The key to the future health of Mexico's oil and gas industry may also be its most politically intractable problem.
Under President Carlos Salinas de Gortari, Mexico has made huge strides in turning around a troubled economy. The catalyst in that turnaround has been a campaign by the Salinas administration to privatize many of the country's state entities.
According to the Institute of the Americas, La Jolla, Calif., by 1991 there were only 280 organizations reported as public, down from 1,155 in 1982. At the same time, state owned operations have undergone restructuring efforts aimed at trimming debt and improving productivity.
However, Salinas' efforts at privatization have not yet touched Mexico's most valuable industry, oil. That remains under control of state owned Petroleos Mexicanos.
Pemex and Mexico's huge oil union have come under increasing criticism for alleged abuses of power. In addition, controversy rages as to the true extent of Mexican oil resources and whether Pemex has the wherewithal to meet domestic demand and sustain oil exports. Critics also contend opening Mexico's oil sector to foreign participation would introduce new efficiencies and cost cutting measures in the cash strapped state oil industry.
At the center of the controversy is the proposed Free Trade Agreement among Mexico, the U.S., and Canada, pushed strongly by Salinas. Oil's role in the FTA may prove the pact's main sticking point.
With or without the FTA, Mexico's petroleum sector is opening up more to foreign companies, at least in the service/supply sector. Among promising developments are successful 1991 turnkey contract drilling jobs conducted for Pemex by units of companies Smith International Inc. and Triton Engineering Inc., both of Houston. Pemex also let turnkey contracts valued at about $100 million late last year to a joint venture of Sonat Offshore Drilling Inc., Houston, and Mexico's EPN SA de CV for all drilling services and equipment for three wells in Campeche Sound (OGJ, Dec. 30, 1991, p. 39).
And as Pemex turns more to public and quasipublic lending agencies, which often require competitive international tenders, such opportunities are likely to increase. Industry observers on both sides of the border say such projects are likely to pave the way for direct involvement of some sort by foreign operating companies in Mexico's oil and gas sector as politically palatable approaches continue to evolve.
FTA STATUS
With Salinas investing so much political capital in the FTA and alarms being sounded about Mexico's oil self-sufficiency threatened by lack of upstream investment by Pemex, some Mexican business analysts contend it's just a matter of time before Mexican oil succumbs to privatization.
That won't be easy, however. The petroleum industry, nationalized in 1938, still evokes deeply rooted nationalistic feelings that stem from the 1910 Mexican revolution. The oil industry and its labor union are still admired by many Mexicans because they have been at the center of nationalist economic policy and symbolized historical feelings of political sovereignty.
Retaining an oil monopoly for Pemex continues to be defended by powerful, entrenched economic and political groups. For a long time, Mexican economic policies have been dominated by fear of excessive influence from foreigners, particularly the U.S.
Exploiting that fear in the last presidential election in 1988 was Salinas' main opponent, Cuauhtemoc Cardenas, a leftist candidate and son of former President Lazaro Cardenas, who was responsible for nationalizing the oil industry in 1938. Cardenas garnered a surprising number of votes and gave the PRI, Mexico's ruling party for 60 years, a run for its money.
A charismatic leader of the national opposition, Cardenas is expected to make another bid for the presidency in 1994. Oil privatization could be a key issue in that election.
Whether the Salinas administration will be able to push for privatizing the oil industry will depend largely upon its success in dealing with Mexico's social problems. Almost 40% of Mexicans live in poverty, and about one fourth of the work force earns only the $4/day minimum wage. A minority still owns most of the nation's wealth.
If success in deregulating the economy does not go hand in hand with strong action on poverty, Salinas could face serious political problems, and the opposition would have ammunition for its claims that privatization benefits only large business groups and the rich.
A U.S.-Mexico FTA also faces political pitfalls in the U.S. Political analysts have suggested the White House may postpone FTA negotiations until after 1992 general elections because of fears it may hurt farmers and cause job losses in the U.S.
OIL IN FTA OUTLOOK
For now, the Salinas administration continues to stand by earlier statements aimed at excluding oil from FTA and privatization.
