The oil industry contracts granted by the Mexican government since 2014 have not included the social impact assessments required by law. The photo shows the Abkatun-A Permanente shallow-water platform in the Campeche Sound, where a fire broke out on Apr. 1, 2015 off the coast of the state of Campeche in southeastern Mexico. Credit: Courtesy of PEMEX

By Emilio Godoy
MEXICO CITY, Dec 23 2015 (IPS)

Mexico’s hydrocarbons law stipulates that oil contracts must include a social impact assessment. But this has not been done in the case of the oilfields granted to the country’s former oil monopoly, Pemex, or to private companies since the industry was opened up to private investment.

Civil society organisations argue that concessions that do include a social impact asessment are illegal.

“The authorities have the obligation to carry out the consultations,” Manuel Llano, the founder of Cartocrítica, a Mexican NGO, told IPS. “One interesting detail is that the law says the evaluation must be conducted prior to the public tenders.”

Article 120 of the hydrocarbons law in effect since August 2014 states that the energy ministry must organise consultations to obtain free, prior and informed consent from indigenous communities that will be affected by oil industry projects in their territories.

And article 121 establishes that those interested in obtaining a permit for oil industry activity must present a social impact assessment (SIA) to the energy ministry. The energy reform opened up oil exploration, extraction, refining, transportation, distribution and sale of oil and its by-products to local and foreign private investment.“With respect to the shallow water projects, the government argues that there is no social impact, which is why the SIAs weren’t conducted. But one of the long-time conflicts is with fisherpersons because of the damage they suffer due to oil industry activity.” -- Aroa de la Fuente

After Pemex’s monopoly was broken up by the new law in August 2014, the state oil company was allowed to keep 83 percent of the country’s probable reserves and 21 percent of the prospective reserves, equivalent to 20 billion barrels of crude. This selection process was known as Round Zero.

On Jul. 15, the Mexican government opened up Round One and assigned two contracts for the exploration and drilling of deep sea oilwells off the coast of the southeastern states of Campeche, Tabasco and Veracruz. The contracts were signed on Sept. 4.

On Sept. 30, the energy ministry assigned three more contracts, and on Dec. 15 the third public tender was held.

“They haven’t done the assessments,” Aroa de la Fuente, a researcher with the FUNDAR Centre for Research and Analysis, told IPS. “With respect to the shallow water projects, the government argues that there is no social impact, which is why the SIAs weren’t conducted. But one of the long-time conflicts is with fisherpersons because of the damage they suffer due to oil industry activity.”

She questioned the argument that there are no social impacts, if no studies have been carried out to demonstrate this.

Since March, the guidelines for the SIAs have been open to public consultation in the Federal Regulatory Improvement Commission (COFEMER).

According to the “general administrative guidelines on social impact assessments in the energy sector”, drawn up by the energy ministry, the evaluations must assess the likely social impacts from oil industry activity and outline the social impact plans and measures to mitigate potentially adverse effects.

The guidelines require a baseline, representing a starting point for companies to compare actual with projected impacts. The baseline should be established before any oil industry activity begins. It should provide statistics in the following areas: demographic, migration, households and families, education, health services, jobs and labour conditions, social security, housing, main economic activities, local public finances, and tangible and intangible cultural heritage.

The company must also include the results from the analysis of stakeholders – individuals, communities, groups, organisations and institutions – taking into consideration their rights, interests and expectations, as well as their levels of involvement, importance and influence regarding the project.

The SIA must specify whether the impacts are short, medium, long-term or permanent; whether the adverse effects are mild, moderate or severe or the benefits are mild or strong; and whether the impacts are low, moderate, high or very high.

The comments about the SIA process reflect the resistance of companies, especially in the storage and distribution sectors, to conduct them.

The energy ministry estimates 176 million dollars in losses from the cancellation of projects due to the lack of SIAs.

The government argues that the first two public tenders did not require SIAs because they involved shallow water drilling. But the law does not make any such distinction.

Llano said SIAs are important for the defence of territory and for those who wish to legally challenge the areas that have been granted in concession.

The position taken by the government “is serious, because many of the wells are on land,” he said. “They are not complying with the law. They say the first two tenders are in offshore areas, which means no assessment is needed, but there is no legal foundation for this argument. What about the issues of the environment and fisherpersons?”

The expert complained that the government assumes that there are no affected groups, “when it is the assessment that must determine this.”

The government has already suffered its first setbacks. On Dec. 11, a federal judge ordered the permanent suspension of the construction of a wind park in the municipality of Juchitán, in the southern state of Oaxaca, after accepting a legal plea for protection filed by Binnizá indigenous communities.

Native groups and NGOs have fought the Energía Eólica del Sur wind park project by the company of the same name, which would generate 396 MW to be fed into power grids in the region. Their argument is that no free, prior and informed consent was sought.

The SIAs can be a useful tool for local populations. “In the public tenders for oil wells on land, the situation will become more complex, because people are going to try to defend themselves, and this is a mechanism that allows them to do so,” said de la Fuente.

