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Andrew Smolski

Andrew Smolski

Andrew Smolski is a contributor at Oilprice.com and specializes in Political/Economic Sociology. His work has been syndicated in many leading online publications and he can…

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PEMEX and the long road to privatization

Petroleos Mexicanos (PEMEX) is the state-owned oil company (and natural gas) of México, which since the 90’s has been discussed for privatization like many other state-owned companies in México. The policy of privatization is sometimes called liberalizing the company, however many aspects of privatization need to be taken into consideration when discussing such a lucrative portion of the federal budget for México. PEMEX has 41 divisions, and is a source of Mexican sovereignty, and any talk of privatization will not happen without a strong fight, not only from the left, but also Mexican nationalists who see it as a source of pride. This article will attempt to give a brief summary of these considerations and bring forth an argument on what will happen in the future of PEMEX and its worth for investors.

According to the Mexican constitution (Article 27) all subsurface minerals are the property of the Mexican government, and not the people who own the land where these minerals are found. This has led to 1/3rd of the federal budget being derived from the fossil fuels found and produced in México, and accounting for 10% of all export earnings for the country. However, over the past 5 years the amount of barrels per day being produced has been declining, mostly due to the difficulty that surrounds new oil exploration, the need for more advanced technology and risk taking investment. With the need for investment and most of the profit utilized as expenditures in the federal budget, PEMEX lacks the resources necessary to continue to produce optimally and also to reach its goal of 600,000 barrels of crude per day by 2021.

None of this means that there is no longer oil in México, with one set of fields, Chicontepec, having an estimated 9 billion barrels of oil if proper investment and technology existed. Instead, since the 90’s the problem has been the obstacles to liberalize the company, with some parts almost being liberalized (such as PEMEX Petroquímica) when the plans were met with a popular backlash, typically from the union movement. $2 billion of assets in PEMEX were sold off, but this is quite meager in comparison to its size of $80.6 billion in revenue. PEMEX has around 140,000 employees, which means it has a large and relatively powerful union, but that has come under attack as of late. It should also be taken into consideration that there are approximately 70,000 retired workers with a pension fund worth about 1,700,000,000 pesos ($145,299,145 dollars). With this sort of money, no one is going down without a fight, and on top of that in 2012 an election is coming with a resurgent Partido Revolucionario Institucional (PRI), who will be seeking the support of the PEMEX union in order to win the presidency.

This does not mean that PRI will not attempt to privatize or liberalize PEMEX, as it has tried before. The before mentioned example of PEMEX Petroquímica happened during the PRI years. But, the resurgence of PRI has led to worries by the US, who sees PRI as wanting to reattempt a recentralization program. Therefore in order to build support, PRI be in a position to maintain PEMEX as a state-owned company. Especially, when the Mexican Constitution (Article 27) give all rights to subsurface minerals to the governments, as well as (Article 28) prohibits any private driller from reaping profits from oil begotten from Mexican land. So, if privatization was to go forward, it would mean that Constitutional referendums would have to be passed with a larger majority then it seems like any political party would like to admit (except the PRD who vehemently oppose any form of privatization or liberalization). Therefore, the closest that liberalization or privatization of PEMEX has come is the utilization of sub-contracting, which is a form of going around the laws to utilize outside companies and investors, such as Halliburton.

The dilapidated condition of PEMEX production factories makes them sell their crude oil to US companies who then refine it and sell it back to México. It has not built new factories since the 70’s, and for being a crown jewel and representation of Mexican sovereignty, the government has looked as if it has wanted to sell it off for quite sometime. Even in 2006 when PEMEX had looked to have turned a corner, it went directly back into its decline, due to lack of reinvestment on the part of the company. PRD party member AMLO (Andres Manuel Lopez Obrador) has called this a “starving the beast” tactic, and whether people are against it or for it, it has been working in order to make PEMEX have to rely upon outside aid and resources in order to continue production.

México does have a history of nationalizing industries after the 1911 revolution, but this does not seem to be its history starting from the 90’s (or even 80’s) with a slow creep towards privatization of large state-owned monopolies. With a starved and deprived PEMEX, a union being busted, and a political climate focused more on the drug war, this might be the perfect time for PRI or PAN to pass what they have tried to for 20 years. However, the Mexican people are quite intelligent, and do not have amnesia, they remember the pesos crisis in ‘94 because of foreign capital flight, and hopes and dreams built on foreigners have never brought their strongest support.

By. Andrew Smolski
Andrew Smolski is a contributor at Oilprice.com and specializes in Political/Economic Sociology. His work has been syndicated in many leading online publications and he can be reached at da.smolski@gmail.com

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  • Anonymous on July 20 2011 said:
    I think that PEMEX should be left to the government, because where will the other revenue be generated from. Better option is that they invest in PEMEX and stop the drug war. Maybe through a legalization program.
  • Anonymous on July 20 2011 said:
    At one point state owned company become similar to private company anyway, I guess the only advantage is that state owned company doesn't hide money in fiscal paradise. Where I live our hydro electric company is state owned and since the 90's it have been led just like a private enterprise. They keep augmenting the cost of energy and most of the new projects are for exportation instead of local consumption.We pay more and more for our energy to finance project that bring more money to the government instead of bringing us cheaper energy which is suppose to be the goal of a state own company no? Anyway if it can help them avoid tax evasion PEMEX should not be privatize but if I believe the people that I knew in Mexico the government is the worse mafia anyway. To the first poster, legalization will never happen as long as drug is not legalize in U.S. We had several report recommending legalization here in Canada but as long as the U.S say no it will never happen.
  • Anonymous on July 20 2011 said:
    I think that the point about the U.S. not legalizing means that México can't legalize it is quite valid. These countries are very connected, especially militarily through the Merida Initiative. The point about the running of PEMEX, it actually keeps gas prices really low here (your looking at still 9 pesos a liter, less than an American dollar). Also, as stated in the article the problem is not with lack of oil in México, it is a lack of political will by the Mexican government to properly invest in a very large portion of its own budget. They are actively committing suicide in order to privatize this juggernaut, and I bet a lot of private oil firms are quite happy about that. The uncle of my fiancee is from Vera Cruz, most of his family works for PEMEX, and they really work, so I could not put the blame on them. It is poor economic domestic policy.
  • Anonymous on July 20 2011 said:
    What you are saying about the company being pushed to suicide in order to privatize make a lot of sens. They made something similar in U.S.S.R when the privatization came around, they voluntarily destroyed profit to buy company for a fraction of what they worthed. In Mexico the climate is different but once the company become a fiscal burden they will have pseudo good reason to privatize. Good comment it truly add to the article.

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