Mexico - A Failed Oil State

8 October 2009
Written by: Nicholas Newman

Petróleos Mexicanos (PEMEX)

There is an awful lot of oil in Mexico to be discovered, but the difficulty is Mexico’s state oil monopoly Petróleos Mexicanos (PEMEX), has trouble finding it! In 2004, Mexican oil production had peaked at 3,383,000 barrels per day (bpd), reports PEMEX. Since then Mexican oil production has shown a steady decline, so by April 2009 output had fallen to 2,642,000 bpd. Unfortunately, for PEMEX it has failed to find new significant replacement oil reserves to compensate.

This is causing concern to not only Mexico, but also to the United States. For the US, Mexico is the third largest supplier of oil, after Canada and Saudi Arabia. In 2004, Mexican oil exports peaked at 1.6 million bpd, and by 2008 had declined to 1.2 million bpd. If current trends in Mexican oil production continue it will make it much more difficult for the US to achieve its ambition of oil independence from OPEC countries. The problem is that, at present, there are very few oil states around the world that have the spare capacity to increase production to take up the slack.

For Mexico, if no new major oil fields are discovered, some experts predict the country will become a net oil importer by 2017! Production has declined for a number of reasons including major fields such as the giant Cantarell oil field in the coastal waters of Gulf of Mexico, are showing their age. Nor has it helped that the region has experienced a series of devastating hurricanes that have interrupted production several times over the past few years, though experts would suggest the real reason is the failure of the Mexican political environment and economy to modernise. Despite the Mexican Revolution of 1910, Mexico today, is still essentially a feudal country, dominated by a few wealthy families who prefer the status quo.

Even despite some investment in new technologies, the problem is PEMEX has not had much success in boosting production. Nor has PEMEX had the success of other oil companies in finding new major oil fields like the new giant Tiber field found by BP in nearby American waters recently. It lacks the specialist expertise and investment needed to find and develop fields in the new fields likely to be found in the deeper waters of the Gulf of Mexico. Outside experts are suggesting that Mexico’s current legal and political environment that deters foreign investment and expertise in the oil industry, together with Pemex having a civil service like company culture that discourages risk taking and innovation and thus makes it hard for Mexico to boost production.

Mexico’s President, Felipe Calderon, has been trying to modernise PEMEX and attract new foreign investment into the industry to boost production and discover new fields in the deeper waters of the Gulf of Mexico. These reforms include giving Pemex more freedom to make decisions, contract out work, and manage its budget to reinvest in production and exploration. It is vital for this failing state that the President’s reforms succeed.

Currently, oil revenues are a key plank of Mexico’s economy, and around two thirds of government revenue is based on oil taxes and royalties. Without political and social change, President Calderon faces the politically unpopular prospect of cutting back on public spending or and even increasing taxes in this low tax economy. This is in a country where large areas of the country are under drug mafia control, and where 17% of Mexican’s who live in poverty have seen little benefit from the profits earned from PEMEX’s oil exports. If Calderon does not succeed in implementing his oil industry reforms, more Mexicans are likely to make the hazardous journey north to the United States looking for jobs. Such a prospect is not likely to be welcomed across the border in the US, as this is likely to drive even more Mexicans to head north for work. Such a prospect is not likely to be welcomed by President Obama, given the dire state of his country’s economy today.

Unfortunately for President Calderon, his reform efforts have faced significant resistance from vested interests in the country’s feudal landowners, major businesses and PEMEX’s own labour force that fears that reforms will see many redundancies in this overmanned company. These elites have tended to treat Pemex as their personal piggy bank, diverting essential resources away from investment in all aspects of the oil industry. Pemex, since its creation in 1938, is responsible for all aspects of Mexico’s oil industry. Foreign energy companies can only work as contractors, not as partners or rival investors as is the case of Cuba and Brazil.

It has been estimated that Mexico would need to increase its investment by $10 billion a year just to halt the current decline and much more to increase output. Such investment is something that Mexico cannot afford to do alone, it needs massive foreign investment, and this means it has to open up its oil industry to outside investment and competition. If the Mexican oil industry is to exist for the benefit of the Mexican nation as a whole, then radical political, economic and social change is essential.


There is an awful lot of oil in Mexico to be discovered, but the difficulty is Mexico’s state oil monopoly Petróleos Mexicanos (PEMEX), has trouble finding it! In 2004, Mexican oil production had peaked at 3,383,000 barrels per day (bpd), reports PEMEX. Since then Mexican oil production has shown a steady decline, so by April 2009 output had fallen to 2,642,000 bpd. Unfortunately, for PEMEX it has failed to find new significant replacement oil reserves to compensate.

by Nicholas Newman - 08 October 2009

 


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