Mexico oil monopoly about to end?

Is the 75-year-old oil monopoly in Mexico about to end? Enrique Peña Nieto, the President of Mexico, has presented Congress with a bill that would open up the oil industry.

If the Bill – which aims to change articles 27 & 28 of the constitution – goes through, foreign companies such as Shell, Exxon Mobil and BP will be able to pump crude on Mexican soil for the first time since 1938.

Deputy Energy Minster, Enrique Ochoa, explained that foreign companies will receive a percentage of profits within a risk-sharing model. Companies from abroad would also be able to make claims on a percentage of reserves under U.S. Securities and Exchange Commission rules.

PEMEX (Petróleos Mexicanos) dominates the oil industry in Mexico. Oil has been a state monopoly since 1938.

However, Mexico urgently needs investment and know-how to develop new gas and oil fields.

Private oil firms can currently be awarded service contracts with the industry.

In Peña Nieto’s proposal, oil companies would be able to go much further – sharing the risks and profits in oil and gas exploration and development.

Freeing up oil could double foreign investment into Mexico

Business analysts in Mexico City say that if the reforms are approved by Congress, foreign direct investment into Mexico would at least double.

The Mexican economy would receive its largest boost since joining NAFTA (North American Free Trade Agreement) in 1994.

Peña Nieto and his cabinet stress that these reforms in no way constitute privatization of the oil industry in Mexico. Concessions will not be sold off, they added.

Opposition in Mexico to any oil industry reforms

Mexico’s leftist politicians will resist any changes to the current oil industry status with all their might.

BBC correspondent in Mexico City, Will Grant, said:

“The reform won’t be simple to get through congress. The government faces a complicated task in negotiating with all sides, including the powerful unions. Yet, there is a growing sense among ordinary Mexicans that PEMEX is no longer fit for purpose, is an aging and out-dated institution and that root and branch reform is probably needed.”

Oil production in Mexico has dropped by one-quarter since its 3.4 million barrels-per-day peak in 2004.

Experts, and even the Mexican government are warning that within the next five years the country could become a net importer of oil.

PEMEX’s own initial success also became its major problem. The company’s profits support much of government spending, which undermines its ability to invest in new technologies and fund new projects.

Many are surprised that Mexico, an oil-exporting country for much of the last 100 years, still has to import almost half of its gasoline, simply because it does not have refining capacity.

Mexico – how did the oil industry become a monopoly?

In 1938, Mexican oil workers went on strike against foreign-owned oil firms. They demanded higher wages and better social services.

President Lázaro Cárdenas, in sympathy with the oil workers, started expropriating all oil resources and facilities on March 18th, 1938.

Cárdenas cited the 27th article of Mexico’s 1917 constitution, and nationalized the foreign oil companies that operated in Mexico at the time. These companies were from the USA, UK and the Netherlands.

In 1938, Petróleos Mexicanos (PEMEX) was born; a state-owned monopoly.

A number of governments closed their markets to Mexican oil in retaliation. However, PEMEX grew and became one of the major oil companies in the world.

Today PEMEX earns $80.6 billion in revenue. However, it also pays very high taxes. Recently it has had to borrow massively to make ends meet.

PEMEX currently owes $42.5 billion, including $24 billion in off-balance-sheet debts.

Cuauhtemoc Cárdenas, grandson of the President who nationalized Mexico’s oil industry, said there is no need to alter article 27 of the constitution.

Cuauhtemoc Cárdenas says that 12 secondary laws need to be reformed so that PEMEX can have autonomy in its management and budget.

In an interview with Milenio, a Mexican media outlet, Cuauhtemoc Cárdenas warned that the energy reforms proposed by the federal government would rapidly leave PEMEX in the hands of private groups.