Analysis: Mexico election favorite faces stiff test on oil reform

MEXICO CITY Tue Jun 12, 2012 4:54pm EDT

Citizens look to a giant screen during the presidential candidates' televised debate at Zocalo Square in Mexico City June 10, 2012. REUTERS/Edgard Garrido

Citizens look to a giant screen during the presidential candidates' televised debate at Zocalo Square in Mexico City June 10, 2012.

Credit: Reuters/Edgard Garrido

Related Topics

MEXICO CITY (Reuters) - Mexico's state oil giant Pemex, the country's most celebrated symbol of self-sufficiency, risks becoming a net importer of crude within a decade unless it can find more oil.

To rescue it, presidential front-runner Enrique Pena Nieto has pledged to open up the firm to more private investment, breaking with the traditions of his Institutional Revolutionary Party (PRI), which nationalized Mexico's oil industry in 1938.

Pena Nieto's promise of "bold steps" to boost outside involvement in oil exploration, refining and production are at the heart of his vision to grow the economy and revamp the image of the PRI, which ruled Mexico for most of the 20th century.

But if he wins the July 1 election as expected and even if his party wins a majority in Congress, Pena Nieto will have a fight on his hands trying to change Pemex, which is buckling under a heavy tax burden, a bloated workforce and declining oil fields.

His plans could also face a wall of opposition from factions within the PRI and leftists seeking to keep foreign hands off Mexico's oil wealth. The PRI has close ties to the 174,000-strong oil workers' union, whose leaders have interests to protect and a history of corruption scandals.

"Pena Nieto will have to respond to everyone who supported him, and that includes the oil union," said energy consultant Luis Labardini, who served as a senior advisor to Pemex. "He will be able to make changes, but limited ones."

Lawmakers, analysts and industry officials say the status quo is unlikely to change much.

At existing fields, Pemex has stabilized production at around 2.55 million barrels per day (bpd) after a sharp decline at its largest field Cantarell. Now the country's largest field is Ku Maloob Zaap (KMZ) and new discoveries in the area have helped Pemex reach a 100 percent reserve replacement rate for the first time in recent history. The longer-term outlook is more worrying. KMZ is also expected to peak and then slowly decline.

"The government is clouding people's vision of Pemex so it doesn't seem like a crises," said Rogelio Gasca, one of Pemex's four independent professional board members. "People don't realize the urgency of the situation."

Experts say Mexico's growing energy demand will soon outpace production. A study by the Baker Institute at Rice University estimates the world's No. 7 oil producer could become a net crude oil importer within a decade if it does not invest in the technology needed to find new deposits.

After taking office in 2006, President Felipe Calderon tried to push through oil reforms similar to those being proposed now by Pena Nieto but failed to make sweeping changes due to opposition from the PRI and the left in Congress.

In 2008, he pushed through a moderate reform that allowed for more private oil field operating contracts and hailed it as a historic victory. His efforts to pass wider fiscal reform to reduce Mexico's reliance on oil revenues stalled.

Oil money funds around a third of the federal budget and Pemex paid out more than half of its sales revenue in taxes last year. It often operates at a loss due to the burden.

For Pemex to have more autonomy, Mexico must find new sources of revenue to fund government programs.

"Pemex is like Gulliver, a giant totally tied down by a mob of little people. It has to break free," said former interior minister Santiago Creel in an interview late last year.

PEMEX AND THE VIRGIN

The election comes at a critical moment for the company as it drills deeper into the Gulf of Mexico.

After more than decade searching for oil in the Gulf, sinking 20 wells at more than 1,640 feet, seven turned up dry and seven only found natural gas, a company presentation showed. Four are still being drilled.

Pemex believes there are up to 29 billion barrels of crude equivalent in the Gulf, more than half Mexico's potential resources. But it lacks the technology or expertise to tap the riches on its own.

Advocates of change say Mexico must modify the constitution so Pemex can form joint ventures or create other schemes to lure oil companies into risky deep water exploration projects.

The constitution says only the nation can exploit Mexico's oil wealth, limiting the level of involvement by private companies to essentially service contractors for Pemex.

The first new oil operating contracts under the 2008 reform were awarded last year with a new round scheduled this month for several small, mature fields. Though the contracts give incentives based on increased production, they failed to attract much interest from oil majors who want to book reserves or share profits from oil finds.

Both Pena Nieto and Josefina Vazquez Mota, candidate of the ruling National Action Party, support a constitutional change that could allow Pemex to grant oil concessions to private companies. It would require a tough two-thirds vote in Congress.

Rating agencies say a more aggressive energy reform could boost economic growth, but they are not optimistic.

