Fight brews over private stake in a Mexican icon

MEXICO CITY — The cornerstone of Mexico’s economy, its state-owned Pemex oil monopoly, is crumbling.

An unnoticed gas leak at its flagship Mexico City headquarters caused an explosion that collapsed three floors and killed 37 people this year. Thieves by the thousands tap into the company’s pipelines, resulting in frequent fiery blasts and damaging leaks. Pemex has barely broken ground on its biggest investment project, a $9 billion refinery, four years after it was announced.

Worst of all, Mexico’s oil fields are drying up and Pemex lacks the equipment to explore for new reserves in deep water or to extract shale gas. Production has plunged about 25 percent over the last decade, and a country that was once a significant oil power could become a net energy importer in a few years unless new production is brought online.

Within days, President Enrique Pena Nieto is expected to propose the most sweeping changes in decades to rescue Petroleos Mexicanos. But the initiative is under ferocious attack even before it’s been made, largely because he is expected to propose loosening the government’s near-total monopoly on oil exploration and production.

The passion over oil arises from one of Mexico’s proudest moments: President Lazaro Cardenas nationalized the industry in 1938, kicking out 17 foreign oil companies that Mexicans believe had been looting the country’s wealth.

Seventy-five years later, most Mexicans still bristle at any hint of involvement by private companies, especially foreigners, even if Pemex itself is encrusted with barnacles of a powerful and bloated union, inefficiency, theft, corruption and outdated technology.

The most controversial part of Pena Nieto’s plan will likely seek to encourage private investment and technology, possibly including risk-sharing, production-sharing or concessionary agreements, which are banned by Mexico’s Constitution.

Pena Nieto repeatedly has assured Mexicans that his plan will not privatize the industry. In the most likely scenario, it would allow private firms to share in a percentage of the oil they find, or revenue from it. At present, the law limits them to straight contractual work with incentive bonuses.

“Mexico cannot delay the transformation of its energy sector any longer,” Sen. David Penchyna wrote in a recent newspaper column. “The economic premises are outdated, but the political dogma has hung on. ... The world changed, but we insisted on playing the same old role.”

Penchyna, a member of Pena Nieto’s Institutional Revolutionary Party, or PRI, who is expected to shepherd the changes through the Senate, acknowledged that the measure would change the constitution, whose Article 27 states clearly that “no concessions or contracts may be awarded. ... The government will exploit these resources.”

When former President Felipe Calderon tried a similar overhaul in 2008, thousands marched in the streets and opposing legislators padlocked the doors of Congress, camping out in the chambers in protest. The watered-down bill that resulted failed to solve Pemex’s underlying problem.

Leftist opponents are already mobilizing against the new reform. Among the most impassioned is Andres Manuel Lopez Obrador, who finished a close second in the last two presidential elections.

“Oil is the property of the nation,” Lopez Obrador said in a speech this past week, charging that Mexico’s oil industry had been intentionally mismanaged by officials who “want to hand it back over to foreigners.”

“I am absolutely convinced that privatizing petroleum, reforming Article 27, is betraying the country. We have to call things by their name. They are traitors,” he said.

Many leftists, such as Cardenas’ son, Cuauhtemoc, argue that Pemex can be saved without touching the constitution. They say it needs only to operate more efficiently and be allowed to reinvest its profits in its operations, which are currently a cash cow that provides fully a third of the federal government’s annual budget.

“There are those who see the opening (of the energy industry) and private sector participation as a magic wand that will solve everything,” said Cardenas, 79, himself a former presidential candidate. “But I don’t see how this famous magic wand will work, how it can solve all the problems simply by opening up the industry.”

One thing Cardenas and others do want to change is the stranglehold that the petroleum workers union has on Pemex.

Union boss Carlos Romero Deschamps controls nearly one-third of the seats on the company’s board and appears regularly with the president, even as Mexican news media have published reports on his son’s million-dollar Ferrari and his daughter’s trips to Europe in private jets. But Romero Deschamps is a PRI senator and an ally in Pena Nieto’s fight. Another union chief who tried to block an earlier key Pena Nieto initiative, teacher’s leader Elba Esther Gordillo, found herself arrested on corruption charges.

Calderon’s conservative National Action Party also is working with the president to woo leftist opponents and prevent a repeat of the 2008 failure.

Pemex already allows private contractors to do tasks such as operate drills and wells, perform maintenance and provide supplies. But those “integrated contracts” have proven so unappealing to investors that no bids were made on half the oil field blocks near Mexico’s Gulf coast that Pemex put up for auction in July.

Backers of the overhaul say there is global competition for expertise and sophisticated equipment, such as the self-propelled deep-water drilling platforms that Mexico needs to unlock its reserves, and they will be sent only to the most profitable fields.

Mexico produced an average of 2.96 million barrels of oil per day in 2011, placing the country among the world’s top 10 producers, according to the U.S. Energy Information Administration. Mexico sends 85 percent of its oil exports to the United States and regularly ranks among the top three foreign sources of oil used in the U.S.

“Changes to the law, in this case the constitution, draw social, ideological and political opposition,” Penchyna wrote. “We cannot discuss an issue of such national importance unless we eliminate the almost theological component that some want to inject into it.”

There is indeed something about oil deep in the national psyche. In a 2012 poll of 2,400 Mexicans by the Center for Economic Research and Teaching, 77 percent said foreign investment in general benefited the country, but 65 percent opposed any foreign investment in the oil industry. The poll had a margin of error of two percentage points.

The business-oriented Mexican Institute on Competitiveness complained that the nationalist arguments have led nowhere.

“No reforms. Technical arguments mean nothing when compared to the dignity of the nation,” the institute wrote sarcastically in a report on oil reform. “The Nation demands its inalienable right to stagnation, the privilege of losing out on the biggest technological revolution in a half century, the pleasure of expensive natural gas and imported oil.”