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Demerits of PEMEX Privatization

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American oil companies are salivating as Mexico’s president, Felipe Calderón, tries to push the state-owned oil company, Petróleos Mexicanos (PEMEX), towards privatization. Mexico’s behemoth oil company is currently suffering and Calderón and his cronies believe that the cure is to open the market to foreign investment by privatizing certain sectors of the enterprise. In opposition, Mexico’s leftist party, the PRD, vehemently advocates maintaining state ownership of the company.

PEMEX has been nationalized since 1938, when President Cardenas heroically expropriated Mexico’s oil holdings from greedy U.S. and British private oil companies. Cardenas’ audacious stand against foreign oil companies is commemorated as a national holiday called Oil Expropriation Day, every March 18. The national pride for Mexico’s publicly owned PEMEX runs deep.

On April 8, Calderón proposed the reform, which will open 37 of PEMEX’s 41 divisions to private subcontractors. Despite his enthusiasm for the project, Calderón’s conservative, pro-business administration has met obstacles posed by the left-leaning opposition PRD, spearheaded by President Calderón’s former presidential opponent, Andrés Manuel López Obredor (AMLO). The PRD has challenged Calderón’s energy reform in a 71 day debate that began on May 13 and is scheduled to end on July 23.

PEMEX has problems
Skyrocketing gas prices are good news for oil companies and usually correspond to an augmentation of gains. However, PEMEX (the sixth largest crude oil producing company in the world) has defied this trend by experiencing a $1.7 billion net loss in 2007. This colossal enterprise, with a workforce of over 150,000 workers, is the single main contributor to the Mexican economy. PEMEX turns 61 percent of its revenue over to the government through taxes which account for 40 percent of the national budget. The government’s dependency on the company stifles PEMEX’s capacity to modernize its infrastructure and technology, as well as hinders its ability to probe the depths of the Gulf of Mexico for new oil deposits.

Weathered facilities also impede PEMEX from performing at its full potential. In order to repair infrastructure troubles, PEMEX requires an immediate $9 billion. A network of 36,738 kilometers of deteriorating pipelines (on average 25 years old) drapes and drips across the Mexican landscape. A reported 45,000 liters have leaked from these aging facilities, polluting the immediate vicinities. On December 22, 2007, a pipeline burst and spewed over 5,000 barrels of oil. The pipelines are also subject to illegal tapping. Mexico only has 6 refineries, all of whose conditions are comparable to the dilapidated pipelines. The country’s refining capacity is unable to swallow PEMEX’s huge crude production rates in order to transform it into gasoline. Much of the excess oil has to cross the border to be refined by some of the U.S.’s 150 refineries. It is humiliating and inefficient for a state-owned oil company that illuminates so much national pride to have to import 40 percent of its own gasoline.

The production in Mexico’s largest oil field, Cantarell, already has peaked and is now on the decline; the rest of PEMEX’s crude oil and natural gas production has followed the same trend. In 2004, PEMEX was able to extract 3.4 million barrels of crude oil a day, this number now has dropped to 3 million barrels a day. The expected lifespan of PEMEX’s oil reserves is now less than a decade. PEMEX’s expiration date has galvanized the government to compose a farseeing energy reform bill. Only 20% of Mexican territory has been properly explored for oil deposits, and experts hold great hope for large oil pockets to be found in the depths of the Gulf of Mexico. However, “PEMEX doesn’t currently have the technical, organizational, administrative capacity, nor the highly qualified personnel, to begin exploratory drilling in ultra-deep waters” (Ultraprofundas, by Sergio Sarmiento, El siglo de Torreon, March 24th, 2008).

As if putting salt on PEMEX’s wound, rampant corruption presents another formidable impediment. Rogelio Montemayor, a former PRI senator and governor was appointed to be PEMEX’s director. He was soon accused of illegally transferring more than $140 million from PEMEX’s account to support a fellow PRI presidential candidate, Francisco Labastida, who eventually was defeated by Vincent Fox in the 2000 presidential election. PEMEX director, Raúl Muñoz, was fined $80 million and forbidden to hold a public office position for 10 years in July 2007, for the misuse of $170 million in company funds. Among other offenses he used money from PEMEX’s account to pay for two of his wife’s liposuction operations. Apparently PEMEX pumps fat as well as oil.

President Calderón’s Energy Reform
President Calderón proposed a bill that he and his party, the PAN, believe to be the blueprint for PEMEX’s convalescence and later good health. His proposal includes allowing foreign investment and “minor” privatization of certain sectors of PEMEX. This energy reform bill would give the oil sector more autonomy from the state in order to contract work and handle its budget more freely. Also, to release the government’s grip on PEMEX, Calderón plans to make tax changes to give the state oil company more financial breathing room. The president believes that more help from the foreign capital market and less government leaching would solve PEMEX’s financial problems and allow it to clean up its present calamitous infrastructure.

Calderón also addresses the issues of corruption by insisting on a heightened sense of transparency. He wants to integrate independent members into PEMEX’s Board of Directors and has called for an independent auditing system. Roger Tissot, director of PFC Energy’s Country Strategies and a specialist in Latin American energy policy, commented that, “foreign investment would force transparency and efficiency, and would go a long way to improving environmental and health practices in these [national] companies.” Calderón’s proposal would have the “invisible hand” use privatization to tighten PEMEX’s loose bolts, resulting in a well functioning oil company.