Salinas said, "Our constitution will not adjust itself to the Free Trade Agreement. The oil industry will continue to be the exclusive patrimony of Mexicans."
Pemex Director Gen. Francisco Rojas said, "Pemex is a symbol of national sovereignty and living proof of the capacity of all Mexicans to create, against all external pressures, the most important enterprise in the country, capable of competing on the same footing with the power of large international consortiums.
"Nevertheless, the upcoming signing of the FTA with the U.S. and Canada is already encouraging concrete cooperation between Mexico's private sector and Pemex toward industrial joint actions, modernization of installations, and a joint search for financing."
The Bush administration late last year stepped up pressure on Mexican FTA negotiators to include trade in energy services and investment in the agreement.
At the same time, Bush and Salinas ordered negotiators to complete a preliminary draft by late January detailing points of agreement and disagreement in key trade areas (OGJ, Dec. 23, 1991, p. 23). The idea was to speed negotiations to prevent the FTA from becoming ensnarled in U.S. election year politics and buoy Salinas domestically by using the FTA to help sustain Mexico's economic recovery program and attract more foreign investment.
OIL: FTA BARGAINING CHIP?
Some Mexican analysts contend oil is the last big bargaining chip in FTA negotiations with the U.S., reported El Financiero International, Mexico City, a national Mexican business newspaper.
In the Dec. 9, 1991, issue of El Financiero, Dolia Estevez wrote, "At a time when Salinas has proposed radical changes in Article 27 of the Mexican Constitution to privatize the collective farms...a move considered to be as controversial and politically explosive as an opening of the oil sector, Mexico's resistance does not make any sense, some analysts contend, except that it is viewer as Mexico's major bargaining card in the final phase of FTA negotiations.
"As the U.S., Mexico, and Canada speed the negotiations, trying to beat the 1992 U.S. electoral clock, Washington could demand the concession on oil in return for a commitment not to postpone the FTA until after the November elections, a strongly rumored possibility, analysts say."
Opponents of efforts to privatize Mexico's oil industry contend Mexico would be hamstrung by the FTA and its energy security threatened in the event of a world shortfall of oil supplies.
Imports currently account for almost half of U.S. oil supplies, and that level is expected to rise to as much as three-fourths in 2 decades even with increased U.S. production and promotion of energy conservation measures, a U.S. congressional study said.
Mexico, however, is among the world's biggest crude oil producers and exporters.
Pemex figures show average Mexican crude oil production the first 8 months of 1991 rose to 2.677 million b/d from 2.548 million b/d in 1990, in turn up 1.4% from 1989's level.
Mexican crude exports averaged 1.277 million b/d in 1990 and climbed to as much as 1.397 million b/d by yearend 1991, the highest level since 1986. Because of higher oil prices stemming from the Persian Gulf crisis, Mexico's oil income increased in real terms 22.6% from the previous year.
Mexico's oil trade balance in 1990 resulted in a surplus of about $9 billion, up almost 30% from 1989.
Opponents of including oil in the FTA also contend U.S. investment in Mexico's oil and gas sector won't be enough to solve Mexico's energy concerns. The government must instead direct more investment by Pemex in exploration and development to avoid a halt to net oil exports after the mid-1990s, critics argue (OGJ, Aug. 27, 1990. p. 20).
In his state of the nation address, Salinas committed himself to this goal but did not offer specifics. Top oil officials have pleaded for greater financial resources from the federal government to halt the trend of increasing energy vulnerability.
"There is a pervasive perception that the petroleum industry has been somewhat ignored and it is time to invest more," one official said.
Further, critics argue Mexico should not emulate the example of the U.S., where a high production to reserves ratio has left the life of U.S. oil reserves at 9.8 years at the current rate of production, compared with Mexico's oil reserves life of 52 years.
However, Mexican reserves estimates have in the past not held up under scrutiny. A recent attention getting flap centers on a claim by a former Pemex official that Mexico's proved oil and gas reserves are only about half of combined 65 billion bbl of oil equivalent (BOE) Pemex claims.