Edited by Verónica Firme/Translated by Stephanie Wildes

Fishermen from the Mexican town of Coatzacoalcos working to contain an oil spill in their fishing grounds in 2012. Credit: Prometeo Lucero/Greenpeace

By Emilio Godoy
MEXICO CITY, Dec 19 2013 (IPS)

As Mexico is about to open its oil industry up to foreign investment, it will need penalties for negligence and regulations that force private firms to follow best practices in order to avoid problems like oil spills, analysts say.

On Dec. 10-11, the Mexican Congress approved the constitutional reform opening up oil exploration, extraction, refining, transportation, distribution and sale of oil and its by-products to local and foreign private investment.

It is a decision that dismantles the very foundations of the 1938 nationalisation of the oil industry.

“This is a good opportunity for the Mexican state to build a robust regulatory framework and above all to develop the capacity to penalise opportunistic or negligent behaviour,” José del Tronco, a professor at the Latin American Faculty of Social Sciences, told IPS.

The expert said that if oil and gas production are stepped up, greater prevention of risks is needed, and companies should incorporate the environmental and human costs of their activities.

Congress passed the reform of articles 25, 27 and 28 of the constitution, making it possible for the government to sign service, production and profit-sharing contracts with private firms.

The reform also allows the government to grant permits or concessions for the exploration and exploitation of oil blocs – a mechanism used in countries like Argentina, Ecuador, Peru and the United States.

The corporations will also be able to store, transport and sell oil products – which effectively breaks down the monopoly of the state-run Pemex oil company.

But Pemex, also a multinational corporation, will be just one more contractor, and will not maintain control over the activity or over the contracts with new operators, which will fall under the authority of the energy ministry.

The regulatory framework, Tronco said, would have to be very different than when it was only necessary to exercise oversight over one company governed by local rules. Multiple operators will participate in a range of activities, and controls and oversight will be hindered without clear rules that take into account international legislation.

In case Pemex commits breach of contract, the companies will be able to turn to international dispute settlement bodies, such as the North American Free Trade Agreement (NAFTA) panel procedures or the World Bank’s International Centre for Settlement of Investment Disputes (ICSID).

The full extent of the reform will be defined by secondary laws that lawmakers will draft in the next few months, and by regulations to be put in place by the government.

The reform was approved in a record 80 hours by the legislatures of 17 of the country’s 31 states – which was needed to enshrine it in the constitution.

Now it has been sent back to Congress for final ratification, before President Enrique Peña Nieto signs it into law.

“International experiences are not encouraging,” Greenpeace Mexico spokesman Raúl Estrada told IPS. “It isn’t clear how the people will benefit from throwing the industry open.

“They say it will draw investment, and that the investment will be spent on the secondary effects of the reform,” such as oil spills and pollution, he said.

The reform has caused political tension. The two left-wing parties in Congress, the Party of the Democratic Revolution and the National Renewal Movement, are opposed to it on the argument that it privatises Pemex and hands over the country’s oil to foreign companies.

Both parties say they will bring legal challenges against the reform and organise a referendum in 2015, based on the federal law on popular consultations passed on Dec. 11.

The reform was voted 95 to 28 in the Senate and 354 to 134 in the lower house.

It was supported by the two traditional forces, the Institutional Revolutionary Party and the opposition National Action Party, along with two smaller parties, Ecological Green and New Alliance.

The government said output of crude would rise from the current 2.5 million barrels per day to three million by 2018 and 3.5 million by 2025, while natural gas production would go up from 5.7 billion cubic feet a day to 8.0 billion by 2018 and 10.4 billion by 2025.

It also projected a one percent rise in GDP by 2018 and a two percent increase by 2025, while promising that 500,000 new jobs would be created in the next four years and 2.5 million over the next 11 years.

The areas where new regulations would be needed are exploration and exploitation of wells deeper than 1,500 metres and shale gas fields, which Pemex has been working on since 2010 with scant results.

After the April 2010 Deepwater Horizon oil spill in the Gulf of Mexico, the National Hydrocarbons Commission (CNH), implemented new industrial safety provisions for deepwater drilling, to prevent such accidents.

The regulations include the assessment of contingency plans and a requirement of accident insurance. But the reform involves a revision of the provisions, so that they also apply to private companies.

“It’s not clear that the state will be more rigorous with Pemex than it could be with private companies. Is it more likely that they will come down hard on Pemex or on Exxon?” Tronco asked rhetorically.

“Do we have the capacity to administer justice in either one of the spheres, public enterprises or private companies? If we don’t, we have to start to build it,” he said.

The U.S. government does not fully implement the new industrial safety and environmental protection standards created after the 2010 disaster, Estrada said.

“We have many many examples of how the law is broken,” he argued. “How does the reform translate into public policies, budget, transparency, monitoring and oversight over the use of resources and the objectives achieved? That is the important part, to see whether these reforms will work or not.”

Greenpeace has protested the way Pemex operates in communities where the oil industry is active.

And such conflicts will be aggravated when the industry is opened up to private companies, Estrada said.

The reform creates the National Industrial Safety and Environmental Protection Agency, which will set industry standards. There are concerns over whether there will be overlap and duplication of efforts with the CNH, the environment ministry, and the federal environmental protection agency, PROFEPA.

