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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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Petrobras and PEMEX: Opening Doors Through Oil

As written by this author last week, PEMEX is on the long road to privatization, however the government in México maybe has a different path through regional interconnection further south than with corporations to the north. Brazil over the last couple of years has expressed its interest in forging ahead as a partner with México, the two countries being the largest economies in Central/South America and have a combined population almost equal to the United States. México needs to begin to diversify its trading partners away from its preferences for the US and Canada. This is taking note that it contracted 6.5% in 2009, because of its strong links economically to the US. This article will examine how building a partnership between PEMEX and Petrobras can aid the Mexican economy by beginning a new project of privatization/liberalization for PEMEX or make a stronger publicly traded state-owned company.

Let us begin with a bit of history on the slow construction of a strategic trading and petroleum exploration partnership between two nations and nationalized oil companies. Before 2004 this idea had already been circulating, but at that time because of a need to utilize the knowledge of processing heavy crude that PEMEX possessed and Petrobras’s knowledge of deepwater drilling, they united to start working on the Fronterizo block in Northern México. From this point on both countries have had politicians willing to talk about a strategic partnership based on the need to continue oil production, with Lula even proposing a plan in 2008 to create a third company to avoid speculation of privatization. Lula did also put forth a criticism that PEMEX is, “like an untouchable goddess,” because the government is utilizing all of the funds and not reinvesting in technology development or updating factories. In 2011 on Bloomberg Calderon discussed the need for PEMEX to emulate Petrobras, and whether or not emulation is needed is a side point of this article which shows this ongoing interest as also to important to data flow. The plan put forth by Lula is something to be considered on both sides, remembering that Lula also believes that these companies should also benefit the populations of their respective countries. Below more will be explained on the health of this companies and why this is a form of liberalization with a new vocabulary and a different partner than the United States and their oil multi-nationals.

Petrobras is a strong company, labeled by Andrea Goldstein as a, “Multilatina”, a multi-national from South America that had first quarter profits in 2011 of $6.72 USD. PEMEX on the other hand has seen declining production, which is not aided by the fact that the government does properly reinvest in its state owned company. PEMEX had a net income in the first quarter of 2010 of only $.1 billion USD, quite low for such a high earning industry. Brazil has 5% of Latin American reserves and México 4% of those reserves, constituting the second and third positions in the region for crude oil reserves (Venezuela is first, but that is for another day). Along with Brazil having these reserves the government starting in 2010 began an investment program lasting 5 years worth $224 billion in order to begin exploring these reserves (aprox. 44 billion USD/year). México has not invested on a similar scale, in 2008 only $19.4 billion in investments (the majority for exploration and production). There are further differences, the Mexican Constitution is a huge barrier to any form of trading PEMEX on a market similar to Petrobras. Also, the difference in growth, where Mexico grew 5.5% in 2010 after the 6.5% contraction (a loss of -1% still), and Brasil in 2009 was contracting but came out with growth before the end of the year and at the end of 2010, net positive growth.
Therefore, it is PEMEX that needs Petrobras, to have a strong petroleum company investing in it that is from outside the US/Canada, but also outside México. PEMEX does not need to be completely privatized and automatically drop into the hands of a Carlos Slim type who will create a private monopoly in Mexico, which is the problem now with privatized state companies. Nor, does it need to become just a subsidiary of US/Canadian companies who take the resources and profits out of the country and leave a gaping whole in the Mexican budget. Rather, Lula is correct, a third company should be created that allows for legal maneuvering around the constitutions of both countries, and also permits trading of valuable information on deepwater drilling and heavy crude processing. This also comes with a recognition that México could begin to show the Mexican people the Brazilian way of liberalization that has become profitable and brought in private investment to Petrobras, creating a multi-national. Yet, this does not mean all is rosy with this scheme for the employees, with 30,000 employees at Petrobras losing their jobs from 1997-2007 and changes to the structure of the retirement plans in order to accomplish this liberalization. So, it will also involve negotiations from a politician in a strong position with the public, such as Lula had since his inauguration.
All of these factors combine, to show what was stated multiple times in the article, this is the way to opening doors. PEMEX has been declining and it does not seem like they are going to have a chance to reverse that decline and sell the Mexican people the plan without a partner that those same people would trust. The BBC World Public Opinion Poll for 2011 shows that 65% of the Mexican population has a mainly positive view of Brasil, which is a 6 percentage point rise from the previous year. Now, this could change without the brilliant Lula running the political scene (his tentacles were in everything), but it seems like the Mexican government with Brazil has found their out. Do not privatize, first open the third company with Lula and begin data sharing, exploration projects on a large scale, and putting Mexico in a larger role in organizations south of the border. Second, publicly trade bonds or stocks for PEMEX, depending on how it can be legally set up, but utilizing Brazilian and not Mexican clout to sell the idea to the Mexican people. Third, well lets talk about that if the other things can be accomplished, with the best of luck to state-owned giants in an era of privatization.

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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