Mexico proposes to open up oil to foreigners

David Agren | Special for USA TODAY

MEXICO CITY – Mexican President Enrique Peña Nieto proposed Monday to scrap a ban on foreign firms taking part in the state-run oil industry – an idea that in the past has prompted protests from those who see government control of the oil business as a symbol of Mexico's revolution and independence.

The proposal would allow state-oil agency Petróleos Mexicanos, or Pemex, to partner with foreign firms and share profits, a practice prohibited by the Mexico constitution. It would also allow more private participation in electricity generation in an attempt to drive down prices that the government says are 25% higher than in the United States.

Peña Nieto insisted, however, that the oil and electricity industries would remain under government control and that private companies could not claim petroleum reserves as their own even as opponents railed against changes they say run contrary to the national interest and risk handing over the country's greatest treasure to foreigners.

"This will permit the federal government to sign contracts that share profits with the private sector, when it is in the national interest," Peña Nieto said.

The energy measure seeks to revive an industry that is lagging technologically and give U.S. oil companies the opportunity to come in and help boost production, which has been falling for years.

"We require capital, technology and know-how so it's necessary to associate ourselves with those who have it," Energy Secretary Pedro Joaquín Coldwell said during the presentation.

But many Mexicans remain suspicious of allowing outsiders to share in the nation's natural resources with Pemex, which controls the oil reserves on and off shore that were nationalized 75 years ago.

"It's for the Mexican people – that's why it's called, 'Petróleos Mexicanos,' " says Marisela Cuevas, a taco stand waitress skeptical of the changes.

Peña Nieto and his Institutional Revolutionary Party say any proposals will spur economic growth and improve Pemex operations and output. The proposals released Monday also call for more oversight of Pemex, which will be reorganized, while new companies will operate in refining, transportation and petrochemicals.

But the proposals stopped short of permitting private players to claim petroleum reserves and put them on their books as assets – standard international practice.

"It's reinventing the oil industry to make it (fit) their own version," veteran Pemex observer George Baker said of the proposals.

"Joint ventures are done all the time, but the idea is that you share production, not profits."

On the positive side, Baker says, "(The government) may have bigger plans for the electricity sector," although details remain undefined.

Pemex plays an important role in Mexico's public life, principally because it provides one-third of government income in a country where tax evasion is rife.

Ironically, it is the PRI that has for years opposed attempts at energy changes and promoted many nationalist arguments against private oil ownership that made the subject a taboo topic in Mexico political debate. Nationalists and many on the Mexican left – most notably ex-presidential candidate Andrés Manuel López Obrador – compare an opening of the oil industry to treason.

Proponents point to the pressing problems facing Pemex that threaten to harm the nation.

Oil output has dropped from nearly 3.4 million barrels per day in 2004 to 2.5 million barrels per day in 2012. The Energy Secretariat expects the country to become an energy importer by 2020.

Peña Nieto expects that to change and predicts his changes will cause production to increase and 2.5 million new jobs to be created by 2025.

Mexico already imports nearly half of its gasoline – including fuel refined at a facility Pemex jointly owns with Shell in Deer Park, Texas.

Pemex has tapped most of its easy-to-exploit reserves and must look at options such as shale deposits and offshore fields – areas in which the company is lacking investment and expertise.

"If easy oil is running out, you need to find more," says David Shields, an independent energy analyst in Mexico City.

The Mexican Institute for Competitiveness (IMCO) think tank projects an energy overhaul potentially improving annual GDP output by 1.7 percentage points and creating more than 300,000 jobs. But it's a tough sell in Mexico, where polls show public skepticism and generations grew up in a school system that celebrates the expropriation of the oil industry from private companies as a seminal moment in Mexican history.

"The general public doesn't understand Pemex … it's a complex thing," Shields says. "There's (also) this myth about foreigners taking over the country's assets."

The hashtag #vendanPemex – "They're selling Pemex" – became a trending topic on Twitter within hours of Peña Nieto saying he would reveal his plans on Monday. A poll from the research office of the lower house of Congress found 54% of respondents opposed to private participation and investment in the energy sector.

"It's something that is supposed to benefit the Mexican people," complained taxi driver Ismael Ponce, who relies on government subsidies and price controls that keep gas prices here low.

Since Mexico is the world's seventh-largest petroleum producer and has a state-run sector, it creates the mind-set, "Why pay Central American prices when we produce (oil) here?" says Federico Estévez, political science professor at the Autonomous Technological Institute of Mexico.

Peña Nieto promoted his energy changes by saying Mexicans will pay less for fuel and also electricity – which is provided by a state monopoly and costs considerably more for industrial customers than in the United States. How prices will plunge remains uncertain: the federal government spent nearly $18 billion on gasoline subsidies in 2012 – more than it did on Oportunidades, a conditional-cash transfer program for Mexico's poorest families.

Bringing in private players into the energy sector provokes disquiet for many Mexicans because past experiences with privatizations – most notably the 1990 sale of telephone monopoly Telemex, whose owner, Carlos Slim, subsequently became the world's wealthiest man.

"Privatization here gathered itself a bad name because of cronyism," Estévez says.

Former president Felipe Calderón achieved some changes in 2008 that created "citizen bonds" in Pemex and allowed the company to partner with private players in exploiting petroleum. But it prohibited risk contracts that would allow foreign firms to claim reserves instead of simply receiving a payment.

It also kept private companies out of oil transportation and refining – the latter being a power base of the oil workers' union (which holds five of 15 seats on the Pemex board of directors) and where facilities are overstaffed five-fold, according to Baker, publisher of Houston-based energia.com.

The president's proposal leaves the interests of the union, whose leader sits as a PRI senator, untouched.

The debate in Mexico "for two decades, has been defined by the question: How to make Pemex more efficient?" says Baker, Houston-based publisher of energia.com.

"Today, no amount of 'efficiency enhancements' will meet the challenges of a generation of under-investment in oil and gas and power infrastructure, and a decade of falling oil and gas production."