BENEFITS UNDER FTA
Significant benefits would accrue to North American energy markets with a tripartite FTA involving the U.S., Canada, and Mexico, contends G.C. Watkins, president of DataMetrics Ltd., Calgary.
"There have been conflicting statements about whether the Mexicans view energy as on the table for negotiation. If it were, the implications could be substantial," Watkins said in a paper presented at the World Petroleum Congress in Argentina last year.
"The fact that Mexico is not a member of OPEC would assist in harnessing Mexican oil capacity to provide a more efficient pattern of oil and gas supply on the North American continent."
Other benefits resulting from including energy in FTA negotiations among all three countries include:
- Better opportunities for using Mexican oil in U.S. and Canadian refineries, although this would require installation of more upgrading capacity, given the preponderance of Mexican heavy crude.
- The U.S. ban on exports of Alaskan North Slope oil, except for about 50,000 b/d to Canada under the FTA, might be relaxed, thus easing current price and distribution pattern distortions.
- The tripartite agreement might stimulate development of natural gas markets in Mexico. This might provide opportunities for substantial movement of Canadian and U.S. gas into Mexico through a new large scale pipeline.
- Increased private sector purchases of Mexican oil would allow development of policies observing hemispheric energy security, with perhaps a less direct role for the U.S. Strategic Petroleum Reserve (SPR).
Mexico has supplied oil on several occasions to the SPR and became the largest single supplier, accounting for more than 40% of the early 1988 total of more than 540 million bbl in storage. In late 1988, Mexico was providing more than 90% of the fill rate needed to reach the goal of 750 million bbl. After Iraq's invasion of Kuwait, Mexico increased its oil exports to the U.S.
The U.S. remains Mexico's biggest market, absorbing 56% of its crude exports in 1990, or 720.6 million bbl out of a total 1.277 billion bbl.
Despite Mexico's efforts at diversifying trade partners, other markets for Mexico's crude oil exports in 1990 ranked far below the U.S., broken out in market share as Spain 16.7%, Japan 11.4%, San Jose Pact 2.7%, and others 12.8%.
PETROLEUM IMPORTS
There are some disquieting trends ahead for Mexican's petroleum self-sufficiency, regained in 1974 after giant field discoveries in Campeche Sound went on stream.
During the first 8 months of 1991 Mexico's consumption of oil products advanced 3.6% from the same period in 1990. Mexican refineries are hard pressed to meet increasing demand, resulting in a surge of products imports, notably gasoline imports averaging about 100,000 b/d. In 1991, Mexico's gasoline imports represented about 10% of the value of its crude exports.
During 1990, Mexico imported $850 million dollars worth of oil products for a total volume of 103,500 b/d. The single most expensive item was gasoline at a price tag of $360.9 million dollars. Petrochemical imports in the same year totaled 228,900 metric tons at a price tag of $91.9 million dollars, a jump of 322.8% from 1989.
Mexican analysts note that although the country could handle a short term gasoline supply shortfall, a long international oil supply disruption could cause severe dislocations in the country because of its inadequate refining capabilities. Even a recent round of products price hikes will do little to stem the surge in demand, analysts contend.
Environmental concerns could strain that capacity still further. Pemex recently began construction of a 70,000 b/d middle distillates unit at the Salamanca refinery intended to partly replace the 105,000 b/d of middle distillates from the Azczpotzalco refinery closed for environmental reasons in Mexico City.
Mexico has become a significant net importer of natural gas with increasing sales of U.S. gas to the mushrooming maquiladora, essentially a mini-FTA arrangement with reduced tariffs for an industrial infrastructure along the U.S.-Mexican border. Gas imports from the U.S. have jumped from a negligible volume to about 200 MMcfd in just a few years.
GOVERNMENT PROJECTIONS
Mexico's Ministry of Energy, Mines, and State Owned industry outlined a range of scenarios for Mexico's energy sector in 1990-94.
It assumes average economic growth of 4%/year in 1989-1994, energy demand growth outstripping that of gross domestic product growth, and a continuing heavy reliance on oil and gas. It also assumes world oil markets will continue to be volatile well into the 1990s, and oil and gas exploration and production costs will increase because of environmental and technical concerns.
