In oil boom, Mexico's Pemex struggles
In oil boom, Mexico's Pemex struggles: printer friendly version
By Elisabeth Malkin The New York Times
WEDNESDAY, SEPTEMBER 21, 2005
MEXICO CITY Pemex, Mexico's state oil monopoly, is one of the world's largest oil companies, pumping more than any company outside the Middle East. Prices are climbing and production is at a record.
So why is the company starved for cash? Its proven reserves are dwindling, and last year fell 7.7 percent. Its main oil field, Cantarell, is about to reach its peak production and will begin to decline next year. Without big investment and new oil discoveries soon, Pemex's total production, now hovering above 3.3 million barrels a day, could begin to decline by the end of the decade, analysts say.
Despite lofty prices for oil, Pemex has seen little of the roughly $9 billion windfall above its expected revenue. It is heavily taxed - the government relies on it to finance about one-third of the national budget.
And events this month have shown an uneven will to give Pemex the means to find and pump new oil. President Vicente Fox, a long-time supporter of legislation to lower the heavy taxes Pemex pays, surprised the country by vetoing a bill that would have allowed Pemex to pay $2.4 billion less next year. The tax break had been seen as a cautious first step to transforming Pemex into a modern company, and the rejection dismayed oil executives. Fox again surprised the industry by proposing a more significant, and less politically palatable, change - the opening of some natural gas exploration and production to private investment.
Both opposition parties rejected the idea outright. The legislators argued that any opening to private investment would be a first step toward an eventual sale of Pemex - an assault on national sovereignty.
"We've entered the age of confusion in oil policy," David Shields, an energy analyst and consultant based in Mexico City, said of the recent developments.
Formed in 1938, Pemex is a symbol of national pride, its monopoly rights enshrined in the constitution. Prohibited from inviting foreign investment, or gaining control of its own revenue, the company is unable to search for the vast new reserves that its chief executive, Luis Ramírez Corzo, says lie beneath the deep waters of the Gulf of Mexico. If it wants to invest more, Pemex, already bending under $45 billion in debt, has to borrow even more.
The predicament facing Petróleos Mexicanos, the company's full name, is important to the United States. Mexico is among its top four foreign suppliers of crude oil.
Pemex has channeled its investment into pumping more oil over the past quarter-century, neglecting its refineries and natural gas production. As a result, Mexico now imports about 20 percent of the country's natural gas needs and as much as 25 percent of its gasoline from the United States.
In announcing the natural gas proposal, Fox pointed to the spike in prices after Hurricane Katrina as evidence of Mexico's vulnerability to international natural gas prices. "Let's turn this threat into an opportunity," he said. Unspoken was the concern of what a hurricane of Katrina's force could do to Mexico's oil infrastructure.
The energy minister, Fernando Elizondo, added that if legislators rejected the bill, "it would just keep Mexico on a path of weakness, which Hurricane Katrina has shown will cause us problems sooner or later." Still, as Fox took on the nationalists for their opposition to private investment in energy, his veto of the tax relief bill showed just how hard it is for the government to change its relationship with Pemex.
Mexico's Finance Ministry relies heavily on Pemex to finance the federal budget. The tax relief bill would have let Pemex keep just $2.4 billion - only a small part of the $11.2 billion investment budgeted this year, most of which was borrowed. Analysts and Ramírez Corzo say Pemex actually needs around $20 billion a year to become a world-class oil company.
"There is nothing more important now than fixing Pemex's tax regime," said Eduardo Andrade, president of the Mexican Energy Association, a trade organization of private energy companies that do work on contract for Pemex, and other companies watching and waiting for Mexico to open to foreign investors.
But Fox sided with state governors and the Finance Ministry, which both argued that the bill's final version took too much revenue from them too quickly. Many also saw politics at play in the run-up to next July's presidential election. Fox is constitutionally barred from re-election, but analysts say Mexico's state governors want that cash to help their presidential candidate's electoral fortunes, regardless of party.
