THE PLAN

Pemex, Mexico's oil monopoly

Mexico’s leader unveils plan to open oil industry to foreign firms

President Enrique Peña Nieto is hoping his proposal to let private companies partner with Pemex, Mexico’s oil monopoly, will yield a long-term economic payoff.

By Richard Fausset and Tracy Wilkinson
August 12, 2013, 9:12 p.m.

MEXICO CITY — Risking a political firestorm, President Enrique Peña Nieto on Monday unveiled a historic proposal to let foreign companies take part in Mexico’s state-run oil industry, long a symbol of autonomy from the U.S. and other global powers.

The proposal, which the president hopes will yield a long-term economic payoff, would change the Mexican Constitution so that private companies could partner with the state monopoly, Petroleos Mexicanos, or Pemex, and share in its profits. The plan instantly came under attack, both from leftists who fear it threatens the nation’s patrimony and from those on the right who believe it doesn’t go nearly far enough.

Pemex was created in 1938 to manage all Mexican oil and gas resources after then-President Lazaro Cardenas expropriated and nationalized foreign petroleum holdings in the country.

The move made a hero of Cardenas, but the company became notorious for corruption, inefficiency and bloat. In the last decade, it saw its production steadily diminish as the country began tapping out its once-vast stores of easy-to-find oil, much of which was beneath shallow waters in the Gulf of Mexico.

Many analysts say the country needs foreign investment and expertise to help it extract oil and gas from more technically challenging deepwater wells and shale rock formations. But the idea is passionately opposed by many who fear the country is on the road to privatizing its most important natural resource. In a recent national poll, 65% said they opposed foreign investment in Mexico’s petroleum industry.

In a pomp-filled presentation Monday before a handpicked audience at Los Pinos, the Mexican White House, Peña Nieto labored to assuage those fears. His reform, he said, would create jobs, lower electricity and gas bills, and even result in better food, because of the development of new fertilizers. And he insisted that Mexico would retain “absolute control” over its oil.

“This is the moment to utilize all of our energy to move and transform Mexico,” he said. “Petroleum and other hydrocarbons will continue to be the exclusive patrimony of the nation. We will continue being owners of the petroleum income.”

Peña Nieto’s allies say the stakes could not be higher for the Mexican economy. Pemex is responsible for about one-third of the government’s income. But if current trends are not reversed, a country famous for its abundant oil and gas reserves could become a net energy importer by 2020.

Energy Minister Pedro Joaquin Coldwell said Mexico had to change to meet growing demands both abroad, in places like China, and domestically.

But the political stakes are daunting as well. Energy reform is perhaps the most important element of a broader package that Peña Nieto is hoping will transform his country, making it more modern and efficient.

With the support of his own Institutional Revolutionary Party, or PRI, and members of the conservative National Action Party, the proposal is expected to pass both houses of Congress. After that, 17 of Mexico’s 32 state and Federal District legislatures must approve the amendment.

Even if he is successful, Peña Nieto, who took office in December and is limited to one six-year term, could still suffer politically if the opposition mounts a sustained and impassioned protest. It is difficult to say whether Mexico’s left, which is suffering from internal divisions, can bring such heat. But there is a concern that, with emotions rising, things could get ugly.

“The debate over energy reform represents the largest challenge in the history of the young Mexican democracy,” columnist Juan E. Pardinas wrote in the newspaper Reforma on Sunday, referring to the period since 2000, when the PRI was defeated after decades of one-party rule. “The civility of the political actors and the power of our institutions will be under a difficult stress test.”

The opposition has been gearing up for what it hopes will be an ideological battle to be waged, at least partially, in the streets. Leftist leader Andres Manuel Lopez Obrador, who was able to essentially shut down the Mexican capital with protests for weeks after losing the presidential race in 2006, has called for a rally next month, about the time that Congress will be debating the legislation.

“What is it they are trying to do with the privatization of Pemex?” Lopez Obrador said in a video statement released Monday. “They are trying to make off with the wealth of the Mexican people.”

Jesus Zambrano, head of the leftist Democratic Revolution Party, criticized Peña Nieto’s proposal to change two articles of the constitution. If the government really does not want to privatize Pemex, he said, there should be no need to fiddle with the document. Earlier this summer, Zambrano’s party held a rally under a giant statue of the late President Cardenas, arguing that opening the company to foreigners would betray his great achievement.

But Peña Nieto argued Monday that his proposal was in the spirit of Cardenas’ reformist impulse, noting that the former president had originally intended Pemex to be able to work with foreign companies. Such partnerships were only prohibited, Peña Nieto noted, by a constitutional amendment in the 1960s.

His presentation was in many ways attuned to notions of national pride. It opened with the president and his Cabinet delivering a full-throated version of the national anthem. Cabinet members, including smartly dressed military officers, were introduced by name, and stood while being applauded.

On the right, meanwhile, critics say the president’s proposal doesn’t go far enough.

“Very timid,” said Gustavo Madero, head of the conservative National Action Party, or PAN, who argued that the measure fails to end the monopoly that Pemex enjoys, and fails to open the company to meaningful competition.

The PAN had proposed a plan that would go beyond the PRI’s idea of sharing profits with private companies. Its proposal would allow for the granting of concessions — that is, contracts in which the government, for a fee, grants a company the right to explore and produce oil in a given area over a fixed period. Private companies often prefer concessions over profit-sharing arrangements.

“We will see where this goes,” Madero said, “but our vision is to broaden all options.”

During the 12 years that the PAN held the presidency, it had hoped to pass sweeping energy reform, but was stymied at least in part by opposition from the PRI. Peña Nieto’s predecessor, Felipe Calderon, was able to pass some changes in 2008.

Coldwell said the proposal would allow Pemex to enter into profit-sharing contracts with private companies, including foreign ones, but not the production-sharing contracts that many international firms prefer. The only other countries that follow a similar scheme, he said, are Ecuador, Bolivia and Iran.

Those are not exactly models of cutting-edge economic performance, and some analysts wondered whether the proposal, once it had gone through the legislative meat grinder, would be strong enough to effect real change.

David Shields, an energy analyst based in Mexico City, said the bill presented by Peña Nieto was sorely lacking in the kinds of details that investors need. Only when legislation has been written to implement the changes will it be clear whether Peña Nieto’s proposal is far-reaching, he said.

“What we got today is what we call in boxing a shadow round,” Shields said. “They weren’t really answering what investors want to know. How do you develop a shale gas industry? What are the contracts really going to look like?”

Enrique Ochoa, deputy energy minister, defended the scope of the proposal. “There has not been a constitutional reform on hydrocarbons in Mexico in more than 40 years,” Ochoa said. “This is indispensable for Mexico. It is a substantial change.”

Cecilia Sanchez of The Times’ Mexico City bureau contributed to this report.

Copyright © 2013, Los Angeles Times

Photo: A protester holds a banner reading “Pemex is not for sale” at a 2008 political rally in Mexico City. (Alexandre Meneghini / Associated Press / March 18, 2008, via LA Times)

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