Monday, November 5, 2007

 

Pemex and Mexico Could Be Drowning in a Sea of Oil

 

By Carlos Luken

 

There was little surprise as the news of yet another hike in oil prices hit the trade airwaves this week. Many specialists had already predicted the probable increase, and most highly developed nations hurriedly made adjustments to amend the impact to their “oil poor, oil hungry” dependant economies

 

At a US$86.00 per barrel price, oil has already doubled its nominal historic high of US$43.00 in  the 70’s, and is rapidly approaching its real historic value which will be approximately US$104 (adjusted after inflation). Most market analysts also predict that this new price will be easily reached by the middle of November (if not sooner in some economies), and are troubled as they expect more demands that allegedly will drive the price to a new high  by year end.

 

Concurrently, most “oil rich poor countries” jubilantly received the intelligence and contemplated how to make the most of the sudden windfall revenues.

 

But Mexico received the news with mixed feelings. On the positive side, despite its Cantarell Sound depletion, Mexico still has vast oil and natural gas reserves in the Gulf of Mexico. Also, the recently approved federal budget estimated total export income at an inferior price per barrel for its heavier Maya crude.

 

Still financial experts agree, Mexico has little cause to rejoice.

 

Because of decades of mismanagement, corruption, sloppy planning and excessive waste, PEMEX (the state oil monopoly) is in no position to benefit from the market situation.

 

Traditionally, as Mexico’s financial needs increased the treasury simply milked its cash cow PEMEX by raising the monopoly’s tax base and diverting oil proceeds into social programs or to government spending. In time Pemex would account for a whopping 60% of the country’s total tax revenues. The monopoly’s remaining income scarcely covered operating expenses, wages and excessive benefits for workers belonging to a politically favored union; consequently it was insufficient to cover exploration costs, infrastructure development, technological research, or deep water drilling.

   

Locally PEMEX was praised as Mexico’s primary showcase of nationalist pride and sovereignty; it also became one of the world’s principal examples of industry mismanagement and wastefulness. Its lack of investment in infrastructure and technology resulted in yearly decreases in efficiency as it gradually depleted most of its land and offshore wells.

 

In time the oil giant was nearly insolvent and unable to exploit its own huge oil and natural gas resources. Without refining capability it was hard-pressed into exporting low-priced crude and importing costly refined gasoline and other products. In a sense PEMEX was drowning in a sea of oil

 

The Ernesto Zedillo administration (1994-2000) was the first to recognize the perilous future PEMEX (and Mexico) was facing and began making adjustments to support its finances. It also attempted to introduce legislation allowing private investment in the oil monopoly. Considering the advanced technology necessary and the quantity of capital required to invest in infrastructure and deep well extraction, the source would necessarily have to be foreign. This drew immediate negative reaction from Congress and all energy reform initiatives were robustly opposed and soundly defeated by a naive nationalistic majority.

 

As infrastructure deteriorated and demands became imperative, the Vicente Fox (2000-2006) administration was also unable to pass the vital energy plan required to jump start the industry and take advantage of deep water fields in the Gulf of Mexico.

 

Recently Pemex’s outdated infrastructure was severely damaged by heavy storms in the southern states of Tabasco and Campeche, where the larger part of oil is presently being extracted. The storm caused total havoc by disabling two oil platforms, resulting in the death of 26 workers who could not evacuate because of inoperative escape pods. The squall also shut down the three main tanker shipping ports, impeding the exportation of millions of barrels of crude oil.

 

It is estimated that if PEMEX acquired the necessary resources to invest in its infrastructure modernization, it would take at least five years to upgrade installations to an efficient level. As to how long it will take to revise its administrative practices, organization and labor problems, it’s hard to say as it has to completely discard obsolete arrangements and corruption.

 

Most economic analysts agree that the inflexibility of Congress, and partisan shortsightedness to pass energy initiatives, will have increasingly damaging repercussions that could lead to yet another major financial crisis. As well, many note that regardless of the party that will win the 2012 elections, it will take over either a buoyant economy or a wrecked country.

 

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Carlos Luken, a MexiData.info columnist, is a Mexico-based businessman and consultant.  He can be reached via e-mail at ilcmex@yahoo.com.