American service and supply companies hope the pending U.S.-Mexico free trade agreement will step up their sales of goods and services to Petroleos Mexicanos.
They testified at a House foreign affairs subcommittee hearing on the oil aspects of the FTA and commented on a recent General Accounting Office report (OGJ, Apr. 20, p. 123).
Rep. Sam Gejdenson (D-Conn.), subcommittee chairman, has been critical of FTA negotiations because it appears they will not open the Mexican oil sector to U.S. firms. Mexico's constitution bans foreign firms from owning Mexican reserves.
William Ramsay, deputy assistant secretary in the Department of Energy, said, "There is a powerful traditional belief in Mexico that foreign investment in its oil sector will erode its sovereign control over the nation's lifeblood. This tradition may seem obsolete or far fetched to us, but it is very real in Mexico."
Gejdenson said, "The modernization of Mexico's oil sector will require capital and expertise readily available from the U.S. oil industry, but so far FTA negotiators seem to have ignored this potential.
"The U.S. oil industry needs the business. The industry, particularly drillers, contractors, and manufacturers of oil equipment, has been hurting for more than 10 years now. They have lost more than 356,000 jobs in this sector in the last decade-more than have been lost in the entire U.S. auto industry. Access to trade and investment in Mexico's oil sector could mean the difference between profit and bankruptcy for tens of thousands of small and medium size oil service contractors."
INDUSTRY VIEWS
Charles Hinton Jr., president of W.B. Hinton Drilling Co., testified for the International Association of Drilling Contractors. He said, "Foreign oil ownership is prohibited in Mexico. They intend to stand by that. That's their asset. They don't have to share it, and they won't be forced to share it.
"Today's dismal opportunities for drilling contractors in the U.S., in combination with the bright opportunities beckoning across the border in Mexico and elsewhere in Latin America, provide a perfect fit in supply and demand terms."
But he said tariffs and tax rates are higher for foreign rigs than Mexican rigs, and adding those extraordinary costs into a bid could price a foreign drilling firm out of the Mexican market.
Mexico has withholding taxes of 21% on gross rental payments, 15% on technical assistance fees, a 35% branch profits tax and withholding taxes of as much as 35% on interest payments made to U.S. individuals or companies.
Hinton said, "The tax problems that have an impact on our industry in Mexico include the inability to obtain tax relief for general and administrative costs, having no tax deduction allowed for allocated interest expense, and suffering a withholding tax rate on gross rentals that supposes a ridiculous, unrealistic high profit rate of 60%."
Hinton said U.S. drilling firms have technology and efficient drilling procedures that could save Pemex 25% of its drilling budget.
Robert Alario, president of the Offshore Marine Service Association, said, "Preferential treatment given to Mexican contractors and suppliers is traditional, predictable, and for the most part unlikely to change. The FTA would naturally result in a significant positive impact on our industry at a critical time for us.
"Any contractor desirous of doing business in the Mexican oil sector must find and engage an 'expediter' or 'business agent' with appropriate connections within Pemex. Undeniably, corrupt practices in contracting marine equipment has refreshingly diminished.
"However, it apparently is still extremely difficult, if not impossible, for providers of conventional marine equipment or supplies to compete without a 'connection' within Pemex to facilitate the process of obtaining and maintaining contracts and obtaining payment in a timely fashion according to the original agreed upon terms."
Rudy Prince, chairman of Digicon Inc., testified for the International Association of Geophysical Contractors.
He said, "We believe the negative effect of the Mexican tariff system is overemphasized.
"Import license requirements are fairly complicated in most countries, our own included, and it is not uncommon for our industry to use in-country experts to facilitate importation requirements.
"Similarly, Pemex's procurement practices that favor Mexican companies, while creating some problems, are not remarkably different from requirements encountered elsewhere, including the "Buy American" provisions found in U.S. government contracts.
"In the case of Pemex, this policy has not been applied across all of our industry but rather has been confined to land geophysical crews. U.S. marine geophysical crews have been free to bid for and conduct work for Pemex without nationality restrictions on crew members."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
