ENERGY-MEXICO: Spectre of Bankruptcy Looms over State Oil Monopoly

By IPS Correspondents Reprint | | Print |

Adrián Reyes

MEXICO CITY, Mar 31 2005 (IPS) - The spectre of bankruptcy is looming over Mexico’s state oil monopoly, which carries a burden of 86 billion dollars in debt, while more than 60 percent of its sales go to the state in taxes.

These factors, combined with its ageing infrastructure, are making it more and more difficult for Petróleos Mexicanos (Pemex) to compete during this time of rising oil prices.

The heavy tax burden and lack of investment in upgrading infrastructure and exploration and prospecting are among the main elements endangering the oil company, which was created by the government of Lázaro Cárdenas after Mexico’s oil industry, in the hands of British and U.S. capital at the time, was expropriated and nationalised in 1938.

Pemex “is in crisis due to a tax regime that keeps it from capitalising on its resources, and is condemned to bankruptcy if it does not receive fresh money and if its tax scheme is not modified,” said Eduardo Andrade, the president of the Mexican Association of Electric Energy (AMEE), a private sector organisation that carries out research and provides advice to university, business and government forums.

“If the outlook doesn’t change, Mexico could stop producing oil by 2015 and would depend on foreign suppliers,” Andrade told IPS.

For that reason, a new legal framework to make Pemex viable is urgently needed, because the oil firm must reinvest its earnings in order to prevent further deterioration and to boost output, he argued.

Andrade warned of the high risk involved in depriving the company of such a large share of its revenues, because operating costs are steadily increasing, and “the future of the country’s energy industry is being mortgaged.”

The fourth annual report by the government of Vicente Fox shows that the country’s leading foreign exchange-earners are oil exports, which account for 23.6 percent, followed by oil industry by-products (13.8 percent), assembled goods (13.6 percent), and farm products (12.5 percent).

Oil revenues are the biggest contributor to Mexico’s state coffers.

Noting that today, 67 years after the nationalisation of the oil industry, the company is the world’s most heavily indebted oil firm, Pemex Director Luis Martínez Corzo urged the Finance Ministry and Congress to come up with mechanisms to keep it from going under without jeopardising state control of the company.

An Energy Ministry spokesperson, meanwhile, said that in order to keep up production, investment in the industry must increase from the current nine billion dollars to 20 billion dollars a year, or “we will paradoxically come to depend on other countries.”

Besides supplying the domestic market, Pemex exported 21.23 billion dollars worth of oil and by-products last year, including 19 billion in sales to countries in the Americas – where the United States is the biggest client – 1.86 billion to Europe, and the rest to East Asia.

On taking office in 2000, Fox, who belongs to the conservative National Action Party (PAN), promised to keep Pemex in the hands of the state.

However, during the first year of his administration, he submitted to Congress a series of reforms aimed at opening up the oil industry to greater private sector participation.

But the opposition parties, which together have a majority in Congress, rejected the government’s proposed reforms and have responded that what is needed, much more than private capital, is a new tax scheme to keep the government from using the company as its cash cow.

While transnational oil corporations are riding high on the profits from international prices above 50 dollars a barrel, Pemex lacks a clear, well-defined strategy at a time when its proven and total reserves are declining and accidents in the pipeline system and fuel theft by organised criminal rings are on the rise.

Pemex’s proven reserves totalled 18.9 billion barrels in 2003, but had dropped to under 17.65 billion by late 2004, which will only cover the country’s domestic needs for around a decade, according to the company’s own projections.

And in terms of total reserves, which include both proven and probable, Pemex reported that they shrank from 48 billion barrels in 2003 to 46.9 billion last year.

In an attempt to ease concern, Martínez Corzo recently noted that prospective deep-sea reserves in the Gulf of Mexico could amount to 54 billion barrels, worth more than 300 billion dollars.

But he also underlined that Pemex lacks the technology and financing, or alliances with large producers, to exploit deep-sea oil wells.

Francisco Javier Carrillo, secretary of the Energy Commission in the Chamber of Deputies, told IPS that “Congress is not opposed to greater financing for Pemex, and there are mechanisms to make that possible without the state losing control over the oil industry.

“What we are asking the Fox administration, however, is that it stop bleeding the company of its revenues to finance government programmes,” he added.

Carrillo, a lawmaker with the leftist Party of the Democratic Revolution (PRD), argued that the government should export less crude oil and put a higher priority instead on refining and petrochemicals, following the example of Brazil’s state-owned company Petrobras.

He also observed that the deterioration of Mexico’s oil industry is already having a severe impact, because not only are the overall reserves falling, but production at Mexico’s biggest oil field, Cantarell, will soon begin to decline, and sufficient funds for exploration do not exist.

Although Pemex’s sales increased 18 percent between 2003 and 2004, the company remained no less heavily in debt, because its revenues are used to foot the bill for the government’s development plans.

In Fox’s four years in office, a full 75 percent of government spending on development projects has come from Pemex, said Martínez Corzo.

The sources consulted by IPS agreed that Pemex’s vulnerability lies in the heavy tax burden it has carried since the era of Institutional Revolutionary Party (PRI) governments, which ruled the country for seven decades until 2000.

While legislators and the government seek ways to revive Pemex, international oil prices continue to climb.

Among the most immediate reasons for the high cost of crude are China’s intent to exploit its own energy reserves and the impact on U.S. stockpiles of the recent blast in a Texas oil refinery, said analyst Eduardo Torres with the BBV Bancomer financial institution.

Torres said oil prices would remain volatile until at least the middle of the year.

Meanwhile, the Organisation of Petroleum Exporting Countries (OPEC – to which Mexico does not belong) recently decided to increase daily production by 500,000 barrels in an attempt to bring prices down.

Although Mexico is benefiting from the current high prices, the benefits would be even greater if Pemex did not have to pay more than half of its earnings in taxes and in huge fines for the accidents in its pipelines, which have run to nearly five million dollars during the Fox administration alone.