Royal Dutch Shell Plc  .com Rotating Header Image Mexico’s PEMEX oil company in financial trouble

By Greg Flakus
Voice of America – VOA
Houston:  03 28 07

Mexico’s state-owned oil company, Petroleos Mexicanos, better known as Pemex, celebrated its 69th birthday on March 18, amid concerns that it is on the brink of insolvency and its production is falling. As VOA’s Greg Flakus reports from Houston, Mexico, still has plenty of oil, but internal politics prevent the investment needed to develop the resources.

At the close of President Bush’s visit to Mexico two weeks ago, a Mexican reporter asked if the two men had discussed the issue of oil. President Bush, for his part, said oil had not been a topic of discussion since energy is a Mexican domestic issue, not a bilateral issue. President Calderon repeated his oft-stated position on energy reform.

He said he does not have any plan to privatize Pemex, but he said Mexico will have to address the problem of falling production at some point and that this will be a matter of discussion between the president and the Congress.

Mr. Calderon has made clear that he, like Presidents Vicente Fox and Ernesto Zedillo before him, sees a need for energy reform. When Mexico expropriated the oil industry in 1938, the idea was to keep the resources in Mexican hands and enrich the nation with oil profits. In recent years, however, it has become clear that Pemex is not up to the task of finding and developing all the resources under the ground, or more to the point, under the waters of the Gulf of Mexico, where its largest producing field, known as Cantarell, is now in sharp decline.

But nationalist politicians have blocked reform, claiming any change in the constitution that would even allow a slight opening to private investment would eventually lead to full privatization of the state-owned energy sector.

George Baker, an oil analyst who publishes the Mexico Energy Intelligence newsletter in Houston, says Mr. Calderon’s razor-thin victory in last year’s election and subsequent charges of fraud from the opposition have put him in a tough spot.

“There is still a very strong shadow from the 2006 elections and that means that it would be politically delicate for the government, at this point, so early in its career, to push forward a radical change, which this would be, in petroleum policy,” Baker said.

In Mexico, many citizens still respond to the old slogan that “the oil is ours,” even though they see no direct benefits. Oil revenue accounts for about a third of the government’s receipts, but Mexicans generally pay more for gasoline than people in neighboring countries and there is no dividend payment distributed to the citizens from oil revenue.

Some Mexican politicians have argued that all Pemex needs is internal reform, but George Baker says that won’t work.

“To improve Pemex, you need to have a view that is not Pemex-centric,” he said. “You need to have a view that looks beyond Pemex and that any particular effort to reform Pemex, as an effort in itself, will not succeed.”

Pemex owes creditors $107 billion, equal to almost all its assets. Petroleum reserves are the state’s, not Pemex’s, property. Since the government takes most of its revenue, Pemex does not have the money to pay its debts, let alone develop the technology it would need to find and produce more petroleum.

Baker says Mexico’s hand may soon be forced by private development on the border between the United States-controlled area of the Gulf and Mexican waters. The Shell Oil company has a well on the US side of the boundary that could go into operation as early as 2010. Although no one can know for sure, it is possible that such a well would also draw some oil from deep rock on the Mexican side.

In a conference call this week, Pemex officials said they have identified 230 prospects for drilling in Mexico’s Gulf waters, but the company only drilled four wells last year. At that rate, George Baker says, it would take 58 years to exploit those resources. The Houston analyst says Mexico needs to allow outside oil companies to operate there.

“In the Mexican side of the Gulf of Mexico, there is room for 20 or 30 companies to be actively drilling,” Baker said. “Pemex, by its own, cannot drill 230 deepwater prospects. Pemex is not prepared to deal with deepwater exploration on a major scale and it is certainly not prepared to deal with deepwater production because it has never done that before and it does not have the experience or the resources to make that happen.”
Baker says one proposal that might find support in Mexico would involve opening 20 percent of the energy sector to private companies, with Pemex maintaining 80 percent control. He says private companies, from the United States and elsewhere, have the technology and expertise necessary to develop the resources in Mexico, thereby boosting the country’s overall production. He says other countries with state-owned oil companies that have tried this formula, like Norway, found that it not only improved production, but reduced corruption and brought greater efficiency to their operations.
Voice of America – VOA 26 03 07

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