From Knowledge at Wharton
For years, the Mexican economy has been largely dependent on oil, which provides about 35 percent of the government's revenues. As a result, Petroleos Mexicanos (PEMEX) is a pillar of the Mexican economy, and everything about the state-owned company is of utmost importance for the country.
The people who govern Mexico are driven by a need to transform PEMEX into a more productive company, with improved processes for the exploration, exploitation, storage and refining of petroleum. A wide range of conflicting opinions have been voiced, from the radical nationalists who believe that there is no need to invest fresh capital, to those who believe that this approach is the only way to transform PEMEX into a profitable enterprise.
Experts have calculated that within 10 years, PEMEX will be in catastrophic condition, unable to produce or refine petroleum. This would force the country to import petroleum or another fuel that generates the energy necessary for everyday activities.
Despite the high price of petroleum, PEMEX, which employs more than 100,000 people, is in dire financial condition. In 2007, its debt was more than 6 billion euros, with accumulated liabilities of 37 billion euros.
Although resolving this problem is complicated, experts advise PEMEX to explore and produce oil from deep sea deposits --- those more than 1,000 meters below sea level. To do that, the company needs to have enough capital to invest in machinery, technology and know how.
Experts say that reform must be accompanied by fiscal measures that enable the Mexican government to raise more revenues and become less dependent on PEMEX.
The situation becomes even more complicated when you consider the various political interests of the different parties represented in the country's Chamber of Deputies and Senate. Like a giant snowball, the obstacles to enacting energy reform are growing larger, day by day. Moises Marcos Benitez, a professor at the Escuela Bancaria y Commercial (EBC), a banking and commerce school in Mexico City, notes that "The government cannot manage the reform efficiently if it is divided into political factions. The PRI wants to enact its reform; the PRD opposes it; and the PAN (the party in power) supports letting in private capital. What we need are agreements that contribute to making the reform perfect."
For Humberto Aguirre Aguirre, also a professor at EBC, there is no way to deny that energy reform is necessary because "the (Mexican) government doesn't have the money required for investing in PEMEX. If the government can't do that, then the private sector should do it. And you need to invest so you can extract crude oil from deep wells."
Mexican President Felipe Calderon told the press recently that there are three ways to resolve this situation. "The first way is we stay the way we are. The second is, we devote more of the federal budget (to energy reform), although that won't be enough. Third, we could look at what other public companies have done around the world."
Aguirre adds that Mexico would hardly be the only country to manage private investment in its energy sector. "Countries such as Spain and Italy have brought private investment into their energy sector, and they have not lost their sovereignty."
The closest model for this approach may be Petrobras, the Brazilian government energy company. For more than a decade, Petrobras has undertaken a modernization process that has enabled it to be at the forefront of deepwater exploration. At the end of 2007, Petrobras discovered a gigantic deposit of crude oil on the Atlantic coast of that country Brazil, which increased its proven reserves by 50 percent.
When it comes to energy reform, the government must play an extremely important role, notes Aguirre. "It has to provide sufficient guarantees for private investment. The government must maintain control of PEMEX. It must do a perfect job of setting limits on the way everything works, and on how all of the players take part in the business."
Until recently, people didn't know which companies were interested in investing with PEMEX. Lately, the news has been filled with talk about a possible alliance between Petrobras and PEMEX.
Calderon and his Brazilian counterpart, Lula da Silva, have already discussed the possibility of creating a new enterprise -- a third company (neither PEMEX nor Petrobras) that would be in charge of drilling for crude oil in Brazilian territory in order to boost Mexico's oil reserves. The new company would also provide services on Mexican territory without getting involved in those areas that are prohibited by the Mexican Constitution.
Aguirre says that "The only way a company invests under these conditions is if you establish the laws that are required for guaranteeing private corporate investment."
The plight of PEMEX is quite complicated. A series of conditions must be reconciled if energy reform is going to be carried out successfully. The great challenge of the Calderon government, experts say, is to reconcile all of those interests in a way that benefits the country. The government must create the kind of plan that effectively achieves a consensus -- the sort of plan that is strong enough to be worth all the effort.
On April 9, President Calderon announced that he had delivered his energy reform initiative to the Mexican Senate. Calderon has explained that his plan involves placing "citizens bonds" (in PEMEX) that raise enough money to "guarantee PEMEX will continue to belong to every Mexican. For the first time, we Mexicans won't merely be the owners of our petroleum; we will also profit directly from the earnings the company earns." The President has also signaled that PEMEX will have financial autonomy.
All of this means that the energy reform initiative will provide greater autonomy to the publicly owned PEMEX, so that it can be managed much more efficiently. At the same time, the Mexican government will try to maintain its control over the company. All of Mexico is waiting to see how energy reform turns out.