Commentary: Pemex: Still in the Dark Ages

Look around Latin America, and you'll see that investment in the oil business has been booming in recent years. Argentina raised billions by selling its woefully inefficient state-run oil company, YPF, which since 1993 has doubled production under private management. In Venezuela, oil majors have plowed $10 billion into joint ventures with state-owned PDVSA. Colombia, Peru, and Brazil--they, too, have laid out the welcome mat for investors.

And then there's Mexico. Even though it was one of the first countries in Latin America to embrace free-market reforms, Mexico is still living in the Dark Ages when it comes to energy policy. Nationalized in 1938, the oil industry remains largely off limits to private-sector companies. And that has hindered the exploitation of Mexico's vast subterranean wealth. Says Juan Camilo Mouri?o, president of the Energy Commission of the lower house of Congress: "Oil riches only benefit a country if they are efficiently used and serve as a tool for development. Here, that hasn't been the case."

Vicente Fox wants to change that. But of the many reforms contemplated by Mexico's President, none seems more problematic than his plans for Petroleos Mexicanos (Pemex), the oil monopoly that doubles as a national icon. Mind you, Fox has not proposed anything as radical as privatization--though he briefly flirted with the idea in his presidential campaign. He is sticking to the more feasible goal of transforming Pemex, which had revenues of an estimated $40 billion last year, into a competitive enterprise. Yet to achieve even this reasonable objective, Fox will have to overcome fierce opposition--which shows just how far Mexico must still go to modernize its economy.

Fox has already rankled the powerful Oil Workers' Union by attempting to inject some private-sector blood into Pemex. The union did not object when Fox tapped veteran DuPont Mexico executive Raul Mu?oz for the CEO post. But when Mu?oz on Feb. 13 named four prominent businessmen to the board of directors, union leaders saw the move as the first step in an invasion of Pemex by the private sector.

Mu?oz may find his options limited in other areas. Mexico's Energy Secretary, Ernesto Martens, estimates that the country must spend around $14 billion a year over the next decade to keep up with soaring demand for energy. The Fox administration would like investors to foot a large share of that tab.

Yet Mexico's constitution bans private participation in the most attractive areas of the oil business--exploration and production. And there is little chance that Fox can convince Congress to back an amendment. Instead, he is expected to push the legal envelope as much as possible by involving private companies in activities where Pemex lacks experience, such as gas-field management.

Most Latin nations have shed fears of foreign participation in the oil sector. Not Mexico. The result of this stubbornness could be dire. Proven reserves have stagnated for nearly two decades, at 28.3 billion barrels of crude, for lack of investment.

BIG LOAD. Pemex urgently needs to sink some $4.5 billion a year over the next decade into exploration. Mexico's Congress is debating fiscal reform designed in part to ease Pemex' tax burden, thereby freeing cash for such investments: 61% of its gross revenues go to the Treasury--which in 1999 left the company with a $2 billion net loss. But Fox's center-right National Action Party lacks a congressional majority, so fiscal reform is likely to be a drawn-out battle.

Meanwhile, Mu?oz must enlist the cooperation of the Oil Workers' Union. Otherwise, his efforts to root out inefficiencies and corruption will go nowhere. Yet to gain the union's backing, Mu?oz may have to guarantee that there will be no layoffs while the company is being restructured.

Sooner or later, Pemex' bloated payroll will have to be trimmed. At 129,159, its workforce is nearly 2 1/2 times that of Venezuela's PDVSA, a state-run oil company with comparable revenues. Fox and Mu?oz are nudging Pemex in the right direction. The question is whether Mexico can afford the go-slow approach. By Geri Smith

Smith covers politics and busi-ness in Mexico.

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