The ministry projects per capita Mexican oil consumption, driven by soaring demand for gasoline and fuel oil, will climb to 11.3 BOE in 1994 from 10.6 BOE in 1992 and 10.1 BOE in 1990. At that rate, the ministry estimates, installed refining capacity will have to increase to as much as 3 million b/d, or more than 1 million b/d above capacity levels currently projected for 1994.
Mexico's current refining capacity is about 1.3 million b/d.
Factoring in proved reserves, present upstream investment rates, and available capital the next few years, the ministry estimates Mexican crude production will remain about flat at 2.5 million b/d through 1994, with about 72% of the total coming from Campeche Sound.
Looking at domestic products demand and refining capacity, the ministry projects crude oil exports will slide to about 1 million b/d by 1994.
The ministry also expects natural gas production will fall to 3.3-3.4 bcfd from 3.5 bcfd in 1988. Accordingly, it recommends development of a specific exploration and production program for gas with particular emphasis on nonassociated gas.
TRITON'S WORK
In April 1991, Pemex put out an international tender for a service contract for work related to an exploratory well in Campeche Sound. Triton subsidiary Marine Drilling Co. won the tender against Mexican and other foreign competitors (OGJ, Apr. 29, 1991, p. 44). At the time of the award, Pemex emphasized the work was under a service contract and not a risk contract, and thus any reserves discovered would "continue to be patrimony of the nation."
Drilling on the 1 Marino Takin NOMQ wildcat in Campeche Sound ended Aug. 30, 1991. Site is 19 km south of Nonhoch field and 70 km north of Cuidad del Carmen. Tests indicated a new field hydrocarbon discovery, but Pemex disclosed no other details.
Using its Marine 10 jack up, the Triton unit drilled the well to 5,210 m in 112 days. Pemex estimated Triton cut costs considerably by completing work on the well in 127 days, compared with the usual 250 days required on a well of this scope off Mexico.
One Mexican industry official said Triton received a $20 million cash payment for its work after finishing drilling, which the source said was about half what Pemex usually pays for this type of work.
SMITH'S CONTRACT
Smith drilled three horizontal wells for Pemex near Poza Rica, Vera Cruz state.
The Mexican industry official pegged Smith's day rate at $250,000-350,000/well.
Smith opened offices in Poza Rica, Villahermosa, Tabasco state, and Ciudad del Carmen, Campeche state, for better coordination with the autonomous Pemex regional offices in these cities.
Smith also will offer its services for another four drilling projects in Nuevo Leon state.
Local press quoted a Smith official as saying, "Pemex is very cost conscious and oriented toward results. Now they want to try new things to increase their efficiency. This is a great change compared with how things were a decade ago."
Smith has been operating two plants in Mexico, producing drilling equipment for more than 30 years. But this is the first time it has performed direct drilling services in Mexico.
Other areas in which foreign companies may cooperate with Mexico's petroleum industry are construction of downstream facilities, to be paid for with revenues from product sales.
The French company Spie Batignolles is expected to begin construction soon on the most ambitious of such projects, a new aromatics complex planned at Cadereyta, Nuevo Leon state, at a projected cost of $600 million.
Pemex let contract to Batignolles and Badger BV for an engineering/financing study of the project last year (OGJ, July 29, 1991, p. 35).
EXIM BANK FUNDING
More work lies ahead for U.S. service and supply companies in Mexico.
Late in September 1991, the U.S. Export-Import Bank approved loan guarantees to support almost $1.3 billion in U.S. exports to Pemex for four projects in Campeche Sound (OGJ, Sept. 23, 1991, Newsletter).
The projects include a 15 well delineation program covering several discoveries and development of Caan, Maloob, and Zaap fields.
Eximbank officials say the loans will enable Pemex to increase oil exports to the U.S. while opening "new and important business opportunities for the U.S. petroleum industry equipment and services sector." Pemex has not yet selected the U.S. contractors for the projects.
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
