With the North America Free Trade Agreement (Nafta) snagged on environmental and labor questions, Mexico is opening a crucial sector of its economy that the pact, at the country's insistence, does not cover. Foreign companies have entered areas of Mexico's oil and gas business previously off limits - including offshore contract drilling. It's a long way from foreign equity interest in Mexican reserves, but it's a start.

These improvements have their roots in changes at state-owned Petroleos Mexicanos (Pemex). They deserve the notice of Nafta negotiators and international oil companies and contractors. Indeed, Mexico's steadfast refusal to make oil and gas part of the agreement was a proper point of contention early in Nafta negotiations, which U.S. officials eventually conceded. Now, despite its Nafta immunity, Pemex acts as though it wants to do business with foreigners.

A WARNING EXPORT

Reasons for Pemex's change of attitude are clear. George Baker, executive secretary of the Consortium for Research on Mexico in Berkeley, Calif., points to a July 1989 Pemex report warning that if production and domestic consumption trends continued Mexico by 2000 would be unable to export oil. The government decided something had to be done, starting with Pemex's notorious bureaucracy and progressing to Mexico's historic insularity in petroleum affairs. Sad as it is to say, the deadly Apr. 22, 1992, sewer explosion in Guadalajara, in which Pemex shared blame, dampened whatever political resistance there might have been toward changing the oil monopoly.

So Pemex has reorganized, trimmed staff, and begun to welcome foreign technology, capital, and management assistance. Non-Mexicans so far have participated in Mexican operations as consultants or contractors without equity interests in production, but their numbers and the list of opportunities available to them are growing. It is obvious that this widening role in oil and gas work for foreigners is a large and necessary step for Mexico. Less obvious but perhaps just as important is the Pemex reorganization.

Until now, the state company has functioned as a single cost center of the Mexican government. It had no system of accounting for internal transfers and thus no valid way of assessing such crucial profitability measures as unit production costs. Economic work subsidized noneconomic work. Efficiency suffered. The Mexican government could not see the economic advantages of an open petroleum industry because it could not evaluate Pemex operations against international standards-until the export warning.

The state company now has four functionally organized subsidiaries that are supposed to work as profit centers. Pemex will still be a political entity, but its standing will depend to a greater degree than before on economic performance. This is progress.

POLITICS AND ECONOMICS

To be sure, Pemex and Mexico have far to go. It will take time, for example, for Pemex to implement an internal cost accounting system; Baker says the process is just beginning. But good things happen when politics yields to economics, things like resource development, wealth creation, and - when governments handle their takes properly - rising living standards for whole societies.

AR of it is happening with Nafta still under negotiation. It's happening because it's good for Mexico, which needs technology and capital, and it's good for foreign contractors and consultants, who need the business. Economics, in other words, is stimulating international trade while the politics of international trade founders. If it keeps up, with or without Nafta, Mexico will still be exporting oil when the century ends.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.

MEXICO TAKES STEPS TO OPEN OIL INDUSTRY

In order to access this content, you must be logged-in and have an active subscription to the OGJ Premium Archive