Mexico oil: The Petrobras model (?)

Mexico oil: The Petrobras model

November 10th 2011

FROM THE ECONOMIST INTELLIGENCE UNIT

Will Pemex be partially privatised? It is possible, but not likely.

Last month, Enrique Peña Nieto, the telegenic frontrunner for the presidential candidacy of Mexico’s Institutional Revolutionary Party (PRI), proclaimed that he believed in the modernisation of Petroleos Mexicanos (Pemex) as a driver of economic growth in the country. On this point, Mexico should consider applying the so-called Petrobras model to Pemex, he argued. This is a roundabout way of saying that Pemex should be partially privatised, as Brazil’s Petroleo Brasileiro (Petrobras) was when it listed on the New York Stock Exchange in 2000.

This may sound uncontroversial to outsiders. Pemex wants to tap Mexico’s potentially abundant offshore hydrocarbon resources (see article), but is short of technology, expertise and cash. In October, it announced its biggest quarterly loss since 2008. Attracting overseas money and know-how, as a restructured Petrobras did, could help turn the Mexican group around. Yet in Mexico, the first country to nationalise its energy assets (in 1938), this is the stuff of controversy. An attempt in 2008 by the current president, Felipe Calderón, of the National Action Party (PAN), to partially privatise Pemex was watered down in the face of stiff resistance from the public and rival political parties—including the PRI.

Mr Peña Nieto’s remarks have therefore caused a stir. While industry experts applaud him, figures on the left denounce his proposal. The PRI itself is divided. Relatively conservative and nationalistic figures are said to be dismayed, although Mr Peña Nieto’s only rival for the party’s presidential candidacy, Manlio Fabio Beltrones, has since declared his support for a more open approach to managing the oil sector.

In Petrobras’s footsteps

Invoking Petrobras appears politically astute. If it follows in Petrobras’s footsteps, Pemex would welcome private and foreign capital but, crucially, the government would keep majority control. Petrobras’s successful overhaul is widely viewed as a blueprint for turning a national oil company into a commercial operation without selling off national assets.

Bringing in outside cash should bring benefits beyond merely injecting of new funds. Greater accountability to shareholders would improve Pemex’s corporate governance. A US listing would bring oversight by the Securities and Exchange Commission and the Mexican equivalent, the Comisión Nacional Bancaria y de Valores, tightening controls on the company’s finances.

Such an overhaul promises a change of mindset at Pemex. With privatisation, Brazil allowed Petrobras to run itself as a company rather than as a state enterprise. Suddenly, it was able to make important financial decisions on its own; to invest in not just exploration and production but also innovative research and design; to choose its business partners; and to plan strategically. These changes made it possible for Petrobras to become a world leader in deepwater technology. Furthermore, they spawned a thriving Brazilian oil industry. Services firms, consultants, engineers, and lawyers all blossomed, and in short order Brazil became an oil-exporting nation.

Battles ahead

A similar transformation would be harder to make in Mexico. Constitutional changes are probably necessary. Risk-sharing contracts would be needed, as would a looser Pemex monopoly over the oil and gas sectors. For this, the support of two-thirds of the Mexican Congress would be required. Yet a president attempting such reforms would incur the wrath of not just the left, but also Mexican nationalists and the powerful Pemex union—not to mention potentially large swathes of the Mexican public.

Presidential candidates will not be chosen until March 2012 and congressional and presidential election will take place simultaneously, on July 1st 2012. Although Mr Peña Nieto is the overwhelming favourite among the public, the PRI is unlikely to secure a working majority in Congress. Mr Peña Nieto would thus need to persuade members from other parties to support a restructuring of Pemex. This would be an extremely difficult task, since the PAN will have little incentive to co-operate with the PRI: there will be no election on the horizon, and the PRI has in any case consistently blocked PAN initiatives since 2000. Even if Mr Peña Nieto won support in Congress, a restructuring of Pemex could require a change to the constitution or at the very least a constitutional reinterpretation. Given the Mexican public’s traditional antipathy to foreign investment in the oil sector, making such a change is likely to prove unpopular, so would be devilishly hard to accomplish.

Oil production trends may drum up the necessary support for radical measures, though. Output dipped from 3.9m barrels/day (b/d) in 2004 to 2.9m b/d last year, according to Economist Intelligence Unit estimates (see chart). By 2013, some analysts think that output at the important but ageing Cantarell field will dwindle further, while Ku Maloob Zaap (KMZ), Mexico’s most prodigious field, will also begin to decline. We forecast that production will fall to 2.3m b/d by 2015 and 2.0m b/d by 2020. (Predictions that oil production will stay on a downward path are disputed by Pemex: its CEO, Juan Jose Suarez Coppel, claimed recently that Pemex will be able to boost output to over 3m b/d by 2015.)

At the same time, as home-grown demand for crude rises, Mexico could be in danger of becoming a net oil importer before long. Resulting pressure on both Pemex’s finances and the government's fiscal position—Pemex provides around 40% of federal revenues—could bring public and elite opinion behind fundamental reform of the sector. The argument for Pemex becoming more like Petrobras in order to stem the decline in production would carry more weight. Like Petrobras, Pemex could focus on deepwater exploration: the relatively unknown seabed within Mexican territories in the Gulf of Mexico is an exciting prospect. Big finds have been made on the US side close to Mexican waters.

By making an issue of Pemex so early in the campaign, Mr Peña Nieto is giving himself time to gauge the public’s reaction to his ideas—and, if necessary, to backtrack. Should he and the PRI decide to pursue it further, the issue will be one of the most hotly disputed of the election. If Mr Peña Nieto’s proposal clears all these hurdles, a decision to follow the Petrobras model would fundamentally change the face of Mexico’s oil industry. But, given the political impediments to reform, the rejuvenation of Mexico’s oil sector is a less likely scenario than that of our core forecast: continued decline.

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