Mexico opening up oil industry to foreign companies

Mexico is in the process of opening up its oil industry to foreign companies for the first time in seventy-five years.

On December 12th, the Mexican Congress’ lower house approved a bill to open up the oil sector to foreign investment.

The bill, close to its final stages of approval, will allow oil and gas companies from around the world to drill for oil and gas alongside PEMEX, the state oil monopoly, in exchange for a share of the profits.

It was first approved by the upper house, the Senate, and then on Wednesday by the lower house, the Chamber of Deputies (Diputados) with 354 votes in favor to 134 against.


Why did Mexico nationalize its oil industry?

By 1921, Mexico was the world’s second-largest oil producer, and supplied about one-fifth of the United States’ domestic demand. In the late 1930s, President Lázaro Cárdenas became frustrated after several attempts to come to a deal with Royal Dutch/Shell and Standard Oil of New Jersey regarding oil revenues.

On March 18th, 1938, he nationalized Mexico’s petroleum industry and reserves and expropriated the equipment of foreign oil companies.

Foreign companies, especially those from the UK were furious, and made sure before they left that nothing was left behind that Mexico could use. It was not until the US entered WWII and sent technical advisers to Mexico that oil production reached pre-nationalization levels.

The UK broke diplomatic relations with Mexico and boycotted Mexican oil and other goods, even though an international tribunal ruled in Mexico’s favor.

Cárdenas founded Petróleos Mexicanos (PEMEX), which later became a model for many countries seeking to regain control of their natural resources. PEMEX is Mexico’s major single source of income. Today Mexico is the 6th largest oil producer in the world.

PEMEX has been an important source of revenue for the country, but also unfortunately, a ‘cash cow’ for money-hungry governments that overspent and bled the company dry decade after decade. Lack of investment has led to inefficiency. Mexican oil production was 3.4 million barrels per day in 2004, compared to 2.5 million today.

The term ‘cash cow’ has many meanings, one of which is a business that is milked until it is dry, with very little money reinvested.

Private investment vital for Mexico’s oil industry

Mexico’s current President, Enrique Peña Nieto, argues that the country needs private investment to modernize the energy sector.

After the vote, Nieto wrote in his Twitter account:

“The energy reform is a fundamental transformation, which will enable Mexico to strengthen its sovereignty and energy security. (The bill) will also boost economic growth and the creation of new jobs.”

Many opposition lawmakers say this is a slippery slope towards selling the family silver and will damage the national interests of Mexico.

During the very long debate in the Chamber of Deputies, there were scuffles and injuries. Deputy Landy Margarita Berzunza Novelo, of the ruling PRI party who represents the state of Campeche, was taken to hospital with a scratched retina after an incident with Karen Quiroga Anguiano, of the PRD (opposition) party who represents the Federal District (Mexico City).

The center-left opposition PRD (Partido de la Revolución Democrática – Democratic Revolution Party) attempted to disrupt the proceedings to prevent the passage of the bill by occupying the podium and barricading the entrance to the chamber.

One lawmaker, Antonio Garcia Conejo, walked around in just his underpants in protest.

Most significant reform since NAFTA

Economists see the bill as Mexico’s most significant reform since the signing of the North American Free Trade Agreement (NAFTA).

If the bill becomes law, which seems likely, companies such as BP, Royal/Dutch Shell, Exxon Mobil, Total, and Chevron will be able to develop the world’s largest area of unexplored crude after the Arctic Circle.

Bloomberg News quoted Carlos Capistran, chief Mexico economist at Bank of America Corp, who said in a telephone interview “The reform will energize Mexico’s economy. Congress was able to pass a better-than-expected constitutional reform.”

Analysts believe the new law could bring in at least $20 billion each year in foreign investment, plus who knows how much if new wells are discovered.

Cuauhtémoc Cárdenas Solórzano, three-times presidential candidate and grandson of President Lázaro Cárdenas who nationalized Mexico’s oil industry in 1938, was quoted by the Mexican newspaper Excelsior as saying:

“(The energy bill) is politics, and socially a retrograde step from 1938, when oil was extracted from the ground without leaving anything for the country” (“política y socialmente un retroceso a 1938, cuando el petróleo se sacaba sin dejarle nada al país”).

The dichotomy every Mexican faces

Mexico signed up to NAFTA, it is a member of the OECD, it is biting at the heels of the first world. The country has embraced every accord available to join the free world, both politically and economically.

Historically, however, the country remembers being trodden on and taken advantage of by its brother next door. California, Florida, Arizona, Colorado, and Texas used to be part of Mexico. These states were taken by the “gringos” (USA).

Lázaro Cárdenas is seen by Mexicans as a man with “cojones” (balls), because he stood up to the US and the other empire at the time, the UK, and drew the line, saying “Ya basta!” (“Enough is enough.”)

Easing up now and giving way in the name of the free market is the current Mexican way for the majority of people. However, there is an underlying fear that history may repeat itself.