Mexican Pipeline

...We need to have a hemispheric energy policy where Canada and Mexico and the United States come together," said Silence on hen Bush...

...Like exploration and drilling, refining is stitutionally to pull the oil out of the ground...

...Fox's broad openings would be several steps short of full privatization, but they would allow private capital to build new plants and to invest-at least to a limited extent-in Pemex's petrochemical subsidiary...

...complete the modernization of its six major refineries What remains to be seen is just how attractive and perhaps build a new refinery, probably at Salina Fox's "openings" will be considered outside of MexCruz, Oaxaca...

...In petrochemicals--the most politically controversial area of operation at Pemex-Fox has said that he will seek broad openings for prirs seem to vate capital...

...This is not restricted by law in any sense, yet investors have not shown interest in new plants for a number of reasons, including poor infrastructure, lack of tax incentives, no long-term contracts for purchasing raw materials and other inputs from Pemex and, above all, the high prices of those key inputs, especially natural gas...

...He is a frequent contributor to the Mexican periodicals Reforma, Expansi6n and Siemprel, and is the former editor of El Financiero International...

...It would be surprising to see vast financial resources devoted to achieving giant increases in output...

...Chemical companies say the system does not provide any incentives for them to set up operations in Mexico...

...6. See "Propone Fox techo a petroprecio," Reforma (Mexico City), August 11, 2000...

...As Fox takes office, however, there view that all is far from well in the Mex try and that the new administration mus with highly complex bureaucratic probl There seems to be consensus among Workers at an oil refinery near Mexico City...

...In any case, Bush's suggestion that the two countries would now work together on the exploitation of natural gas in Mexico contrasts with the perception of industry experts in Mexico, who foresee a future in which Mexico-a major oil producer, but not a major gas producer-would remain a net importer of natural gas, perhaps even with increased imports of gas from the United States...

...This belief thwarted all attempts of the past two Mexican administrations to privatize the company...

...The $10.5 billion Cantarell Project should ensure that this field continues to provide over half the nation's total oil output...

...natural gas prices throughout 2000...

...Fox has hinted that he might lobby to remove a Congressional recommendation made in 1997 which limits private investment--foreign or domestic--in Pemex petrochemical plants to 49...

...interests...

...What's electric power more, it can probably count on political support from ict, despite his elements of the "old regime," as well as from the ish for a major larger labor movement...

...The CERA analysts calculated that Mexico's energy sector would require at least $60 billion in new investments over the six-year period of Fox's administration and that "only a portion of that investment can be generated internally within Mexico...

...See "Sacar a Pemex del presupuesto federal, propuesta de Vicente Fox," El Financiero (Mexico City), September 15, 2000...

...This implies a ;ican oil indus- move to allow the company to reinvest its profits...

...presidential debate...

...2. Fox's advisors have called for an autonomous public enterprise...

...37 Mexican Pipeline 1. Armando Leal Santana, head of Pemex's petrochemical subsidiary, told the press that creating subsidiaries within Pemex was an "major error" which Zedillo did not correct...

...Real output and oil export volumes are likely to increase gradually in line with demand and with output accords reached by the OPEC nations in agreement with other oil exporters...

...In 1992, President Carlos Salinas, in the midst of his drive to privatize the Mexican economy, oversaw the division of the state-owned oil monopoly Petr6leos Mexicanos (Pemex) into four subsidiaries, Pemex-Exploration and Production, Pemex-Refining, Pemex-Gas and Pemex-Petrochemicals...

...3 In fact, silence on hemispheric energy policy has been just as much a U.S...

...Plans at the outset of the Zedillo ico...

...Cantarell now produces about 1.7 million barrels a day and output is projected to increase to over 2.2 million barrels a day by 2003...

...5 Meanwhile, on the contentious question of oil prices, Fox has said that there should be a price ceiling of $30 a barrel and that an ideal price would be between $20 and $30...

...They appear to want Pemex to invest bring the barriers down before the end of the year abroad, particularly in downstream (post-production) 2000, thus underlining his sense of urgency and his activities like refining and fuel sales...

...CERA adds that "reforming the current monolithic and bureaucratic energy sector is essential for attracting the outside investment and participation required to meet economic goals...

...3. Comment by George Baker in a press note of October 4, 2000, to subscribers of Mexico Energy Intelligence (MEi), an information service run by Baker...

...Several attempts at privatizing the petrochemical "coming to subsidiary failed during the emex means Zedillo government, though for almost a decade now, petrochema company icals have been considered a "secondary" or "non-strategic" employees in activity-as opposed to the rest union is still a of the oil industry, which continues to be considered "strategic" tend with...

...One such alliance already exists: Pemex and Shell currently own and operate a profitable refin- l uring a trip to Canada and the United States ery-called Deer Park-in Houston, Texas...

...The state-owned oil industry had been looked upon as a key foundation to Mexico's fast growth during the period of "stabilizing development" in the 1940s and 1950s, which was also a period of consolidation of one-party political rule under the auspices of the Institutional Revolutionary Party (PRI), which governed the country from 1929 to 2000...

...In addition, the company has been a source of national pride and a key to Mexico's identity, embodying Mexicans' widespread belief that it enables them to have sovereign control over their destiny and to achieve progress and development with little or no outside help...

