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MEXICO: Oil Reforms Leave State in the Red

Diego Cevallos

MEXICO CITY, Oct 29 2008 (IPS) - The oil industry reforms approved by the Mexican Congress and applauded by the government and most of the country’s parties, with the exception of factions on the left and part of the business community, will deprive the state of a source of funding that currently finances 40 percent of the public budget.

“Good for the oil industry, which will now have more funds, but the lack of an alternative source of financing for the state is very worrisome,” Roberto Gutiérrez, an expert on energy issues at the Autonomous Metropolitan University (UAM), told IPS.

From 2009 to 2016, the flow of funds from the state oil monopoly PEMEX to the state coffers will gradually be reduced, according to the reforms approved Tuesday by the lower house of Congress after six months of heated debate. (They passed the Senate last week).

The hope is that by increasing the proportion of revenues left in the hands of the oil company, Pemex will improve its performance, which has been undermined by a lack of funds and up-to-date technology, while output has steadily fallen and reserves have shrunk (according to official figures they will last less than nine years).

Gutiérrez said that in the current political context, the emergence of a proposal for tax reforms aimed at addressing the lack of revenue that the state will suffer in the years to come is unlikely.

Analysts say that because legislative elections are due in July 2009, neither the political parties nor the government are willing to take the political risk posed by tax hikes that would affect voters’ pocketbooks.

The reforms, which conservative President Felipe Calderón said he would sign into law without reservations, stipulate that in 2009 Pemex will use 35 percent of its revenues, or a maximum of 852 million dollars (whichever sum is greater), to increase expenditure in investment, maintenance and operations.

In 2010, that proportion will go up to 65 percent, or one billion dollars. And by 2016 the company, which has long been the state’s cash cow, will hold onto practically all of its earnings.

“Politicians are good at postponing problems. The energy reforms are a good example of that. Today they all proclaim they are patriots and claim that they saved Pemex, but they did not solve the huge gap left in the finances of the state,” energy consultant Marcelo Contreras told IPS.

Although the oil industry reforms were presented as modifications of the energy sector, they basically involve Pemex and its activities, and introduce changes in seven different laws.

The reforms were originally proposed by President Calderón, of the conservative National Action Party (PAN), when he sent a package of initiatives to Congress in April. One of the changes he was seeking was to allow greater investment in the oil industry by private companies, although the sector would remain under state control.

In the midst of the supercharged political climate, in which the left has accused Calderón of trying to carry out a disguised privatisation of Pemex, Congress diluted the government’s proposal with modifications aimed at tightening state control over the industry.

But they also revived some of the president’s suggestions with respect to granting PEMEX greater autonomy, and making its administration and operations more transparent.

What neither the government nor the legislators touched was the functioning of the powerful oil workers’ union, which is tainted with corruption.

Since the oil industry was nationalised in 1938, Pemex has been the country’s foremost symbol of national sovereignty.

Although a majority of lawmakers from the left-wing Party of the Democratic Revolution (PRD) – the main opposition force – negotiated and voted in favour of the reforms, former PRD presidential candidate Andrés López Obrador has opposed them, arguing that they do not completely close the door to a possible privatisation.

López Obrador and his followers, who are shrinking in number according to observers, announced that they would mount civil resistance actions against the reforms. The leftist leader said he would visit all of the offices of foreign oil companies in Mexico to warn them that he would not allow them to “take over Mexico’s oil.”

For different reasons, part of the business community rejected the reforms, because they will make private sector involvement in the oil industry more difficult, although private investment will be allowed, under tight state control.

Calderón, governing party lawmakers and most opposition legislators celebrated the reforms, which they interpret as a demonstration of the ability to overcome ideological differences and negotiate important agreements.

“With this reform, we all won. We have been able to reach agreement on an important and touchy issue in a context of great pluralism and diversity of ideas and proposals,” said the president.

UAM professor Gutiérrez said that time and Pemex’s performance will demonstrate whether the reforms are a good thing and whether the state is able to replace the lost influx of revenues with another source of funding.