Mexico’s Bid for Energy Reform Stirs Passion on Oil Patrimony

Mexico’s president seeks to stem falling oil production by luring foreign money and technology. But the privatization drive faces nationalistic opposition.

Mexico's ambitious president has unleashed a staggering series of reforms in his first year, tackling education, labor relations, and drug crime. But the trickiest gambit of all may be one that strikes at the heart of the nation's pride and its economy: the bid to transform Mexico's energy sector.

President Enrique Peña Nieto, who took office in December, has confronted in oil and natural gas an issue central to Mexico's sense of sovereignty. The day in 1938 when President Lázaro Cárdenas kicked out the U.S. and British oil companies and nationalized Mexico's reserves is celebrated each year as a national holiday. Instead of paying fealty to the corporate interests of its powerful northern neighbor, Mexico eventually became one of the United States' most important oil suppliers, valued as a bulwark against the vicissitudes of OPEC.

But Mexico's secure position among the world's top oil producers is eroding. Its old oil fields are depleting rapidly, and state-owned monopoly Petróleos Mexicanos, or Pemex, lacks both the money and technology to tap its substantial oil and natural gas reserves in the deepwater of the Gulf of Mexico and in the shale formations that run along much of the east coast. (See related, “Pictures: Mexico's Robust Wind Energy Prospects Ruffle Nearby Villages.”

Peña Nieto has pledged to revive Mexico's moribund energy industry, but the path ahead is a political minefield. His proposal—on which the first votes are expected in the Senate this month—would mark the first modest reopening of Mexico's oil and natural gas fields to foreign companies since the 1938 expropriation. Peña Nieto's opponents on the right have blasted the plan as inadequate to lure investment. His foes on the left, meanwhile, have vowed to block what they term as the "theft" of the nation's resources. "It would be like bleeding the nation dry," said Andrés Manuel López Obrador, at a rally of thousands of supporters on the wide Mexico City avenue, Paseo de la Reforma on Sunday.

With emotions running high, the prospect for Mexico energy reform depends largely on Peña Nieto's skill in crafting a plan that opens the door to foreign money and industry know-how while protecting the nation's title to the resources Mexicans hold dear. His move for privatization, in other words, is steeped in appeals to the same nationalism tapped by his opponents.  "This is the moment to utilize all of our energy to move and transform Mexico," Peña Nieto said last month in a nationally televised speech from Los Pinos, the presidential residence. (Related Quiz: "What You Don't Know About World Energy")

Cantarell's Fall

Most of Mexico's oil production has come from three fields in the relatively shallow waters of the Bay of Campeche north of the Yucatán Peninsula, which juts into the Gulf of Mexico. One of the fields, Cantarell, is an emblem of Mexico's oil rise and fall. Discovered by a fisherman in the 1970s, Cantarell once was among the world's largest fields. When production stagnated, Pemex began injecting nitrogen that helped boost production for a few years. Then Cantarell's production began falling rapidly and is now less than a quarter of its peak in 2004.(See related, “To Stem Fall in Oil Output, Alaska Seeks to Slash Industry Taxes.)”

As Cantarell has fallen, so has Mexican oil production, having peaked at nearly 4 million barrels a day in 2004 before falling steadily to less than 3 million barrels per day in 2012. Analysts say that, without new investment, Mexico risks becoming a net oil importer as soon as 2020.

With few easy pickings left, Mexico must turn to oil and gas trapped in deepwater reserves and hard-to-develop shale formations. Pemex has said that with the added cash and technology it could nearly triple the nation's proven reserves by adding about 27 billion barrels of deepwater crude.

Another staggering resource: the geological shale formations that have fed a petroleum and natural gas boom in the United States extend from Texas south into Mexico unimpeded by political borders. A U.S. government assessment this summer concluded that Mexico's unproved shale oil resources exceed its current proven conventional oil reserves, and in fact would rank among the world's top ten shale oil basins.(See related, “U.S. to Overtake Saudi Arabia, Russia as World's Top Energy Producer.)”

