Mexico’s president on dangerous ground as he pushes Pemex reform

MEXICO CITY — If Mexico had a crown jewel, it would be the giant state oil monopoly Petroleos Mexicanos, or Pemex. Year after year, it has poured billions of dollars into the state treasury, historically paying for schools, hospitals, dams, highways, ports and more.

The seizure of foreign oil companies 75 years ago that created the company is a cause for annual celebrations affirming Mexico’s fierce sense of independence from outside interference.

Yet even as the country’s new president, Enrique Peña Nieto, credits Pemex with building the nation, his administration acknowledges that the notoriously inefficient conglomerate is in trouble: If it is not opened to private and foreign investment, Mexico, the world’s ninth-largest oil producer, will become a net energy importer by 2020, officials say.

As Peña Nieto moves ahead with a plan to overhaul Pemex, he is navigating the most perilous political minefield of his young presidency. He is toying with taboos and challenging revered perceptions surrounding the nation’s top revenue earner. And he is meeting with impassioned opposition.

At the back of a recent rally for Pemex, Jesus Castillo Sanchez, a 46-year-old handyman, waved a giant Mexican flag as if he’d just taken a hill in battle. Booting the foreign oil companies in 1938 “gave Mexico its true independence from the great powers,” Castillo said. “After [the foreigners] bring their oil platforms, they will bring their armies and their troops.”

The president is expected to introduce landmark energy reform legislation, including proposals addressing Pemex, as early as this week.

The government and industry experts contend that Mexico needs advanced technical expertise from outside companies to find and retrieve oil and gas from deep water and shale-rock formations that are believed to hold more than half the country’s estimated 14 billion barrels of reserves.

But “Pemex is not allowed … to choose associations … to reduce the level of risk that you run” in deep-water exploration, Carlos Morales Gil, Pemex director of exploration and production, said in an interview. “What Pemex needs is budget autonomy and flexibility” to form joint ventures, he said.

Making that possible could require changing the constitution, and that could prove a bruising battle for Peña Nieto. The matter is so sensitive, so wrapped up in Mexico’s ability to assert its independence from foreign meddling, that when Peña Nieto, speaking in London, suggested that the other major political parties had already agreed to reform, several politicians back in Mexico went ballistic.

Yet the problems plaguing Pemex are legendary. With corruption, poor management, a union that demands enormous benefits and a corporate structure that fosters duplicate jobs, Pemex is a model of how not to run an oil company.

According to a 2011 study by the Texas-based Baker Institute, Pemex, with about 140,000 employees, produced revenue of $585,000 per employee, a quarter of the per-employee revenue of British oil giant BP and about half that of the partially state-owned Brazilian oil company Petrobras.

Morales, the Pemex executive, acknowledged that Mexico was 30 years behind the industry standard in deep-water exploration. Pemex, he said, hadn’t felt pressure to pursue the riskier search because it had so much readily accessible shallow-water and inland oil. Consequently, Mexican engineers did not keep up with the widening technological know-how that has benefited competitors.

A case in point is the Cantarell oil field, in the Bay of Campeche. It was discovered in 1976 by a fisherman who noticed his nets were being ruined by oil. Pemex engineers soon realized he had stumbled on one of the largest oil fields in the world.

But in the mid-2000s, production at Cantarell peaked, and it has declined rapidly, while a second big find, Ku-Maloob-Zaap, has already been bled of two-thirds of its reserves.

In all, Pemex’s production of crude has declined steadily to 2.6 million barrels a day — from a high in 2004 of 3.5 million — stabilizing only in the last year or so.

There’s plenty more out there, but experts say Mexico can’t get to it without outside help.

“Mexico, outside of the U.S., probably has the widest array of energy plays that anybody has in the world: shallow water, deep water, shale gas, shale oil, tremendous marginal fields that have largely been neglected over the last 40 years,” said John Padilla, managing director of the international energy consulting firm IPD Latin America. “It’s too much for any one company to handle. There’s nobody in the world that could do that.”

The Mexican Constitution says that raw materials found in the land, like oil and gas, belong to the state, requiring a constitutional amendment for future agreements that might touch on ownership of resources.

Private operators could pay a tax, based on percentage of revenue or profit, for the right to pump. Or they could enter into joint-venture agreements with Pemex, each side sharing risks and benefits.

But how outside investors share revenue, and Mexico’s long-standing refusal to cede any ownership of the oil itself, remain a key obstacle.

The problem is that companies probably would prefer to take a cut of the oil itself; the amount of “booked reserves” to which a company has the legal rights is used by analysts to set the company’s stock price.

U.S. companies could be major beneficiaries, because they can take advantage of their geographical proximity. But big multinationals are most likely to sign up first because they are in the best position to assume what will still be high costs and risks.

For Peña Nieto and his Institutional Revolutionary Party, or PRI, the challenge is to reverse an allegiance to the very myths of nationalism and identity that built and sustained the party for seven decades of nearly unchallenged rule.

Energy reform was a centerpiece of Peña Nieto’s presidential campaign platform last year. He now appears confident he can muster unity within his party to support his initiative and expect backing from the conservative National Action Party, or PAN. Between the two parties, they could overcome legislative opposition from the leftist Democratic Revolution Party, or PRD, although the PAN is in the throes of bitter, divisive infighting.

As compelling as the argument is for reform, the opposition is just as vehement.

“No, no, definitely no,” said Jesus Zambrano, head of the PRD. Peña Nieto, he said, seems willing “to sell the golden eggs and the goose that laid them!”

Cuauhtemoc Cardenas, a founder of the PRD, is the son of none other than Lazaro Cardenas, the Mexican president widely regarded as a hero for nationalizing the oil industry. The younger Cardenas has announced his opposition to the “privatization” of Pemex.

“They must tell us why they want to privatize,” Cardenas, a former presidential candidate, said. “They must give us figures; tell us where the money is lacking; why; why they can’t get loans.” The constitution, he said, must not be rewritten.

He and others said Pemex’s performance can be improved by reducing its stiff tax burden — it pays 70% of its revenue to the government, which limits its ability to finance expansion, upkeep or exploration — and by reining in its hugely corrupt union. The union has saddled Pemex with $100 billion in pension liabilities while showering longtime union President Carlos Romero Deschamps and his family with private jets and designer clothing.

In a poll released in June, 65% of Mexicans said they opposed opening Pemex to additional private investment. The survey, conducted last fall by the Center for Economic Research and Teaching, said the oil sector remained one of the nation’s most enduring repositories of Mexican nationalism.

At the foot of a giant statue of Lazaro Cardenas, hundreds of PRD supporters rallied in June to protect Pemex from the intrusion of external investors. Among them was Castillo, the handyman, who said that the fate of Pemex, in his view, was tied inevitably to a past of Spanish colonialism and a U.S. military invasion that subjected Mexicans to years of economic domination.

Peña Nieto and senior PRI officials insist they are not planning to privatize Pemex but to modernize it and make it more efficient. The government has deliberately withheld submitting its detailed proposal to the legislature until after the summer break, local elections and the passing of other, less fraught reform initiatives.

U.S. and other foreign energy firms worry that Peña Nieto’s reform won’t go far enough. They have watched as attempts to open up the company, widely regarded as one of the most closed and antiquated in the world, fell apart.

“Mexico has a very small window of opportunity,” said an executive with Exxon Mobil, who requested anonymity because of the sensitive nature of the debate. “The risk is they approve a watered-down reform, and investors are skeptical about that. You can’t just keep kicking the can down the road.”

wilkinson@latimes.com

richard.fausset@latimes.com