Someone in the Finance Ministry worked out what the state governors would lose if the tax bill passed, "and they all got very scared," said Rogelio Ramírez de la O, an economist who has been advising the leading presidential candidate, Andrés Manuel López Obrador, the former mayor of Mexico City. "In an election year, they will need to spend their dues to boost their candidate." Fox has sent the tax bill back to Congress and asked it to reduce the loss to the federal treasury by stretching out the transition period and reducing Pemex's tax forgiveness at the beginning - to about $1.6 billion next year, but rising quickly to between $5.6 billion and $6.6 billion by 2009.
He also urged action to overhaul Pemex's corporate governance and open the company to greater scrutiny. Administration officials have argued that, in return for keeping more of its earnings, Pemex should prove it is attacking internal corruption and inefficiency.
The company is lagging its own production forecasts. Its Web site says it will pump four million barrels of oil a day next year, but the budget Fox sent to Congress earlier this month projects 3.48 million barrels.
The main oil field, Cantarell, which accounts for about 2.2. million barrels a day, 75 percent of Pemex's output, will begin to decline next year by 2 percent, officials say. The question is whether new projects will come on line in time to make up for the shortfall.
Some experts believe that Cantarell will decline much faster than that.
Guillermo Domínguez, an oil engineer who retired as vice president of technology at Pemex's exploration and production subsidiary in 2003, said that Cantarell could begin to decline by as much as 15 to 20 percent by 2008.
"If production in two or three years begins to decline, particularly because of Cantarell, and it takes five to eight years to develop new fields, it will catch up with you," Domínguez said.
At that rate, Pemex's current projects, led by a field called Ku-Maloob-Zaap, will sustain Pemex's current production levels for a couple more years. The only option, he said, echoing Pemex's Ramírez Corzo, is to explore in the deep waters of the Gulf of Mexico. Most of Pemex's platforms are in the shallow waters of the Bay of Campeche, in the southern region of the Gulf.
"They are looking in the wrong places," said Domínguez. "They have to go where they have not gone before."
By Elisabeth Malkin The New York Times
WEDNESDAY, SEPTEMBER 21, 2005
MEXICO CITY Pemex, Mexico's state oil monopoly, is one of the world's largest oil companies, pumping more than any company outside the Middle East. Prices are climbing and production is at a record.
So why is the company starved for cash? Its proven reserves are dwindling, and last year fell 7.7 percent. Its main oil field, Cantarell, is about to reach its peak production and will begin to decline next year. Without big investment and new oil discoveries soon, Pemex's total production, now hovering above 3.3 million barrels a day, could begin to decline by the end of the decade, analysts say.
Despite lofty prices for oil, Pemex has seen little of the roughly $9 billion windfall above its expected revenue. It is heavily taxed - the government relies on it to finance about one-third of the national budget.
And events this month have shown an uneven will to give Pemex the means to find and pump new oil. President Vicente Fox, a long-time supporter of legislation to lower the heavy taxes Pemex pays, surprised the country by vetoing a bill that would have allowed Pemex to pay $2.4 billion less next year. The tax break had been seen as a cautious first step to transforming Pemex into a modern company, and the rejection dismayed oil executives. Fox again surprised the industry by proposing a more significant, and less politically palatable, change - the opening of some natural gas exploration and production to private investment.
Both opposition parties rejected the idea outright. The legislators argued that any opening to private investment would be a first step toward an eventual sale of Pemex - an assault on national sovereignty.
"We've entered the age of confusion in oil policy," David Shields, an energy analyst and consultant based in Mexico City, said of the recent developments.
Formed in 1938, Pemex is a symbol of national pride, its monopoly rights enshrined in the constitution. Prohibited from inviting foreign investment, or gaining control of its own revenue, the company is unable to search for the vast new reserves that its chief executive, Luis Ramírez Corzo, says lie beneath the deep waters of the Gulf of Mexico. If it wants to invest more, Pemex, already bending under $45 billion in debt, has to borrow even more.
