Mexico To Open The Floodgates To Foreign Oil Companies
Mexico’s president is calling on lawmakers to pass legislation that would allow foreign oil companies to tap resources in the now-privatized Mexican oil industry, opening up the doors — partially — to companies like Shell and Exxon, which have long eyed the nation’s dense oil resources.
President Enrique Peña Nieto isn’t ridding the nation’s privatized oil industry. Instead, he’s allowing international companies a piece of the pie, yet not enough to drain the Mexican government-owned Pemex Oil, whose revenue makes up one-third of the government’s budget.
While Pemex has been deemed a failure of a company, one that has fallen short of goals and failed to operate for maximum extraction, it did do its part in terms of shallow crude oil extraction. It’s the company’s shale oil, only accessible through fracking, that has stood in the nation’s way of maximum profit.
According to the Canadian Broadcast Corporation, the company’s production has decreased by 25 percent in the last 10 years. Half of the remaining 14 billion barrels of reserves are found in shale formations.
The plan proposed by Peña Nieto would allow oil companies to explore and produce oil, alongside Pemex. While the Mexican monopoly will maintain its resource ownership, it will share profits with outside oil companies. Prior to the new plan, Mexico had worked with outside international oil companies — but the deal wasn’t sweet enough to draw companies with the technology necessary to extract shale oil deposits.
The previous plan allowed oil companies to work on contracts, yet Pemex only gave companies “fees” for their work.
“This is the moment to utilize all of our energy to move and transform Mexico,” Peña Nieto said in a televised speech. “Petroleum and other hydrocarbons will continue to be the exclusive patrimony of the nation. We will continue being owners of the petroleum income.”
Already, oil giants Royal Dutch Shell, Chevron, Exxon and Repson have shown interest in entering into business with Pemco. What is yet to be seen is whether the deal will be sweet enough, though, to attract the type of partnership Peña Nieto is proposing. According to Mexican Finance Minister Luis Videgaray, Mexico would likely reap the rewards from successful drills, with outside companies earning less than 50 percent of the profits.
“Mexico is looking at a competitive situation — they are going to have to attract resources that, frankly, would go to other places. That’s the key for them — they are going to have to open up wide enough and address (risk) enough that at the end of the day companies will say, ‘This may be a risky alternative, but the upside is great enough we can take that risk,” Eric Farnsworth, president at Council of the Americas told the Canadian Broadcast Corporation.
On top of that deal, Peña Nieto will have to sell his plan to the public, which has a history of opposing any move toward privatization. Protests have already emerged this year in opposition to any move toward privatization.
Union workers for Pemex are among those concerned with international oil outfits moving in, as the now somewhat stable positions they hold could soon become compromised with outside partnerships.
Too soon to say, or a deal in the bag?
In 2008, then-President Felipe Calderon proposed legislation that would allow outside companies to own pipeline networks and refineries on Mexican land — a plan that angered Mexicans wary of the influences of privatization.
Thousands demonstrated throughout Mexico, many of whom claimed they’d use acts of civil disobedience to block access to Mexico’s oil wells. Even lawmakers got in on the action, protesting debate of any bill that would lead to any form of privatization.
“I’m ready to do whatever it takes,” Melba Lopez, a retired teacher from Guerrero, Mexico told The Arizona Republic newspaper in the midst of the 2008 demonstrations. “The oil has to remain the property of the Mexican people.”
The year Lopez made her statement, polls show she was among the majority. According to Fox News Latino, a poll taken this year found that nearly 85 percent of Mexicans did not support any form of Pemex privatization.
Mexico’s history of oil is one rooted in pride. After the creation of Pemex in 1938, the government’s oil monopoly has supplied the federal budget with necessary funds, and has allowed Mexicans access to oil, without international companies serving as the middlemen.
Calderon’s plan was different than that of Peña Nieto’s, as it did not include partnerships with foreign oil companies to drill for oil. Yet this time around, the deal includes a form of profit sharing in the extraction, transportation and refinery business. Peña Nieto’s sell to the Mexican people is now one that promises lower prices — and a robust revenue stream.
“The private sector will be able to contribute and this will lead to lower prices,” Gerardo Gutierrez Candiani of the private Business Coordinating Council told the Canadian Broadcast Corporation.
Yet those who are opposing the proposal claim that might not be the case, citing the lack of interest international oil corporations like Shell and Exxon have in investing in Mexican federal programs.
According to Washington Post writer Max Fisher, Mexican law professor John M. Ackerman is on the side of opposition, claiming foreign companies will only use the opportunity to continue to get a “larger slice of the national wealth.”
Other Mexicans are warning that letting U.S. companies in, especially to access oil, will lead to a puppet state for the Americans.
“After (the foreigners) bring their oil platforms, they will bring their armies and their troops,” Jesus Castillo Sanchez, who was taking part in an anti-privatization demonstration, told the LA Times.
Regulations for international corporations fracking Mexican shale is also still not known. The horizontal drilling process, which shoots a mixture of water, chemicals and silica sand into the earth to extract hidden oil, can cause groundwater contamination and raises issues related to wastewater disposal.
The process also requires a hefty amount of water. According to Mexico’s Energy Regulatory Commission, each well requires up to 30 million litres of water.
Marching on, despite criticism
Five years after Mexico’s outrage with Calderon’s proposal, the nation is facing a not-so-bright future in terms of its future oil supplies.
Without funds in the coffers to purchase new technology for extracting shale oil, the nation is in danger of falling down the ladder of oil producers. As of now, it’s the third largest supplier to the U.S., behind Saudi Arabia and Canada.
Peña Nieto has yet to gain full support from constituents in his Revolutionary Party. In order for the Mexican constitution to be amended to allow his proposal to move forward, he’ll need to earn the votes of 53 percent of Mexico’s legislatures, which would require support from 17 out of the 32.
In June, when Peña Nieto was in the discussion phases of how to move forward with Pemex, he showed confidence that the nation’s oil business will undergo transformations, pointing to a former pact among the nation’s three primary political parties, who agreed to Pemex reform.
Still, he’s acknowledging what he sees as the need to move forward, regardless of protest among those who see it as a step in the wrong direction.
“Democracy is about respecting the majority, it’s not about unanimity,” he told the Financial Times. “Although the pact does not include everybody, it includes the most important parties. And there will always be dissident voices — as happens in any country that is liberal and free.”
According to Pemex’s mission statement, the oil giant is poised to undergo major changes through 2016. In order to do so, the company has identified 14 objectives to achieve long term growth and efficiency. On the top of the list is an increase of reserves “by new discoveries and reclassification.”
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