Pemex Modernization: A “Mexican Moment”?

Bottom Line: After being stalled a week over tough back room negotiations, Mexican President Enrique Peña Nieto has now formally publicized his proposal for the "modernization of Pemex"

Analysis: On 12 August, President Enrique Peña Nieto (PRI) formally publicized his proposal for the "modernization of Pemex." Back room negotiations stalled the announcement (which was expected last week) as Peña Nieto and his advisors met with their counterparts from the PRD who oppose the reforms. On the question of constitutional prohibitions on foreign investment in the energy sector, Peña Nieto hopes to amend Articles 27 and 28 to permit Mexico to issue concessions-although not concessions that include ownership of any oil or gas extracted. Mexico retains possession of the natural resources, but can now enter into risk- and profit-sharing partnerships with foreign investors. Yet Peña Nieto carefully lays out an argument built on the very words of Lázaro Cárdenas, the president who nationalized the oil sector in 1938.

Ever since, resource nationalism is a point of pride for Mexican politicians as well as the Mexican public. But Cárdenas himself stated that in the future, the nation should be able to enter into state-regulated concessions with outside actors.

Although Mexicans are dissatisfied with the retail facing side of Pemex, which has a monopoly on gas stations in Mexico, they are also skeptical of government-led efforts to draw in outside investors. In a historic move to privatize telecom in 1990, under Carlos Salinas de Gortari (also PRI), the public utility Telmex transformed into a monopolistic empire for Carlos Slim, now one of the richest men in the world. While lucrative, Mexicans are not happy with how that reform panned out; they pay 28% more for phone services on average than other Organization for Economic Cooperation and Development (OECD) nations. To overcome those concerns will require savvy public relations and a lot of political capital.

Yet Peña Nieto has been able to capture significant support, and is coming off a string of relative success. Headlines in his first year governing include a revision of telecom laws to foster more competition, along with arrests of drug trafficking kingpin Miguel Angel Treviño and the (allegedly corrupt) head of the teachers' union Elba Esther Gordillo.

The Pemex Workers Union is another hurdle for the modernization of Pemex. On 29 July, the Oil Workers' Union signed a new three-year contract pushing labor obligations up to $103.4 million with wage increases of 3.99% and benefit increases of 1.98%. The contract comes despite productivity that is among the lowest in the sector. The Pemex workforce, considered by outsiders to be bloated, produces just a third of what Norway's Statoil and Colombia's Ecopetrol produce per person. Many Pemex workers remain at wells that have run dry, or in floundering operations, like petrochemicals and refining that, so far, are massive money pits for Pemex. [The 12 August document specifically notes that those non-exploration and production operations can also enter into contracts with foreign partners, though CFE will remain a state monopoly.] Production has been declining for years, even as the U.S. has seen a resurgence in shale gas production and deep-water drilling. Mexico has failed to extract oil from deep-water drills in the Gulf of Mexico, even though Pemex estimates they have 27-29 billion barrels of reserves at depth.

Recommendation: Though there has been a lot of talk of a "Mexican moment," oil is a business. Given the tepid reception for Peña Nieto's proposal, the greatest risk may be that the proposal does not draw the level of investment needed to boost production. Supporters of the legislation point to Mexico's need for both capital and technical expertise. They argue that a strong hydrocarbon sector can buoy the entire economy but if major companies like Chevron, Shell, Ecopetrol and Petrobras scale down plans because of the "ownership issue," the political battle will have been for naught.