LEAKED GOVERNMENT DOCUMENTS POINT TO DEEPER MEXICAN PETROLEUM PRIVATIZATION

Mexico's government may be considering deeper privatization of its state owned petroleum sector than had ever been thought politically feasible.

Aug. 16, 1993

6 min read

Mexico's government may be considering deeper privatization of its state owned petroleum sector than had ever been thought politically feasible.

According to a draft of proposed new regulations under enabling legislation of Article 27 of Mexico's constitution, leaked from an unknown government source to the press earlier this month, the government at the highest levels is considering permitting construction and operation of natural gas and refined product pipelines by private companies. In addition, the government is considering converting much of state petroleum company Petroleos Mexicanos' exclusive pipeline system into a common carrier for third parties.

The new rules also would give new regulatory authority to Mexico's Energy Ministry (Semip), with a corresponding reduction in Pemex's operating freedom. And they would allow private imports of natural gas, refined products, and basic petrochemicals.

RESPONSES

Documents outlining the new regulations were sent from an unidentified source to El Financiero, Mexico's national business daily, which published an Aug. 4 article summarizing them.

Controversy erupted over the possible source of the leak, with speculation centering on Pemex, Semip, and the Ministry of Commerce.

Shortly after the El Financiero article appeared, Pemex dismissed the report of such new regulations as "apocryphal." There was no subsequent comment from the two ministries.

Some Mexican analysts note the draft clearly involved months of work and suggested the leak represented a trial balloon for a possible new direction in Mexican oil policy.

Article 27 is the constitutional amendment that vested the state with total monopoly over Mexico's petroleum sector (see related story, p. 55). It was subsequent enabling legislation that created Pemex, conferring upon the state company that total monopoly. Regulations under the aegis of that enabling legislation outline Pemex operating guidelines and in effect set petroleum policy.

CONSTITUTIONAL BAN ALTERNATIVE

While promonopoly forces in Mexico often point to Article 27's prohibition of private ownership of oil and gas reserves as justification for retaining a rigid monopoly for Pemex, some analysts see an alternative.

Mexican petroleum industry analyst George Baker, Baker & Associates, Oakland, contends critical changes in Mexican petroleum policy can occur simply, through changes in such enabling legislation regulations that can be accomplished by presidential approval without having to go through Mexico's congress.

"Mexicans seldom change their constitution; they just change the interpretation of the constitution," he said.

Consideration of new rules to further privatize Mexico's petroleum sector comes at a time when negotiations are growing more difficult amid mounting U.S. congressional opposition over approval of the North American Free Trade Agreement (Nafta).

Although Pemex has relinquished a minor portion of its state monopoly-specifically with regard to certain petrochemicals-most areas of the petroleum sector, notably upstream, remain exempt from foreign investment. That was one of the early sticking points for Nafta negotiations (OGJ, Feb. 3, 1992, p. 16).

However, Mexico's petroleum sector is opening more to participation by service and supply companies. In the latest development, the U.S. Export-Import Bank approved two loan guarantees supporting sale of almost $400 million in U.S. offshore oil goods and services to Pemex (see related story, p. 27).

Baker sees new roles for Pemex and the Energy Ministry embodied in the Article 27 amendments.

New rules would provide for an Energy Commission that would operate as a Mexican equivalent of a U.S. public utilities commission.

The Energy Ministry would operate as a counterpart to the U.S. Federal Energy Regulatory Commission and state oil and gas commissions, giving it approval authority for drilling as well as pipeline permits.

Baker noted, "An unexpected tone of voice appears in the regulations in several places where Pemex's long standing custom of withholding information, even from the Mexican government, is challenged:"

In Chapter II of the regulations, Pemex is required to issue at least once a year a full report on the prospects of the oil industry in Mexico.
In Article 19, Pemex is required to give a full report to the Energy Ministry on E&P activities. The ninth clause of this article requires Pemex to swear under oath that the information provided is correct.
Under the fourth clause of Article 22, Pemex's drilling privileges in a given area may be canceled by the ministry in the event Pemex does not render timely and truthful information about its activities or in the event it hinders onsite inspections by ministry personnel.

PROSPECTS FOR CHANGE

Baker sees prospects for further change in Mexico's upstream petroleum sector in the direction of such new regulations, should they come to pass.

"One hopes that somewhere in the Mexican government such innovative thinking is taking place in the upstream area," he said.

He noted that Pemex sought to refute his claims, made in an article written earlier this year (OGJ, Mar. 1, p. 42) that argued for a need for strategic upstream alliances, on the grounds it has a high exploratory success rate-59% in 1992.

"A closer review of Pemex's performance suggests that Pemex is an excellent exploration company-no question. Pemex would likely do well as an exploration company in the North Sea," Baker said.

"In doubt, however, are Pemex's skills as a production company. Pemex has not undertaken the development of a major oil field in 12 years. Today, in the Ek-Balaam field, service companies report that Pemex and the private drilling contractors are having trouble in getting production up to expected levels.

"Neither Pemex nor the authorities that drafted the controversial regulations have a clear sense of the economics of oil production. Article 23, for example, requires that Pemex optimize the long term recovery of oil and gas while at the same time reducing the nonproductive uses of hydrocarbons such as flaring gas.

"What is missing from this framework is the concept of economic optimization. Pemex is an agency driven by volume goals, not by profit goals.

"So far, the only known way to instill profit goals in large organizations is to introduce the principle of price competition, a step that the Mexican government may be trying gingerly to take in the areas of storage and pipeline distribution of natural gas and refined products."