Development & Aid, Economy & Trade, Headlines, Latin America & the Caribbean

OIL-MEXICO: Severe Withdrawal Symptoms Ahead

Diego Cevallos

MEXICO CITY, Jan 25 2007 (IPS) - Mexico is as addicted to oil as heroin addicts are to their next fix: the country depends on oil for a large proportion of its energy needs, consumes it at an unsustainable rate and goes into debt to obtain it. Unless it changes its behaviour or finds a therapy that works, the prognosis is that it will experience a serious crisis.

The problem is enormous, analysts told IPS. Mexico produces 3.3 million barrels per day (bpd) of crude, making it the sixth world producer; it exports 1.8 million bpd, and owns one of the 10 largest oil companies, the state monopoly Petróleos Mexicanos (PEMEX) – but it is teetering on the edge of an abyss, they said.

Local oil reserves are expected to last only nine years and eight months at current rates of production, according to precise calculations by experts, whereas in 2000 they were forecast to last 20 years and seven months. Besides, PEMEX is bankrupt.

PEMEX has debts greater than its total assets, is undertaking very little exploration, its extraction costs are rising steadily, and most of its revenues go straight into the state coffers to finance 36.1 percent of the national budget, twice the proportion that it contributed 20 years ago.

Over the last six years, PEMEX’s revenues grew by 100 percent thanks to the high oil prices on the international market, but the company was not able to reinvest its earnings because most of them went to the state, where nearly all of them were spent on salaries for the public administration.

The authorities sounded the alarm when the price of Mexican crude, most of which is exported to the United States, fell to 41.7 dollars a barrel on Jan. 16.

Congress calculated the government budget for 2007 on the basis of an average price of 42.8 dollars a barrel. If this expectation is not met, the government will be forced to cut spending and investment.

“Oil has become an opiate for Mexico, and if its price falls still further, or the wells run dry, a serious withdrawal effect would ensue,” economist and columnist for the local newspaper Reforma Enrique Quintana told IPS.

Energy consultant David Shields said that Mexico has been carelessly using up its oil with no thought for the future.

While the government, politicians and many sectors of society are aware of the problem, they have not come up with short or medium term solutions, which is massively irresponsible, he told IPS.

Conservative President Felipe Calderón, who succeeded fellow National Action Party (PAN) member Vicente Fox on Dec. 1, said he was working on a plan for the energy sector, but so far the strategy that he will adopt remains unknown. The only decision that has been announced is that PEMEX will continue to be a state monopoly.

Analysts are urging Mexico to follow the example of other oil-producing countries that have managed their resources better. Their recommendations include granting PEMEX independent management powers and encouraging private investment, but this is strongly resisted in local political circles. The Mexican oil industry was nationalised in 1938.

This situation is in sharp contrast to that of other oil-producing nations. Most state oil companies welcome private capital and issue shares on the stock exchange. They also invest heavily to maintain and expand their reserves.

On average, oil-producing countries have crude reserves that will last 48 years and two months, nearly four decades longer than Mexico’s. Some, like Saudi Arabia, the United Arab Emirates, Venezuela and Kuwait, have more than 75 years of proven reserves, and they are still exploring and certifying new oilfields.

Mexico’s biggest oil producing area is the Cantarell oilfield in the Gulf of Mexico, where oil has been extracted since 1979 and which is now in decline.

Exploration of new oilfields is going ahead slowly, because of lack of resources and technology, resulting in a drastic drop in reserves.

However, from 2000 to 2006, production levels increased by 320,000 bpd, up to 3.3 million bpd. But this was achieved by over-exploiting already active wells.

Senator Francisco Labastida of the Institutional Revolutionary Party (PRI), who was defeated in the 2000 presidential elections by Vicente Fox, authored a comprehensive study titled “Petróleo” in which he said that for every 100 barrels of oil extracted in Mexico, only 26 barrels go into the strategic reserves.

Oil production is rapidly going to exhaust this natural resource, part of the nation’s heritage, which is “irresponsible,” he said.

To boost productivity, PEMEX injects nitrogen into its oilwells, which increases internal pressure and speeds up extraction, but drives up the cost. Between 2005 and 2006 the production cost of a barrel of Mexican crude rose from 4.20 dollars to over 4.30 dollars, according to PEMEX statistics.

By increasing output in this way, the state finances were maintained at the level of the annual budgets, which by law are defined by Congress. However, PEMEX’s financial and operational health did not improve.

Although Mexico is an oil producer, it imports up to 35 percent of the different fuels it uses, such as gasoline and natural gas.

The country’s oil reserves will run out in a few years’ time, which the administration and Congress are aware of, yet they insist on extracting more and more, said Shields. Meanwhile, added the energy consultant, draft laws to increase revenues through taxation continue to gather dust.

Tax revenue in Mexico amounts to less than 13 percent of gross domestic product (GDP), the lowest level among the Organisation for Economic Cooperation and Development (OECD) countries, a group of industrialised economies including Mexico. It is also one of the lowest levels in Latin America and the Caribbean.

PEMEX is being managed not as a company, but as the state’s financial arm, observers said.

In order to keep afloat, PEMEX has gone into debt and mortgaged its assets. This strategy has led to its finances being nearly one billion dollars in the red.

“PEMEX is bankrupt, not because it is an inefficient company, but because the state has squeezed out its resources,” Senator Labastida said.