The predicament facing Petróleos Mexicanos, the company's full name, is important to the United States. Mexico is among its top four foreign suppliers of crude oil.
Pemex has channeled its investment into pumping more oil over the past quarter-century, neglecting its refineries and natural gas production. As a result, Mexico now imports about 20 percent of the country's natural gas needs and as much as 25 percent of its gasoline from the United States.
In announcing the natural gas proposal, Fox pointed to the spike in prices after Hurricane Katrina as evidence of Mexico's vulnerability to international natural gas prices. "Let's turn this threat into an opportunity," he said. Unspoken was the concern of what a hurricane of Katrina's force could do to Mexico's oil infrastructure.
The energy minister, Fernando Elizondo, added that if legislators rejected the bill, "it would just keep Mexico on a path of weakness, which Hurricane Katrina has shown will cause us problems sooner or later." Still, as Fox took on the nationalists for their opposition to private investment in energy, his veto of the tax relief bill showed just how hard it is for the government to change its relationship with Pemex.
Mexico's Finance Ministry relies heavily on Pemex to finance the federal budget. The tax relief bill would have let Pemex keep just $2.4 billion - only a small part of the $11.2 billion investment budgeted this year, most of which was borrowed. Analysts and Ramírez Corzo say Pemex actually needs around $20 billion a year to become a world-class oil company.
"There is nothing more important now than fixing Pemex's tax regime," said Eduardo Andrade, president of the Mexican Energy Association, a trade organization of private energy companies that do work on contract for Pemex, and other companies watching and waiting for Mexico to open to foreign investors.
But Fox sided with state governors and the Finance Ministry, which both argued that the bill's final version took too much revenue from them too quickly. Many also saw politics at play in the run-up to next July's presidential election. Fox is constitutionally barred from re-election, but analysts say Mexico's state governors want that cash to help their presidential candidate's electoral fortunes, regardless of party.
Someone in the Finance Ministry worked out what the state governors would lose if the tax bill passed, "and they all got very scared," said Rogelio Ramírez de la O, an economist who has been advising the leading presidential candidate, Andrés Manuel López Obrador, the former mayor of Mexico City. "In an election year, they will need to spend their dues to boost their candidate." Fox has sent the tax bill back to Congress and asked it to reduce the loss to the federal treasury by stretching out the transition period and reducing Pemex's tax forgiveness at the beginning - to about $1.6 billion next year, but rising quickly to between $5.6 billion and $6.6 billion by 2009.
He also urged action to overhaul Pemex's corporate governance and open the company to greater scrutiny. Administration officials have argued that, in return for keeping more of its earnings, Pemex should prove it is attacking internal corruption and inefficiency.
The company is lagging its own production forecasts. Its Web site says it will pump four million barrels of oil a day next year, but the budget Fox sent to Congress earlier this month projects 3.48 million barrels.
The main oil field, Cantarell, which accounts for about 2.2. million barrels a day, 75 percent of Pemex's output, will begin to decline next year by 2 percent, officials say. The question is whether new projects will come on line in time to make up for the shortfall.
Some experts believe that Cantarell will decline much faster than that.
Guillermo Domínguez, an oil engineer who retired as vice president of technology at Pemex's exploration and production subsidiary in 2003, said that Cantarell could begin to decline by as much as 15 to 20 percent by 2008.
"If production in two or three years begins to decline, particularly because of Cantarell, and it takes five to eight years to develop new fields, it will catch up with you," Domínguez said.
At that rate, Pemex's current projects, led by a field called Ku-Maloob-Zaap, will sustain Pemex's current production levels for a couple more years. The only option, he said, echoing Pemex's Ramírez Corzo, is to explore in the deep waters of the Gulf of Mexico. Most of Pemex's platforms are in the shallow waters of the Bay of Campeche, in the southern region of the Gulf.
"They are looking in the wrong places," said Domínguez. "They have to go where they have not gone before."
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