In 1992, President Carlos Salinas, in the midst of his drive to privatize the Mexican economy, oversaw the division of the state-owned oil monopoly Petróleos Mexicanos (Pemex) into four subsidiaries, Pemex-Exploration and Production, Pemex-Refining, Pemex-Gas and Pemex-Petrochemicals. It is widely believed that the move was meant to make the company's separate divisions—perhaps everything but exploration and production—easier to sell off. This past October, just weeks before the administration of Salinas' hand-picked successor, Ernesto Zedillo, left office, a top Pemex official said publicly that the division of the company into four subsidiaries had been a "monumental error," mostly because it weakened the company's ability to compete against the merged and consolidated giants of the global oil industry.[1] Interestingly, this critical statement earned no rebuff from top energy sector officials.
Pemex remains vital to the Mexican economy. It accounts for about 6% of Gross Domestic Product and about a third of all the government's tax income—perhaps even close to 40% in years such as this past one, when world crude oil prices were exceptionally high. In addition, the company has been a source of national pride and a key to Mexico's identity, embodying Mexicans' widespread belief that it enables them to have sovereign control over their destiny and to achieve progress and development with little or no outside help. This belief thwarted all attempts of the past two Mexican administrations to privatize the company.
It is not yet clear whether Mexico's new government will seek to reunify the subsidiaries into a single company, but what has become obvious is that President Vicente Fox, despite enormous pressures from the global oil industry, has ruled out privatization of any of the oil company's subdivisions. In his maiden speech to Congress upon taking office on December 1 of last year, he was absolutely emphatic, repeating three times that Pemex would remain under government control. Earlier in his career—indeed, earlier in his campaign for the presidency—Fox had expressed a desire to privatize Pemex, but less than two months before the elections, in a successful bid to win the support of center-left intellectuals, politicians and voters, he recanted and made "no privatization of Pemex or of the CFE (Federal Electricity Commission)" one of his Ten Commitments Before the Nation. Fox seemed to have realized that he could neither win nor govern if he were to go against the basic consensus within society to keep Pemex in state hands.
This basic consensus was borne out by a poll conducted just before the elections by the Mexico City daily paper, Reforma, confirming that 82% of Mexicans still supported the public-sector status of the company nationalized by President Lázaro Cárdenas in 1938. The state-owned oil industry had been looked upon as a key foundation to Mexico's fast growth during the period of "stabilizing development" in the 1940s and 1950s, which was also a period of consolidation of one-party political rule under the auspices of the Institutional Revolutionary Party (PRI), which governed the country from 1929 to 2000. Fox's victory in 2000 and his apparent need to embrace Pemex as the patrimony of all Mexicans suggests that the oil company is a national symbol that goes beyond partisan lines.
Fox does, however, despite his pragmatic commitment to public ownership, seem set on changing Pemex by giving it more of a business orientation, getting individuals from the private sector involved in its decision making and, as far as possible, getting private capital to finance its major projects. This intention was underlined by his decision to name Ernesto Martens as Energy Secretary and Raúl Muñoz Leos as director general of Pemex. In recent years, Martens and Muñoz Leos have been successful leaders of major Mexican corporations. Martens was CEO at glassmaking giant Vitro and at airline holding company Cintra (owner of airlines Mexicana and Aeroméxico), while Muñoz Leos was CEO at DuPont México. They are expected to seek ways of making Pemex operate competitively and efficiently with private- sector criteria.
In petrochemicals—the most politically controversial area of operation at Pemex—Fox has said that he will seek broad openings for private capital. Several attempts at privatizing the petrochemical subsidiary failed during the Zedillo government, though for almost a decade now, petrochemicals have been considered a "secondary" or "non-strategic" activity—as opposed to the rest of the oil industry, which continues to be considered "strategic" and off-limits to direct private investment. Fox's broad openings would be several steps short of full privatization, but they would allow private capital to build new plants and to invest—at least to a limited extent—in Pemex's petrochemical subsidiary.