Oil, the symbol of modern Mexico, is once again stirring up local political waters, with turbulent debates on the fate of the state-owned oil monopoly and conflicts over the privatisation of key economic and strategic areas.

The leading issues of contention revolve around the reform of Mexico’s state oil company Pemex (Petróleos Mexicanos), pitting advocates of full state control, who call for only minor changes in the company’s administration, against proponents of opening the industry up to private capital in prospecting, crude refining, petrochemical and other activities.

“We have to get back to discussing these issues urgently, with a frank and open debate on the need to modernise, backed by solid arguments. Addressing safety, health, environmental and other practices in Pemex is a pressing matter,” Miriam Grunstein, a researcher with the state Economic Research and Teaching Centre, told IPS.

Mexican President Enrique Peña Nieto, of the traditional Institutional Revolutionary Party (PRI), is in favour of a constitutional reform, proposed last year as part of his campaign platform. The reform would allow Pemex to receive investments from individuals and to partner up with private companies for crude petroleum exploration and extraction, without privatising the company.

In December, after the new administration took office, all the parties with parliamentary representation signed seven agreements on oil-related matters, which included retaining government control over oil resources and implementing reforms to grant Pemex management autonomy.

One of these agreements, known as the Pact for Mexico, covers a number of issues ranging from human rights to the economy, as well as safety and justice, accountability and democratic governance.

“Necessary reforms will be implemented, both in parastatal regulations and in the energy sector and the fiscal system, with the aim of transforming Pemex into a productive public company, without relinquishing state ownership but allowing it to be competitive in the industry,” reads the agreement, which sets out a series of executive and legislative transformations.

In recent years, Mexico’s oil company –which currently yields an average of 2.5 million barrels of crude a day– has experienced a drop in performance, with a contraction in production, decreasing exports, a growing debt and increasing imports, revealing the need for substantial changes.

According to a book on Mexico’s oil industry published in 2012 by industry expert Roberto Ortega, Pemex was the sixth largest oil company in the world in 2004 and by 2011 it had dropped five places to number 11. In crude reserves it went from number nine to number 17 in the world, and in gas reserves it plummeted from number 21 to number 35.

Hydrocarbon imports, including gasoline and other fuels, represent a great burden, as the company’s numbers reveal that in 2012 it imported more than 600,000 barrels a day.

The situation with natural gas is no better, with foreign purchases above one billion cubic feet per day last year.

In 1938, Pemex became Mexico’s most emblematic company when then-president Lázaro Cárdenas nationalised the oil industry, forever linking it to the PRI as a symbol of the country’s sovereignty, and later to the left-wing Party of the Democratic Revolution formed in the late 1980s from a PRI breakaway group.

“The ban on oil exploration concessions, reserve sharing and any form of competition with other prospectors won’t be lifted,” Ortega, a former Pemex general manager, said.

“The fiscal reforms in Pemex go hand in hand with a general reform. There’s no sense in separating them. But these will be the most debated reforms and differences may lead parties to withdraw from the pact,” the expert told IPS, in reference to Peña Nieto’s announcement that he would propose changes in the tax regime.

Pemex is the world’s fourth largest oil producer and the third largest exporter of crude oil to the United States, according to the company’s information. It ranked 34th in the 2012 Global Fortune 500, the annual ranking of top corporations worldwide as measured by revenue, compiled and published by Fortune magazine.

Pemex, which reported 127 billion dollars in revenue in 2012, is subject to a special tax regime, channelling a large part of its income to the state, with little funds left over to invest in prospecting and technological and infrastructure development. The company also represents a source of income that finances 33 percent of the national budget.

The left-wing National Regeneration Movement, headed by former presidential candidate Andrés López Obrador and on its way to becoming a full-fledged political party, has launched a plan of action to defend crude oil, including demonstrations, forums and campaigns to raise awareness on the value of Pemex.

The tension in political and business circles was aggravated by an explosion on Jan. 31 in Pemex headquarters in Mexico City, which killed 37 people and left 120 injured. The authorities have yet to determine the cause of this accident.

“Private investments will prove a healthy injection provided competition and transparency mechanisms are changed. Private is not necessarily good, just as public is not necessarily bad,” Grunstein noted.

In 2008, a much debated oil industry reform was implemented to improve the state company’s administration and strengthen accountability and transparency. Among the measures introduced then were the reorganisation of its Managing Board and the establishment of monitoring and auditing committees to supervise the awarding of contracts and other business deals.

For analysts like Ortega, one of the effects of these changes was the imposition of even more regulations. The state company is governed by some 2,000 rules and procedures and approving a new management project involves a seven-stage procedure.

“If we want to turn Pemex into a competitive company, we need to see if we can do it with the current infrastructure. It can’t be modernised if we don’t first analyse its production capacity and it won’t autonomous while it’s tied to the national budget,” Ortega said.

A report issued in November 2012, under the title “A New Beginning for Mexican Oil: Guiding Principles and Recommendations for a Reform in Mexico’s National Interest”, concluded that “the current oil industry model, in terms of its legal, regulatory and organisational structure, has run its course”, and suggests a legal and regulatory reform for the sector.