Mexico's Oil Dilemma

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Nationalized Oil a Sacred Cow

Even if the foreign companies were willing to join forces with Pemex under simple service contracts just to get their foot in Mexico's door, nationalist politicians would likely mount a legal challenge to their presence. Over the years, successive governments have interpreted the constitution very narrowly as barring all participation by private companies in exploration and production activities of any sort.

When Cárdenas nationalized the oil industry in 1938, kicking out American and British companies, thousands of Mexicans applauded, donating family jewelry and their hard-saved pesos to the government to help pay for the expropriation. Sixty years later, Pemex remains a sacred cow for most Mexicans, who view with suspicion any effort to expand the activities in which foreign oil companies are allowed to engage.

So Morales does what he can. "We just want to be able to work with them [the international oil companies] to do more of the work that we're already doing—to find and pump more oil," he says. Pemex has technical cooperation agreements with a handful of foreign oil companies, which has allowed Morales' team to learn more about directional drilling (i.e., drilling at angles and sideways through rocky formations, instead of drilling straight down, to aim directly at oil reservoirs) and deepwater formations.

Yearning for Joint Ventures

What do foreign oil companies get from the deal, apart from garnering goodwill and getting a rare inside glimpse into the way Pemex is run? Morales says they learn from Pemex about producing the heavy crude that Mexico is known for, and about working with oil flows under high pressure, at high temperature, and within the fractured rock formations typical of Mexico's geology.

Others are more skeptical that the technical cooperation is that significant. David Victor, who heads Stanford University's Program on Energy & Sustainable Development and is coordinating exhaustive studies of the world's leading state-run oil companies, including Pemex, believes the technology-sharing agreements are less about technology than they are about strategic posturing for the day when Mexico may be ready to work more readily with foreign oil majors. "The foreign oil companies don't know what the future is going to look like, so they're jostling for a place in line, to get some information and connections that might be useful in the future."

What Pemex would really like to do is form joint ventures with foreign oil companies to explore for deepwater oil so that its own engineers can learn the ropes. Last year, Brazil's Petrobras approached Pemex about forming a joint venture to drill for oil on the U.S. side of the Gulf of Mexico, and five other foreign companies have made similar offers, Morales says. Forming such partnerships overseas would allow Pemex to gain deepwater experience it could later apply at home. (Such offshore deals aren't unprecedented: In the 1990s, Pemex joined with the private sector in a successful oil exploration and production venture in Argentina, which it later sold. And, with Shell Oil, it jointly owns an oil refinery in Texas where much of the gasoline that Mexico imports is refined.) Morales says Pemex is currently studying the offers to see whether they make strategic sense. "We haven't made a decision yet; we're still evaluating those projects to see if they are better than projects we have here in Mexico," he says. Pemex is only barred from forming such joint ventures at home, where Mexican oil reserves are in play, he says.

Chicontepec Contracts

That may change if the energy reform now under consideration by Mexico's Senate is approved. For now, Morales' team is limited to working with the oilfield service contractors. Since last year, Schlumberger, Halliburton, and Fluor have won contracts (BusinessWeek.com, 4/15/08) to drill hundreds of onshore wells in southern Mexico, including a promising area called Chicontepec. Chicontepec is a complicated field, with dense rock structures that will make it necessary to drill some 15,000 wells, each of which may produce just a few hundred barrels of oil a day.

Pemex is relying on the oilfield service companies to do much of the work because they can deliver a well 20% faster than Pemex employees can, and with fewer operators, Morales says. "The faster we can start pumping the oil, the more quickly the revenues start flowing." That is key to maintaining Mexico's status as one of the world's top oil producers—and exporters.

Smith is BusinessWeek's Mexico bureau chief.