Fox has hinted that he might lobby to remove a Congressional recommendation made in 1997 which limits private investment—foreign or domestic—in Pemex petrochemical plants to 49%. He will also attempt to attract fresh investment into the building of new, 100%-privately-owned plants. This is not restricted by law in any sense, yet investors have not shown interest in new plants for a number of reasons, including poor infrastructure, lack of tax incentives, no long-term contracts for purchasing raw materials and other inputs from Pemex and, above all, the high prices of those key inputs, especially natural gas. The current system links Pemex's raw-material prices to "international prices" prevailing in Texas. This is a subject of controversy throughout Mexican industry, especially due to very high U.S. natural gas prices throughout 2000. Chemical companies say the system does not provide any incentives for them to set up operations in Mexico.
Fox's first efforts, then, will be geared toward convincing companies that investment possibilities are, in fact, wide open and that what is really needed is a change in mindset. The new administration may also seek to create incentives for new investment in petrochemicals and may try to achieve different kinds of associations between Pemex's petrochemical subsidiary and private companies, allowing some degree of private involvement in administering the Pemex plants. The private companies might be expected to enter into joint ventures with Pemex, or to help finance the modernization of Pemex's plants in exchange for a guarantee of receiving the output from the plants. Different joint venture options may be drawn up for different product chains.
Strong candidates for joint-venture investment are Pemex's ethylene plants at the giant Cangrejera and Morelos complexes, at Coatzacoalcos, Veracruz. A private company could receive the additional ethylene output under long-term contracts and build its own wholly owned polyethylene plant. It may well become a priority for the Fox Administration to process more oil domestically and reduce Mexico's $5 billion annual trade deficit in petrochemical and chemical products. Support for refining and petrochemicals would help promote domestic industrial integration and growth.
Fox will probably make an effort to get private capital more directly involved in a very aggressive exploration and production program in natural gas, especially to develop fields in new regions. The Zedillo Administration made some recent signals to foreign companies that production might be opened up totally to risk capital in the not-so-profitable, dry-gas basins of northern Mexico, and that Pemex might leave that region. This would allow foreign direct investment in gas production, but would also require amendments to the key constitutional clauses which reserve exploitation of hydrocarbons to the state. This would be a delicate matter politically, and Fox's advisors have not yet expressed support for such a policy.
Another energy area in which Fox has promised a broad opening to private capital is the electric power industry—a major gas consumer. In fact, despite his "no-privatization" promise, Fox will push for a major reform of the power industry that would allow private capital to act freely in building new infrastructure. The power reform bill will face opposition from unions and the left, many of whose members still consider it to be a "back-door privatization" measure. However, Fox considers power reform to be an urgent and inevitable measure to raise sorely needed capital for new generating plants. He may thus use a great deal of his political capital trying to transform the industry in ways that would guarantee to private capital that it will hold sway there several years from now, even though CFE assets will not be sold.
As these openings to capital are put into place, one area that will continue to be off-limits to private investment is the production of crude oil. As Fox takes office, however, there is a pervasive view that all is far from well in the Mexican oil industry and that the new administration must come to grips with highly complex bureaucratic problems at Pemex. There seems to be consensus among Fox's advisors that "coming to grips" means downsizing a company with 130,000 employees—more than any other oil company in the world—in which the union is still a force to contend with. While the oil workers union may no longer have as much political power as it once had, it still has considerable ability to mobilize its membership to resist any proposed job cuts. What's more, it can probably count on political support from elements of the "old regime," as well as from the larger labor movement.
Fox's government is expected to carry out technical audits of major Pemex public works to see just where they stand, in addition to financial audits to see whether corruption at Pemex has been as widespread as many of its critics contend. It will oversee a management team that will have to solve controversies with contractors and suppliers and deal with thousands of labor suits. It will have to strengthen the company as a whole, make major investments in infrastructure and overcome the lack of coordination among its subsidiaries. It must ensure that the company remain a major oil producer and exporter, as well as an efficient supplier of fuels to the domestic market.
In addition, the Fox government will try to redefine Pemex's role and provide it with greater autonomy, so that it can operate in a more agile manner, based on business rather than political criteria. This implies a move to allow the company to reinvest its profits. It will thus be "freed" from the federal budget in order to work competitively in the market, rather than like an institution devoted to filling the government's tax coffers.[2] Fox has said that this new, "autonomous public enterprise" will have an independent board of directors enabled to make long-term business decisions. The board will no longer be dominated by political appointees, but rather by businessmen, industry specialists and competent technicians. Fox has indicated a commitment to make the energy sector a growth engine for the economy and the key to following through on his commitment to achieve a robust annual growth rate.
