Monday, April 21, 2008

Mexico’s Goal May be to Strengthen & thus Weaken Pemex

By George Baker

 

To appreciate the importance of the energy reforms proposed by Mexican President Felipe Calderón on April 9, you need to anchor yourself not in statistics or legalities, but in Mexican culture. The first rule in Mexico is this: you do not call things by their names – you call them by their meta-tags.

The text of his televised address on April 8 is available online in Spanish and English (www.presidencia.gob.mx). In the five bills submitted to the Congress, Mexico’s president sought to list problems and challenges in the oil sector, referring to them both by their names in some cases, by their meta-tags in others.

In the introduction to the fifth bill Calderón rightly observes that it is necessary to endow Pemex, Petróleos Mexicanos, with tools that permit it to multiply its project management capabilities and to obtain leading-edge technology. “At the same time, to guarantee that the activities of exploration and development are consistent with an energy policy that maximizes the petroleum rent for this and future generations, it is also indispensable to strengthen the State as the rector [highest authority] in the oil industry.” In making this statement Calderón was saying something profoundly true in Mexico but that is never called by its name: the weakness of the State vis-à-vis Pemex.

We may see this weakness in the contrasting views of regulation: Pemex just the week before published its “Diagnosis of the Situation of Pemex.” On page 119 there is a half-page devoted to regulation, but the text of the two applicable sentences there has nothing to do with regulation. There are no recommendations, with the apparent message that Pemex needs no additional public oversight of its activities and operations.

It was probably a shock, therefore, for Pemex to learn that the logic of the Calderón reform bills is to strengthen Pemex while simultaneously strengthening the State.

Pemex is strengthened by having the ability to have its own procurement rules, letting it get over the nightmare of having to accept contractor proposals by the lowest-cost rule of the Public Works Law, as well as by other proposed measures.

The intent to strengthen the State is clear in the proposal to create a Petroleum Regulatory Commission, analogous, distantly, to the Minerals Management Service of the United States, and to the Petroleum Directorate of Norway.

This intent is also clear in the proposal to add outside members to Pemex’s largely ceremonial board of directors. The same is true for strengthening the Energy Regulatory Commission, a goal of one of the bills.

This intent may also be seen in the proposal to create a species of “citizen bonds,” whereby Mexicans can invest in financial instruments related (in ways not clear) to Pemex’s performance.  In his speech, Calderón justified these bonds not as ways to make money but primarily as a measure to encourage greater attention by Mexicans to the performance of Pemex. He noted that the bonds would also create an obligation on the part of Pemex to provide information that transparently documents its accomplishments.

Finally, this same intent is visible in one of the measures which, if implemented, would weaken Pemex. This is the one to allow and provide investment in the areas of pipelines, storage and refineries.  Calderón seemed to be saying, if you break one of the links of the unbroken value chain controlled by Pemex, you strengthen society’s confidence in the prices and services of Pemex, the regulators and private investors. Clearly, this was not a Pemex goal.

In his address, Calderón intoned the traditional narrative about the importance of Pemex as the engine of development and as a symbol. “To strengthen Pemex is to strengthen national sovereignty,” he said; but the letter and spirit of many of his proposals are to weaken Pemex vis-à-vis the State and civil society.

Calderón expressed concern about how Pemex is supposed to discover the estimated 30 billion BOE [barrel of oil equivalent] that are believed to lie in the deepwater areas of the Gulf of Mexico, including resources that could lie in cross-border oilfields. In one of the bills Calderón observes that Mexico needs to negotiate a treaty to allow for the joint development of cross-border oilfields that may exist on the borders shared with the United States and Cuba.

There is much to be praised in the Calderón proposal.  And such praise overrides the complaints of those who say that it does not go far enough, as well as the objections by others who say that it goes too far.

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George Baker, a MexiData.info guest columnist, is the director of Energia.com, a publishing and consulting firm based in Houston.