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Mexico's Energy Reform and the Future of Pemex
email this pageprint this pageemail usRodrigo Camarena - World Politics Review
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October 20, 2010

The ebullient celebration in Brazil over Petrobas' historic $70 billion share-issue last month was bitterly received in Mexico City, where the state-owned oil company Pemex is mired in debt, inefficiency and ongoing political wrangling.

With little having changed since Mexican President Felipe Calderón sought to reform the country's energy sector two years ago, the contrast between Petrobras' successes and Pemex's failures has reignited discussion of Pemex's future and renewed the public's interest in the beleaguered Mexican oil giant.

Once Latin America's largest company, Pemex has persistently lost profits and market share to other state-led oil companies, including PetroChina, Russia's Lukoil, and Petrobras. Pemex's inability to expand production and compete internationally stems from decades of mismanagement, corruption and a politically sensitive constitutional provision barring the company from receiving private investment, as most of its state-led competitors already do.

Pemex's status as a fully state-owned enterprise has left the company vulnerable to limited financing, a dysfunctional corporate bureaucracy and corrupt public officials. Due to a lack of competitive investment and technology as well as a failure to develop new reserves, Pemex's output has declined by nearly one-third since 2004. If current trends hold, Mexico is on track to becoming a net oil importer by 2020, with some estimates projecting this taking place as early as 2016.

Making matters worse, Mexico's federal government relies on taxes from Pemex's falling profits for roughly 40 percent of the total national budget, from which it funds not only Pemex itself but also the country's development and its expensive war against organized crime.

In 2008, seeking to reverse the country's fortunes, Calderón's government passed one of the country's most significant energy-sector reforms since Mexico nationalized its oil industry in 1938. The reforms aimed to give Pemex greater budgetary authority, update its statist corporate structure, and allow the company to contract foreign firms to improve production and exploit untapped resources in the depths of the Gulf of Mexico -- where most of the country's hydrocarbon deposits lie.

To Calderón's displeasure, implementation of the 2008 law has been slow and largely unsuccessful. The law's stipulation that industry experts be added to the company's boards -- formerly made up entirely of political appointees -- has led to friction in the chain of command and to delayed decision-making. The provision allowing Pemex to contract foreign firms is currently undergoing a lengthy Supreme Court review following complaints from opposition legislators.

Against this backdrop, the successful Petrobras share-issue has triggered public frustration among Mexico's reform advocates and turned the public eye to Pemex's stewardship. Following Petrobras' historic sale, Calderón released a message via Twitter lamenting Pemex's inability to offer shares internationally while cautiously suggesting that it ought to be able to do so. Mexico's Institute of Financial Executives and the president of the Mexican Stock Exchange, Luis Téllez, issued more forceful statements decrying Pemex's limitations as a publicly financed company and arguing for greater private-sector investment in the country's energy sector.

Public statements and Twitter posts aside, Mexico's lawmakers have largely refrained from challenging Pemex's status as a nationally owned company or suggesting further reforms. Proposing changes to Pemex's ownership is the third rail of Mexican politics, as debate on oil-industry reform is nearly always met by nationwide protests and rallies. Changes to Pemex's corporate structure and transparency are particularly feared -- and fought -- by the nation's powerful public-sector unions and the political parties tied to them, who have gained the most from rents on the state's monopoly over the oil industry and other sectors of the economy.

Separate from the question of allowing private investment in Pemex, analysts believe that the company would greatly benefit from passage of the Law on Union Transparency (Ley de Transparencia Sindical), promoted by Calderón's center-right National Action Party (PAN) and supported by some legislators from the center-left Democratic Revolutionary Party (PRD). Inflated labor costs and onerous worker entitlements are the largest and fastest-growing short-term liabilities on Pemex's ledger and are largely responsible for the company's recurring loss of profits during a period of record oil prices. The urgent need for union transparency was highlighted by the Pemexgate scandal -- uncovered in January 2001 during former President Vicente Fox's administration -- when an audit of Pemex's books found that funds from the Pemex workers union were being funneled to Francisco Labastida's presidential campaign in 2000. Labastida, then the candidate for the Institutional Revolutionary Party (PRI), is currently the president of the Congressional Committee on Energy.

Although the Pemexgate scandal debunked any remaining arguments against the legislation on union transparency, the political will needed to pass the law has been lacking, in part because it would not only affect all public-sector unions, but could also be extended to force greater scrutiny and transparency upon other recipients of public funds -- including political parties, public institutions and all branches of government. While the benefits of such a reform to public accountability and governance would be considerable, passing the measure would surely doom any hopes Calderón might have of gaining political support from opposition parties or the country's influential public-sector unions in the future.

Given Calderón's waning time in office and the PAN's congressional minority, public-sector reforms are unlikely to occur before congressional and presidential elections in 2012. But unless radical changes to Mexico's energy sector are enacted soon, the country's fate as a future net oil importer may very well be sealed.

Rodrigo Camarena is a freelance journalist covering Latin American business, politics and foreign affairs, and is the Foreign Policy Association's blogger on Brazil. He is based in London, where he is a graduate research student at the London School of Economics.

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