The state has been slow to add infrastructure, to explore for new oil and gas fields and to modernize refineries and petrochemical plants in recent years. Investment in Pemex overall has been insufficient, except in the case of the country's only supergiant oil field, known as Cantarell, which lies in shallow waters of the Bay of Campeche, close to Ciudad del Carmen in the southeast of Mexico. Big spending on Cantarell—which has been the mainstay of Mexican oil production for 20 years now—has allowed crude oil output and exports to increase over the past three years.
The $10.5 billion Cantarell Project should ensure that this field continues to provide over half the nation's total oil output. Close to $5 million has already been spent on this project and by 2003 that figure will be over $8 billion. The project aims to increase capacity by drilling new wells, adding new platforms and pipelines, and injecting nitrogen into the oil field to maintain pressure in the wells. Cantarell now produces about 1.7 million barrels a day and output is projected to increase to over 2.2 million barrels a day by 2003. Real output and oil export volumes are likely to increase gradually in line with demand and with output accords reached by the OPEC nations in agreement with other oil exporters.
Fox, however, like Zedillo before him, is committed to the creation of a more diversified and stable economy, and is not expected to reorient the country's economic strategy heavily towards oil again, as occurred in the 1980s. It would be surprising to see vast financial resources devoted to achieving giant increases in output. Greater efforts will probably be made to bolster exploration and to diversify areas of production. Exploration is expected to concentrate on areas with light oil. Though it is acknowledged that this will require major investments, it is thought essential to incorporate new oil reserves, to diversify types of crude oil and not to rely basically on the heavy oil from one single field—Cantarell. The role of foreign companies in exploration and production is expected to remain restricted to service work contracts, which, since the inception of NAFTA, have often been very lucrative. Such contracts allow private firms to do practically all major constuction, maintainence and drilling work on Pemex's oil projects, but only Pemex is allowed constitutionally to pull the oil out of the ground.
Comprehensive alliances with international companies are likely to be sought abroad, especially in refining, which is off-limits to private capital at home. One such alliance already exists: Pemex and Shell currently own and operate a profitable refinery—called Deer Park—in Houston, Texas. Refinery agreements like Deer Park are at the heart of the still imprecise concept of the "internationalization of Pemex" that Fox and his economic advisers have spoken about. They appear to want Pemex to invest abroad, particularly in downstream (post-production) activities like refining and fuel sales. However, with the exception of Deer Park, Pemex's attempts at expanding abroad have never come to much in the past, nor have these efforts ever had sufficient, long-term government support.
At home, Pemex will have to spend heavily just to complete the modernization of its six major refineries and perhaps build a new refinery, probably at Salina Cruz, Oaxaca. Plans at the outset of the Zedillo Administration were to modernize all six of its refineries, but finally only one, Cadereyta, near the northern industrial city of Monterrey, came close to completion. Like exploration and drilling, refining is expected to remain constitutionally off-limits to direct private investment. The distribution and sale of refined products, such as gasoline, diesel, propane gas and fuel oil, is also likely to remain off-limits.
During a trip to Canada and the United States just after winning the presidency, Vicente Fox told businessmen that he would act to eliminate all barriers to foreign investment in power and petrochemicals. He even suggested that he might bring the barriers down before the end of the year 2000, thus underlining his sense of urgency and his will to send encouraging signals to foreign investors in the energy sector. However, Energy Secretary Martens has said that new policies in these areas will not go to the legislature until the spring session of Congress. This should gain time for lobbying congressmen on the changes required.
What remains to be seen is just how attractive Fox's "openings" will be considered outside of Mexico. An early sign that the openings are taken seriously north of the border was candidate George W. Bush's unexpected comment about Mexico's natural gas during the first U.S. presidential debate. "We need to have a hemispheric energy policy where Canada and Mexico and the United States come together," said Bush. "I brought this up recently with Vicente Fox, who is the newly elected president. He is a man I know from Mexico. And [we] talked about how best to be able to expedite the exploration of natural gas in Mexico and transport it up to the United States, so we become less dependent on foreign sources of crude oil."
