By David Iaconangelo, Aug 14, 2013 10:44 AM EDT
(PHOTO CREDIT: Reuters) A helmet from a marching worker reads "Pemex isn't for sale".
Mexican President Enrique Peña Nieto formally began his push on Monday to open Mexico's state oil company Petróleos Mexicanos (Pemex) to private and foreign investment, presenting a plan of reforms which include changes to two articles of the constitution. Hours after the president concluded his remarks, two-time presidential candidate and leftist opposition leader Andrés Manuel López Obrador released a YouTube video in which he accused Mexico's secretary of energy of lying in saying that Pemex is going bankrupt, and read from a July 2012 company report which said it brought in some $100 billion a year and extracted some 2.6 million barrels of crude oil per day.
López Obrador characterized the report as one drawn up especially for foreign investors. "They tell the truth to them. Not to Mexicans...what [Secretary of Energy] Pedro Joaquín [Coldwell] says is that Pemex is going bankrupt, and so private investment needs to be permitted, especially foreign investment."
What Peña Nieto and backers of the proposal really want, alleges López Obrador, is a piece of the oil profits. Right now, the majority of what Pemex brings in gets channeled back the federal and state governments either by way of taxes or specific programs. It makes up about 30 percent of the federal government's budget. Those profits, says López Obrador, "belong to the nation, to the people. They're what allows there to be a budget to finance public education, health: the development of Mexico. It's not that investment is required if Pemex can produce so many resources".
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Elsewhere, López Obrador has struck an even more strident tone. That same day, he called the president a "traitor to the country" and his plan "the heist of the century".
What is Peña Nieto proposing?
Peña Nieto's plan, presented on Monday, would alter two articles of Mexico's constitution to allow Pemex to enter into risk-sharing and profit-sharing contracts with companies like Exxon, Chevron, Royal Dutch Shell Plc and Repsol SA, all of which have their eye on Mexico. Risk-sharing contracts grant the right to exploitation of a resource to a third party in exchange for compensation hinging on how successful the venture is. The Mexican president's plan wouldn't allow concessions, which put underground petroleum reserves under the direct control of firms - the arrangement that existed before former president Lázaro Cárdenas expropriated foreign oil companies' facilities and issued an order (later codified through a constitutional amendment) turning Mexico's petroleum into property of the state in 1938.
In effect, Mexico would keep ownership of crude reserves and share profits with firms that can find and produce the oil. In the past, Pemex has done no more than pay companies a fee for certain temporary contract jobs.
So how bad off is Pemex, really?
Pretty bad, thinks Duncan Wood, director of the Mexico Institute at the Woodrow Wilson Center. The company hit peak oil production in 2004, when it pumped an average 3.4 million barrels per day. Since then, that number has declined steadily. In 2012, it produced 2.5 million per day.
Mexico sits on huge deep-water and shale gas reserves which, if exploited, could reverse that trend. But Pemex doesn't have the technology to access them. And it probably won't ever unless it lets foreign companies carry out operations on Mexican territory.
"That kind of technology isn't really for sale," Wood told the Latin Times. "Big firms such as Exxon, PetroGas, Shell, etc. have invested tens of billions of dollars in developing the technology over the years. That's what allowed them to go into deep-water production successfully. Pemex has not invested in that." Those companies won't sell Pemex the technology, either, says Wood, because they want a shot at the petroleum reserves which would land them a much bigger windfall.
The other problem Pemex faces are notorious levels of corruption and inefficiency. It ranks in the top ten oil producers in the world, but its workforce is among the least productive. Its union has wrangled out extraordinarily generous deals for its workers, including a pension scheme which helps keep the company in perpetual debt: Pemex employees can retire at the age of 50 and collect pensions consisting of 120 percent of their salary for the rest of their lives even if they go on to work other jobs.
"The only reason why Pemex is able to borrow money on central markets is because it basically carries the same credit rating as the Mexican government," says Wood.
What does the left want to do about it?
The leftist Party of the Democratic Revolution (PRD), which chose López Obrador as their candidate in the last two elections, is beginning to distance itself from him. They've released their own reform proposal which would modify 12 laws but wouldn't touch the constitution. It seeks to turn Pemex from a government agency into a public company in order to give its heads flexibility over its decisions. It would also cut federal taxes on the company from 71.5 percent to 62.5 percent, and open up some $157 million in governmental retirement funds to be used to finance the company.
Luis Sánchez, one of the PRD lawmakers who crafted the proposal, says these measures will allow the company to buy from foreign firms the technology they need to ensure the future of Mexican oil.
"If we give it this room...in 10 years we would have a business which would already be drilling for deep-water gas, buying technology", he told Excelsior.
Peña Nieto's plan is a similarly long-term bet, judges Duncan Wood. With 30 percent of his administration's budget on the line, the Mexican president is gambling that he can finance his government with a value-added tax on consumer medicine - which he's hoping to pass before Christmas - and a big surge in tax revenue from foreign companies as oil production increases.
"That will take, really, three to five years to kick in. So there will be this period of time when you will see a reduction in revenue from Pemex and before you see a rising tax take from the private sector," Wood says.
"The only weakness of that plan is that it's going to take time."