Nationalism Disguises the Coming Oil Crisis

A masterful manipulation of Mexican nationalism has produced perverse results. Mexico is headed directly toward an energy crisis unless it modernizes, and fast.

Mexico is one of the largest oil producers in the world, with output at 3 million barrels per day. Despite almost 20 years of restructuring programs, which have generated billions of dollars for contractors and consulting fees, the government-owned monopoly Petroleos Mexicanos or Pemex has not been able to make it an efficient or modern operation.

The most striking evidence of Pemex’s dismal management and performance is the dramatic reduction in reserves from 69 billion barrels in the late 1980s to the current 40 billion barrels. And the latter figure includes 6 billion in reserves that cannot be commercially exploited.

Pemex not only has dwindled reserves, it also suffers from lack of strategic planning, insufficient and decaying refineries and poor maintenance. Explosions and accidents in its facilities are becoming common. In 1998, there were 28 serious accidents resulting in 17 deaths, 20 injuries and the evacuation of 4,000 people.

Although the company invokes financial constraints to justify its poor performance, the real problem is a blatant disconnection between its operations and the market. With its monopoly status, there is an absence of competition or shareholders who can fire managers.

Even the Mexican Congress has no real access to information on the workings of the company, the largest in Mexico. This explains how Pemex can sell imported gasoline in Mexico at prices 50% higher than what gasoline sells for in the U.S. In effect, the company is sheltered from any criticism or serious investigation, and any stories of corruption or inefficiency are only known by accident. Recent press stories indicate that Pemex has granted major contracts without public bidding, in violation of regulations.

What maintains this state of affairs is the godsend of low production costs. So in spite of the global fall in oil prices, the government still receives huge royalties, a sum equivalent to one-fourth of federal revenues. On top of that, Pemex still has a large financial surplus. But the company has been unable to use this surplus efficiently. Its mismanagement is evident in the mismatch between crude output and refining capacity, which forces it to import $2.2 billion worth of refined products, including close to $1 billion of gasoline, every year.

Currently, virtually all Pemex fields record declining output, as they are old and no new discoveries have been made because of lack of exploration technology. The only field where output is being maintained is Cantarell, in operation since 1979. It is somewhat of a miracle that such a mature field keeps producing more than 1 million barrels per day, 40% of the nation’s crude output.

Problems are now evident in Cantarell. To maintain the pressure in the field necessary for pumping, Pemex is trying to implement a plan to inject 2 billion to 3 billion cubic feet of nitrogen per day into the ground. But as no project of this scale has ever been tried in the world, it implies great risks. World industry experts point out that before investing $2 billion in a nitrogen plant, a pilot project should have been put in place. Technical debates reveal that nobody can guarantee that the injected nitrogen will not become mixed up with the gas in the field. Some congressmen also are alarmed that output in Cantarell would rise by only a small amount and even that would be heavy crude. How much of the investment will be recouped through profits is a mystery.

Mexico pays for this national industry by dedicating billions of dollars of taxpayers’ money to Pemex industrial projects of dubious feasibility and high commercial risk. The political elite and the bureaucracy that benefit economically from this have invoked nationalistic sentiment to prevent a thorough discussion of alternatives for Mexico. Their argument is that public surveys show a majority prefers a national oil industry. They do not say that school textbooks give an incomplete story of such national industry, for there is no mention of inefficiency or corruption.

At the rate at which reserves are falling and extraction costs increasing, Mexico could find itself in the humiliating situation of having to import crude oil within a few years.