But Pemex is saddled with too much deep debt and outdated technology to tackle these more challenging sources. (Related Interactive: Breaking Fuel From Rock)So Peña Nieto has sought to craft a reform plan that would shake up the status quo, all the while pledging that the monopoly would remain in government hands.

The task of energy reform has sorely strained a legislative deal among Mexico's three main political parties, the Pacto por México, which has helped the president overcome gridlock and enact a variety of labor, economic, and criminal reforms. Energy reform's first test comes this month, when Mexico's National Congress takes the first votes on constitutional amendments that would allow foreign companies to participate in producing Mexico's oil and gas.

Working in the president's favor is the fact that Mexico's central government derives more than a third of its revenue from taxes and fees on oil and gas production. "The government is addicted to oil and the revenues from oil," said Jose Larroque, a Mexico-based expert on business structures for the U.S.-based international law firm Baker & McKenzie. "If production continues to decline, the politicians will have less money to spend on social programs, or incentives to business, or whatever," Larroque said.

But the proposals are drawing opposition from Mexico's leftists, including Cuauhtémoc Cárdenas, son of the former president who expelled the foreign oil companies 75 years ago, and a three-time presidential candidate. Another key opponent is Lopez Obrador, who has vowed to lead even bigger protests than when he brought central Mexico City to a standstill after narrowly losing the 2006 presidential election.

The question is if opponents can fill streets with enough protesters to stall the changes, or at least force compromises as they did with recent votes on education reform, said Diana Villiers Negroponte, author of The End of Nostalgia, a recently published book on Mexican reforms.

"This is a serious, serious struggle in Mexico," she said. "These are protests against modernity, protests against globalization."

Sharing Profits or Production

The new energy reform initiative follows past, less ambitious efforts such as limited 2008 changes that did nothing to draw investment from the major international oil companies Mexico sought to attract.

Under Peña Nieto's plan, Mexico would offer profit-sharing contracts, which are akin to structures used by other countries including Iran and Ecuador, Mexican officials told reporters. (See related, “Hugo Chavez Leaves Venezuela Rich in Oil, But Ailing.)” Peña Nieto's success may rely on a sort of sleight of hand—sophisticated accounting that would allow Mexico and the foreign oil companies to both claim they control the nation's energy reserves. The oil companies would like to count the reserves on their books, which is important in reports to investors. Under the proposed reforms, however, Mexico would still claim full title to the oil and gas, said Larroque. "It's a little bit contradictory. But it's more an issue of semantics. There are ways you can word around definitions to achieve the same goal of booking reserves."

Negroponte said it's unclear if such an arrangement would provide enough economic interest to the foreign oil companies to satisfy corporate regulators in the United States and elsewhere.

Pemex officials are said to be negotiating the accounting issue behind closed doors with U.S. securities regulators, she said: "The question gets very technical."

It also depends on a second round of lawmaking to come after Mexico changes its constitution. The secondary laws will add detail to the arrangements, as will regulations that come yet later, said Jeremy Martin, director of the energy program at the Institute of the Americas in San Diego.

While Mexican officials say they hope to get the laws and regulations in place by next year, it could be five or six years before the country sees any real impact from the changes, Martin said.

It would be easier if Mexico could allow production sharing or even the type of concessions in which the United States and other countries transfer outright ownership of reserves to private companies. "It's a bit of folly to expect concession contracts in Mexico," Martin said.

Mexico's changes may not seem so bold in other places, he added. But it's a dramatic transformation in a country that has tied its national budget, and national identity, to oil production.

The petroleum riches drawn from beneath the nation's land and waters cast a quasi-religious, even mystical, hold over many Mexicans, he said. "What the government has to work through is pretty monumental."(See related, “Cuba's Oil Quest to Continue, Despite Deepwater Disappointment.)”

This story is part of a special series that explores energy issues. For more, visit The Great Energy Challenge.

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