Aside from Bush's remarkable exemption of Mexico from the category of "foreign sources," the most significant aspect of his comment was the implication that private-sector negotiations would be strongly encouraged by a Bush administration. Another noteworthy aspect of his statement was remarked upon by George Baker, a Houston-based observer of Mexican energy matters. "That Governor Bush should have mentioned this delicate topic of private conversation," wrote Baker, was "to have violated the Mexican rule of silence in such matters. The public discussion agenda had itemized only immigration, trade and drugs."[3] In fact, silence on hemispheric energy policy has been just as much a U.S. rule as a Mexican one. There has never been a clear declaration of the goals or principles prevailing in regional or bilateral energy policy. It has never been known, for instance, what criteria (if any) should define how much oil Mexico should export to the United States, or whether Mexico should feel that it has a long-term obligation to continue those exports. The only known bilateral U.S.-Mexico energy accord, signed in 1996, is basically limited to a constant exchange of information between the energy authorities of both nations.
In any case, Bush's suggestion that the two countries would now work together on the exploitation of natural gas in Mexico contrasts with the perception of industry experts in Mexico, who foresee a future in which Mexico—a major oil producer, but not a major gas producer—would remain a net importer of natural gas, perhaps even with increased imports of gas from the United States. And even if Fox is successful in finding ways to get greater involvement of private companies in exploration and production of natural gas, it does not necessarily follow that the gas produced would be exported north, especially as domestic demand for gas is growing in Mexico.
A more serious sign that that Fox's "openings" are being taken seriously by foreign investors is the upbeat evaluation of Fox's policy ideas published by Daniel Yergin and Sondra Scott, influential analysts at Cambridge Energy Research Associates (CERA), in September 2000. The piece was written after Fox's energy transition team made a visit to Houston, meeting with representatives of the international energy industry.[4] The CERA analysts calculated that Mexico's energy sector would require at least $60 billion in new investments over the six-year period of Fox's administration and that "only a portion of that investment can be generated internally within Mexico." Fox will inherit an energy industry that is "fundamentally capacity-challenged," wrote Yergin and Scott, due to chronic underinvestment in recent years that caused a tight balance between supply and demand. CERA adds that "reforming the current monolithic and bureaucratic energy sector is essential for attracting the outside investment and participation required to meet economic goals. The Fox administration is looking toward private-sector partnership and alliances with a state industry that is tested by competition."[5]
Meanwhile, on the contentious question of oil prices, Fox has said that there should be a price ceiling of $30 a barrel and that an ideal price would be between $20 and $30. He has also stated that Mexico would continue to defend a fair price for oil by working together with other oil exporters to make joint decisions on oil supply to world markets. "We believe that we have to put a ceiling on oil prices in order not to affect the economies of countries with which we trade and do business, because this would affect our own development," he added.[6]
This position is practically identical to the one adopted by the Zedillo government and is perceived to be in line with U.S. interests. Indeed, by pledging to rein in oil prices and by promoting foreign investment in Mexico's energy industry, Fox's energy policy points towards a harmonious relationship with his presidential neighbor to the north, as the new administrations in both the White House and Los Pinos, within different sets of historical and political limits, pursue their agendas of expanded private investment and greater bilateral trade.
ABOUT THE AUTHOR
David Shields is a Mexico City-based writer and energy analyst. He is a frequent contributor to the Mexican periodicals Reforma, Expansión and Siempre!, and is the former editor of El Financiero International.
NOTES
1. Armando Leal Santana, head of Pemex's petrochemical subsidiary, told the press that creating subsidiaries within Pemex was an "major error" which Zedillo did not correct. See "Pemex, a contrapelo de la industria internacional," El Financiero (Mexico City), October 18, 2000.
2. Fox's advisors have called for an autonomous public enterprise. See "Sacar a Pemex del presupuesto federal, propuesta de Vicente Fox," El Financiero (Mexico City), September 15, 2000.
3. Comment by George Baker in a press note of October 4, 2000, to subscribers of Mexico Energy Intelligence (MEI), an information service run by Baker.
4. See "Houston Dialogue tells Mexico's energy future," Houston Chronicle, September 15, 2000.
5. Quoted in "Houston Dialogue tells Mexico's energy future."
6. See "Propone Fox techo a petroprecio," Reforma (Mexico City), August 11, 2000.