AMLO’s Rebuttal
President Calderón sells his energy reform bill by softening his rhetoric against Mexico’s oil nationalization. He states that PEMEX is not being transferred to the private sectors in its entirety, but will only experience “minor” reforms that will privatize its refining, storing, and transportation sectors. AMLO and his PRD see PEMEX as an integrated entity and consider all those sectors to be components of PEMEX’s conglomerate make up. In his account, to privatize “just those sectors” would be tantamount to privatizing PEMEX. AMLO renounces Calderón’s energy reform bill because he feels it will undermine Mexico’s sovereignty and hurt the country’s working class.

First, AMLO connects the beginning of PEMEX’s decay to the last reigning years of Mexico’s PRI party and the installation of the PAN in December of 2000. According to AMLO, the PAN intentionally neglected PEMEX’s needs in order to create a crisis situation to facilitate a transition into privatization and an inevitable call for foreign help. AMLO states that, “the government, for 25 years, has acted in a deliberate manner to ruin PEMEX because they have only one goal: to make PEMEX into booty to be plundered, and to privatize the oil business.” (Lopéz Obrador told the New York Times on April 8.)

A large portion of the Mexican public agrees with the PRD that Calderón’s energy reform bill challenges national sovereignty and that it will ultimately drive more Mexican families deeper into poverty. Marches, protests, and even hunger strikes have sprouted throughout the country in an effort to hamper the move towards privatization. After President Calderón’s public announcement of plans to modernize PEMEX in April, his approval rating dropped 4 percent from what was January’s all-time-high figure of 66 percent. His disapproval rating also jumped from January’s 18 percent to April’s 25 percent.

Another aspect that induces strife between AMLO and Calderón’s ideal PEMEX reform is the potential violation of 12 articles of the Mexican Constitution if the restructuring is successful. If the constitution is to be amended, AMLO wants the public’s voice to influence the future of its own oil company by way of a national referendum.

Any privatization of PEMEX would go against an international trend whereby private oil companies are being nationalized. Over 77 percent of the world’s oil reserves are now nationalized. Brazil, Venezuela, and Bolivia, some of South America’s most competitive countries in the oil market, have made significant steps towards nationalization of their entire holding revenues. Bolivia’s oil companies have experienced an immense growth in revenues since nationalization- from $172 million in 2002 to $1.57 billion in 2007. The catalysts for nationalization today are the same as they were when Mexico expropriated its oil industry in 1938; principal among them is the transnational oil companies pilfering and pollution in the countries in which they operate. As a result, the trend of nationalizing oil companies is occurring worldwide.

Sheinbaum’s Proposal
The PRD has composed its own proposal on how to attend to PEMEX’s obvious ailments. The plan includes strengthening its profit-making potential, diminishing imports, increasing oil reserves, and lowering prices, without making major judiciary reforms. The author of this anti-privatization reform proposal is Dr. Claudia Sheinbaum Pardo, one of PRD’s founding members and adviser of the National Commission for Energy Conservation. Her proposal would instead direct PEMEX towards increased nationalization and less foreign influence.

PRD’s proposed adjustments to PEMEX would reintegrate it as one whole functioning body, unlike its current format of divided sectors. This move towards integration would unify all parts of PEMEX, from exploration of oil fields to commercialization of the final product. An assimilated industry would facilitate and lower the costs in the production/value chain, which currently is costing the company more than $20 billion annually. Sheinbaum’s proposal stresses the importance of internalizing PEMEX’s price system of hydrocarbons by connecting it to the cost of production and national income. It is presently pegged to the price system of the U.S.

The Mexican government would also have to take responsibility for the debt built up in President Fox’s investment setup known as PIDIREGAS (Proyectos de Inversión Diferida En El Registro del Gasto) in order to liberate it from its fiscal burden. This would supply PEMEX a budget of $1.5 billion to be allocated to its necessary areas in order serve and improve production, refining, storage, as well as the exploration of new reserves. Sheinbaum also stresses the importance of investment in renewable sources of energy such as wind and solar power. This enhanced budget would also include the construction of three new refineries that would help wean Mexico from dependence on Houston refineries. The PRD’s plan requires that present private contracts be broken. Sheinbaum claims that PEMEX’s debt exists because of the private contracts and the fees which they impose. The official proposal by the Calderón administration would invite more private contracts, and the strengthening of foreign private businesses participating in Mexico’s oil industry

Sheinbaum’s proposal also focuses on the problem of corruption within PEMEX and guarantees a functioning Anti-Corruption Committee in the Council of Administration. Qualifications for membership on this committee will include Mexican citizenship and no relation to PEMEX or the executive branch of government.

Sheinbaum’s proposal also addresses pollution, exploitation, waste and other negative externalities of the oil industry. First, Sheinbaum would like to close 80 contaminated wells that burn 500,000 barrels of crude daily, releasing 700 million cubic feet of pollution into the atmosphere. The dilapidated infrastructure and sporadic explosions and leaks are in dire need of attention, but the PRD plans to request the help of Mexico’s engineering sector instead of seeking aid from an outside source. A nationalized engineering sector would draft an expert Mexican team to assist PEMEX personnel with all their technological and administrative demands. This group would consist of experts from the IMP (Instituto Mexicano del Petróleo), the UNAM (Universidad Nacional Autónoma de México), the Instituto Politécnico Nacional, Intituto de Investigaciones Eléctricas and other prestigious public institutions involved in education and research. This team of engineers and managers would facilitate Mexico’s means of exploration and extraction of crude and natural gas in order to add heft to PEMEX’s dwindling reserves. The PRD proposal would give this challenge of innovation and skill to their very own people and would also fortify Mexican institutions dealing with education, research, innovation, and engineering. This proposal contrasts with Calderón’s which would simply pay private foreign companies to install their own versions of administrative measures and technology in selective sectors of PEMEX.