PRI readies energy reforms as Pemex output plummets

Having planned to unveil his proposal for a major overhaul of the energy sector this week, President Enrique Peña Nieto announced on Wednesday that he will now wait until next week to present the bill to Congress.

“I continue to prepare the presentation of the energy reform that will stimulate national development. I’ve decided to announce it next week,” Peña Nieto wrote on Twitter.

The delay comes as political parties extend negotiations over the reforms, which will include the controversial proposal for constitutional amendments that allow foreign corporations to partner with the government-run monopoly Petroleos Mexicanos (Pemex) in oil and gas exploration and production, thus ending 75 years of near-absolute state control over the industry.

News of the proposal came just as the head of Pemex’s refinery branch had announced plans to invest in a refinery in the United States. Citing the profitable Deer Park refinery in Houston that Pemex acquired in a partnership with Shell in 1992, Miguel Tame, the director of Pemex Refinacion, said this week that investing in another refinery north of the border would bring “good results.”

The Deer Park refinery brought in 1.3 billion pesos last year, according to a report sent to the Security and Exchange Commission. In contrast, Pemex Refinacion lost over 142 billion pesos in Mexico in 2012, plus another 79 billion pesos up until June 30 this year.

Another refinery in the United States could prove a more practical alternative to Pemex’s refinery in Tula, Hidalgo, which is 11 months behind schedule and is now due to cost 2.6 billion dollars more than the nine billion dollars originally envisaged.

Due to inadequate investment, Pemex lacks the capacity to refine much of the crude oil it produces. As such, Mexico loses millions every year by exporting crude oil to the United States and then importing nearly half of its gasoline at higher prices.

Although it is one of the world’s ten biggest crude oil producers and provides around one third of the federal government’s annual budget, Pemex is notoriously inefficient and production slowed to an 18-year low last month. Crude oil production fell to 2.5 million barrels a day in July – the lowest monthly output since October 1995, when it produced 1.9 million barrels a day – and Pemex is now headed toward a ninth straight year of declined output since peaking at 3.5 million barrels a day in 2004.

This continued slump in production will be viewed in some quarters as further evidence that Pemex should be opened up to private investment in order to boost both efficiency and productivity.

Exxon, Chevron and Spanish oil producer Repsol SA are among companies that have expressed interest in Mexico’s oil fields. In return for their investment, these firms could receive cash payments, a percentage of the oil produced or a stake in an oil field’s underground reserves, under the government’s soon-to-be-unveiled proposal.

Although Peña Nieto plans to maintain Pemex under state control, the idea of granting concessions to foreign energy companies is viewed by certain sectors of society as tantamount to privatization. This makes the impending legislation not only one of the most significant developments in recent Mexican history, but also one of the most polemic.

Since its foundation in 1938, when socialist President Lazaro Cardenas expelled foreign oil companies and nationalized the industry, Pemex has been a source of great pride for the Mexican people. The embodiment of Mexico’s independence from foreign intervention, it has become something of a holy cow and any perceived attempt to privatize it will be met with fierce resistance from the Mexican left.

The leftist Party of the Democratic Revolution (PRD) has already made clear it will not support any constitutional changes proposed by the government, while other left-wing organizations have vowed to lead massive demonstrations in a bid to keep Pemex completely in the hands of the state.

However, the Institutional Revolutionary Party (PRI) does not need the support of the PRD in order to obtain the two-thirds majority required to pass the bill in Congress – provided it can keep the conservative National Action Party (PAN) on side. Ideologically, the PAN is much closer to the PRI than the PRD on this matter and last week it presented its own aggressive proposal for constitutional reform, which would permit concessions and strengthen Mexico’s energy regulatory bodies by making them autonomous.

Carlos Slim eyes up the oil industry

Ahead of the anticipated energy reforms, Mexican magnate Carlos Slim has been gradually investing in the sector over the last seven years.

Although upcoming telecommunications reforms will see Slim’s Telmex lose a certain share of the market, he seems determined to make up for any losses by moving into the oil industry. While he cannot invest directly in Pemex or produce crude oil in Mexico, Slim, the world’s richest man, has won several contracts to help Pemex drill for oil, while investing in several oil-producing companies elsewhere in Latin America.

Since December 2006, Swecomex, a subsidiary of Slim’s Carso Infrastructure and Construction (CICSA), has won a number of contracts from Pemex for the drilling and completion of oil wells in southern Mexico – projects worth over 400 million dollars. Swecomex remains a major supplier of Pemex to date, while CICSA recently signed a 415-million-dollar contract with Pemex in return for the use of its drilling platforms in the Gulf of Mexico.

In 2008, Slim acquired a 5.99 percent stake in U.S. firm Allis-Chalmers Energy, which specializes in oil, natural gas and well drilling and has contracts in several Latin American countries, including Mexico and Argentina. The same year, Slim bought 15.4 percent of Bronco Drilling, a contractor from Oklahoma which won two contracts to drill onshore wells in the Chicontepec basin in eastern Mexico.

The following year, Slim increased his share in Allis-Chalmers Energy to 9.2 percent, while CICSA bought 60 percent of Bronco Drilling’s Mexican operations for 30 million dollars. However, in 2011, Slim sold his stake in Bronco Drilling, making a significant profit as he had bought around 4.2 million shares at six dollars per share and then sold them at 11 dollars per share.

In February 2011, Slim bought 70 percent of the Tabasco Oil Company in Colombia for 23.3 million dollars, while in June 2012 he bought 8.4 percent of Argentina’s YPF oil firm. If the Mexican government succeeds in allowing private companies to invest in Pemex, it seems likely that Slim will be among the first in line.