"Despite the election talk, our base case scenario does not include a further opening of Pemex," said Lisa Schineller from rating agency Standard & Poor's.

Support for Pena Nieto, who has recently faced growing opposition from student protesters reviving memories of the PRI's reputation for corruption and authoritarianism, has slipped, dimming his hopes for a big majority in Congress.

Pena Nieto's own party could also be a worry. In 2008, some PRI lawmakers joined forces with left-wingers in Congress to oppose Calderon's energy reform plans.

"(Pena Nieto) has the challenge of convincing those both inside his own house and outside," said a high level PRI official who asked not to be named. "The flag, Pemex and the Virgin of Guadalupe are all on the same level."

The Virgin is Mexico's most sacred religious symbol.

PRI lawmaker Francisco Labastida, a moderate, says the party will close ranks behind Pena Nieto if he wins, but admits there will be hurdles.

"It is possible. I am not saying it will be easy. We will face the same challenges or even more than we faced in 2008," said Labastida, whose senate term is just ending.

The PAN, which has held the presidency since 2000, is unlikely to have forgotten the fight over oil reform.

"The PAN may be willing to support a constitutional reform but it's not going to be cost-free for the PRI after 12 years of resistance," said Eurasia Group analyst Carlos Ramirez. "I suspect one condition will be tackling the power of the union."

SHREWD UNION LEADERS

The oil workers' union, with its five seats on Pemex's 15-member board, will be crucial to cutting a ballooning pension deficit that is putting Pemex's finances in jeopardy.

During the PRI's rule from 1929 to 2000, the party traded patronage and political favors for political support from public sector unions, and the oil workers were no exception. The 1994 union bylaws pledge allegiance to the PRI.

Along with board seats, the party gave the union a 2 percent commission on all contracts and a right to assign half of all contracts given out to third parties. Analysts say the union would block reforms that threaten its position.

"They are very shrewd and know how to maintain their power," consultant Labardini said.

Union leaders have blocked more requests to open its accounts to the public than any other institution. The only document ever released under transparency laws shows Pemex paid the union 1.97 billion pesos ($141 million) over just 31 months between 2005 and 2007 in worker dues and extravagant amounts to fund activities like a May Day parade.

With more than 140,000 workers, Pemex is overstaffed compared to other state oil companies like Venezuela's PDVSA, which produces more crude with about half the employees.

The annual cost to maintain retirees, some earning a full salary for years after they stop working, is seen by Pemex as exploding to 1.5 trillion pesos ($108 billion) by 2019. Retirees make up 50,000 of the union's ranks, adding to its power.

Juan Bueno Torio, a PAN senator and former head of Pemex's refining arm, said work contracts should be more flexible and changes made to the pension scheme for new hires.

"These reforms are incredibly urgent for Pemex, but they haven't been able to implement them, I think, because they're afraid of the union," Bueno Torio said.

The union did not respond to requests for an interview for this story and Pemex declined to comment on its labor relations.

Still, the union says it wants the best for the company.

"The good relationship between the authorities and the union representatives has often been questioned as suspicious but as a result of that climate of cooperation we have seen results for Pemex and its workers," union leader Carlos Romero Deschamps said in March at the 74th anniversary of Pemex's foundation.

He has led the union for 19 years and is running for Senate for the PRI despite lingering accusations about corruption in his past. He has served as a lawmaker before, which protects him from prosecution, while maintaining his post as union head.

In a scandal dubbed 'Pemexgate', Romero Deschamps and other leaders were accused of embezzling some $200 million from Pemex and funneling it to the PRI's failed presidential bid in 2000.

The most serious charges against Romero Deschamps and union treasurer Ricardo Aldana - also running for the PRI in Congress - were dropped in 2003 but detractors still accuse union leaders of siphoning off cash and Pemex contracts for their own gain.

Last month, more suspicions were raised about Romero Deschamps' wealth when newspapers published pictures of his daughter flying in private jets with her three bulldogs - one wearing a diamond collar - while enjoying $700 bottles of wine and toting designer handbags. Her 68-year-old father's official salary is a modest $1,800 a month.

The left and Vazquez Mota were quick to pounce, calling Romero Deschamps a throwback to corruption under seven decades of PRI rule, but Pena Nieto defended him, saying: "He is a leader that has worked hard and has the respect of his union."

(Additional reporting by Miguel Angel Gutierrez and Dave Graham; Editing by Kieran Murray and Sofina Mirza-Reid)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
Eideard wrote:
China will help with the exploration. :-]

Jun 12, 2012 6:28pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.