mexico’s leaders
would pull out all the stops to reform their petroleum
industry.
There is no alternative. It’s worth
a try.
American citizen Allan Wall (
email
him) resides in Mexico, with a
legal permit issued him by the Mexican government. Allan
recently returned from a tour of duty in Iraq with the
Texas Army National Guard. His VDARE.COM articles are
archived
here; his FRONTPAGEMAG.COM
articles are archived
here his "Dispatches from
Iraq" are archived
here his website is
here.
