Mexico ponders how to boost faltering state oil company

McClatchy NewspapersJuly 31, 2008 

MINATITLAN, Mexico — Pungent smoke billows from aging petrochemical plants here. Foul-smelling bluish water gathers in pools outside the walls. Fading paint announces the creaky Lazaro Cardenas refinery, a perfect metaphor for one of the world's biggest and most antiquated state oil companies.

Petroleos Mexicanos employs more than 147,000 people and has long operated as a state within a state, with its own hospitals, pensions and integrated business operations.

But Pemex has historically overinvested in a bloated work force and underinvested in new or expanded refineries and sophisticated oil exploration and production. That's evident in the rust, smog and environmental contamination here in the state of Veracruz and further east in the state of Tabasco.

A big reason for the decrepit state of affairs is that much of the national oil company's earnings go directly to the Mexican treasury.

Given the sorry shape of Pemex, President Felipe Calderon in April proposed a controversial energy overhaul that would give it more control over its budget and allow private foreign firms to search for deep-water oil and to build and run refineries.

Now the nation is in knots over whether and how to modernize the 70-year-old company and find new sources of oil before Mexico's easy-to-extract oil goes dry.

Mexico is already a net importer of gasoline — most coming from the United States — as it's unable to refine enough oil to meet its demands. Within a decade, Mexico could compete with the United States for ever-scarcer barrels of imported oil.

Oil production in Mexico — until recently the second largest oil exporter to the United States, after Canada — is falling precipitously because output at the Cantarell offshore oilfield is declining faster than expected.

In fact, Pemex officials on Wednesday reeled back their output projections for the second time this year; they now say that Mexico will produce 2.8 million barrels per day this year, not the 3.1 million first forecast.

It falls to Carlos Morales Gil, the director of exploration and production, to turn things around. But in an interview on the 41st floor of Pemex's towering Mexico City headquarters, he warned, half jokingly, that it could take a century to tap Mexico's vast but unproven oil reserves.

Morales doesn't have that much time, nor much room to maneuver. Restrictive rules govern contracting, and little of what Pemex earns can be reinvested. About 40 percent of federal spending in Mexico comes from oil earnings.

In Morales' best guess, there are 30 billion barrels of yet-unfound oil under the deep waters in Mexico's portion of the Gulf of Mexico. U.S. companies have drilled hundreds of test wells in the U.S. deep waters, but Pemex has drilled just four to date in Mexico's deep gulf waters.

That's where Mexico's wrenching national debate over Pemex begins.

Ever since President Lazaro Cardenas nationalized the oil industry in 1938 and kicked out Standard Oil, which much later became ExxonMobil, Mexicans have equated Pemex with national sovereignty. Allowing foreigners to extract oil in Mexico, even if on behalf of Pemex, is simply anathema.

Two deep-water teams operate for Pemex now, and three more will arrive in 2010. With five operators, Mexico's annual deep-water drill rate will grow to about 12 or 13 wells, still woefully insufficient.

"I need to drill in deep waters about 1,500 wells in order to find these 30 billion barrels I mentioned, because not all will become producers," Morales said. If the overhaul doesn't progress and he must drill at current rates, "it implies it will take me 100 years to discover all the hydrocarbons that are there. Meanwhile, nobody benefits from them."

It's not just oil that troubles Mexico. Pemex hasn't built a new refinery since 1979. As the country's economy and middle class grew, the six surviving Pemex refineries couldn't keep up with the demand for gasoline.

Mexico imported 360,700 barrels per day of gasoline in March. The energy ministry projects imports of nearly 500,000 barrels per day within seven years.

Calderon's proposal would allow Pemex to contract with private companies to build and operate refineries. The left-leaning Party of the Democratic Revolution strongly opposes this idea, warning that big U.S. multinationals such as Halliburton soon would establish influence over Pemex.

Pemex was completely off limits in the North American Free Trade Agreement. That's an oddity given that the 1994 pact otherwise opened up all trade among the United States, Canada and Mexico.

"To my knowledge Pemex was never on the table . . . it was politically out of bounds," recalled James Jones, the U.S. ambassador to Mexico at the time.

Indeed, Mexicans still celebrate the date of the expropriation decree on March 18; it's feted in song, and even the professional baseball park in Minatitlan is called the 18th of March Stadium.

"Petroleum allowed during many years, during 40 or 50 years, for Mexico to grow economically, to industrialize. It impacted both employment and regional development," said Cuauhtemoc Cardenas, 74, son of the legendary president and a national center-left leader in his own right.

Cardenas supports giving Pemex greater control over its budget but doesn't want to see his father's act undone by allowing Pemex to contract with foreign companies. Such contracts now are largely limited to technical advice.

"I think nationalization is a fact that happened 70 years ago, and was a positive. It benefited the country, and I think there isn't a single reason that carries weight to break these productive chains of Pemex," he said in an interview.

Pemex leaders think otherwise.

Today oil fetches record high prices, yet Pemex's output falls because production at Cantarell — a complex of four big oil deposits along Campeche Sound — has dropped from about 2 million barrels per day in 2005 to 1.5 million last year. Exports to the United States have fallen from 1.81 million barrels per day to 1.68 million over the same period.

Pemex enjoys one advantage over most competitors: low operating costs. Its current lift cost — the per-barrel cost of extraction — is about $4.20, among the lowest in the world. Morales estimated his deep-water extraction cost at around $17 per barrel and $10 a barrel for complicated onshore oilfields such as Chincotepec.

Both compare favorably to the $75 cost for an average new marginal barrel of oil elsewhere in the world.

A giant question mark in the proposed foreign-contracting plan is what it holds for labor, which isn't addressed directly. If Pemex were given greater autonomy, could it reduce its bloated work force?

"These legal initiatives have nothing to do with unions," Cardenas said, making it clear that he considers the issue off limits.

Workers warn that they'll fight downsizing.

"The energy reform should not harm the (labor) agreements. If it does, it won't fly," warned Jose Manuel Sanchez Urrita, a 24-year veteran of the Lazaro Cardenas refinery in Minatitlan and a member of the powerful oil workers union.

The Minatitlan refinery employed 3,781 workers last year at a facility that has the capacity to handle about 200,000 barrels per day of crude oil but processes about 170,000. The Shell Motiva refinery in Port Arthur, Texas, employs 950 workers while processing 275,000 barrels per day. When Motiva's expansion to 600,000 barrels per day is complete, it'll handle three times as much crude oil as Minatitlan with a third of the workers.

The extra jobs in Minatitlan and in other oil regions reflect that Pemex isn't just an oil company but also an engine for employment and economic development.

For better or for worse, much of southeastern Mexico depends on Pemex. For better, because the company has its own hospitals and health-care system, and for worse, because Pemex facilities often are ringed by environmental disaster.

"Every day there are more (pipeline) ruptures that spill into the fauna, it makes it harder to protect the environment. They don't do anything to plant trees," complained Guadalupe Porras, the mayor of Minatitlan, who seeks a "more active participant" locally.

McClatchy Newspapers 2008

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