...Earlier in his career-indeed, earlier in his campaign for the presidency-Fox had expressed a desire to privatize Pemex, but less than two months before the elections, in a successful bid to win the support of center-left intellectuals, politicians and voters, he recanted and made Fox's advise agree that grips" with P downsizing with 130,000 which the ur force to cor "no privatization of Pemex or of the CFE (Federal Electricity Commission)" one of his Ten Commitments Before the Nation...

...Fox will probably make an effort to get private capital more directly involved in a very aggressive exploration and production program in natural gas, especially to develop fields in new regions...

...6 This position is practically identical to the one adopted by the Zedillo government and is perceived to be in line with U.S...

...Different joint venture options may be drawn up for different product chains...

...s these openings to capital are one area that will continue to b private investment is the produ oil...

...I brought this up policy has bee recently with Vicente Fox, who is the newly elected president...

...Martens was CEO at glassmaking giant Vitro and at airline holding company Cintra (owner of airlines Mexicana and Aeromaxico), while Mubnoz Leos was CEO at DuPont M6xico...

...It will oversee a manan urgent and agement team that will have to solve controversies ded capital for with contractors and suppliers and deal with thousands a great deal of of labor suits...

...That Governor Bush should have mentioned this delicate topic of private conversation," wrote Baker, was "to have violated the Mexican rule of silence in such matters...

...Energy Research Associates (CERA), in September 2000...

...Though it is acknowledged that this will require major investments, it is thought essential to incorporate new oil reserves, to diversify types of crude oil and not to rely basically on the heavy oil from one single field--Cantarell...

...5. Quoted in "Houston Dialogue tells Mexicot energy future...

...Fox, however, like Zedillo before him, is committed to the creation of a more diversified and stable economy, and is not expected to reorient the country's economic strategy heavily towards oil again, as occurred REPORT ON OIL in the 1980s...

...Exploration is expected to concentrate on areas with light oil...

...Congress...

...Support for refining and petrochemicals would help promote domestic industrial integration and growth...

...It will have to strengthen the company the industry in as a whole, make major investments in infrastructure capital that it and overcome the lack of coordination among its subom now, even sidiaries...

...In fa "no-privatization" promise, Fox will pu reform of the power industry that woul4 capital to act freely in building new infr power reform bill will face oppositio and the left, many of whose members to be a "back-door privatization" means Fox considers power reform to be inevitable measure to raise sorely neec new generating plants...

...Fox's first efforts, then, will be geared toward convincing companies that investment possibilities are, in fact, wide open and that what is really needed is a change in mindset...

...We believe that we have to put a ceiling on oil prices in order not to affect the economies of countries with which we trade and do business, because this would affect our own development," he added...

...Fox's victory in 2000 and his apparent need to embrace Pemex as the patrimony of all Mexicans suggests that the oil company is a national symbol that goes beyond partisan lines...

...A private company could receive the additional ethylene NACIA REPORT ON THE AMERICAS 32 REPORT ON OIL output under long-term contracts and build its own wholly owned polyethylene plant...

...Fox seemed to have realized that he could neither win nor govern if he were to go against the basic consensus within society to keep Pemex in state hands...

...The public discussion agenda had itemized only immigration, trade and drugs...

...This should gain time for lobbying conAt home, Pemex will have to spend heavily just to gressmen on the changes required...

...He even suggested that he might ken about...

...The distribution and sale of nies are likely to be sought abroad, especially in refined products, such as gasoline, diesel, propane gas refining, which is off-limits to private capital at and fuel oil, is also likely to remain off-limits...

...The private companies might be expected to enter into joint ventures with Pemex, or to help finance the modernization of Pemex's plants in exchange for a guarantee of receiving the output from the plants...

...This is a subject of controversy throughout Mexican industry, especially due to very high U.S...

...However, as many of its critics contend...

...put into place, In addition, the Fox government will try to redefine e off-limits to Pemex's role and provide it with greater autonomy, so action of crude that it can operate in a more agile manner, based on is a pervasive business rather than political criteria...

...ut would also that "coming to grips" means downsizing a company utional clauses with 130,000 employees--more than any other oil carbons to the company in the world-in which the union is still a politically, and force to contend with...

...It is widely believed that the move was meant to make the company's separate divisions--perhaps everything but exploration and production--easier to sell off...

...It may well become a priority for the Fox Administration to process more oil domestically and reduce Mexico's $5 billion annual trade deficit in petrochemical and chemical products...

...And [we] talked about There has nehow best to be able to expedite declaration the exploration of natural gas in Mexico and transport it up to principles f the United States, so we become less dependent on foreign bilateral el sources of crude oil...

...4. See "Houston Dialogue tells MexicoS energy future," Houston Chronicle, September 15, 2000...

...The current system links Pemex's raw-material prices to "international prices" prevailing in Texas...

...Such con- Administration were to modernize all six of its tracts allow private firms to do practically all major refineries, but finally only one, Cadereyta, near the constuction, maintainence and drilling work on northern industrial city of Monterrey, came close to Pemex's oil projects, but only Pemex is allowed con- completion...

...It t come to grips will thus be "freed" from the federal budget in order ems at Pemex...

...Fox has indicated a commitment to make the energy sector a growth engine for the economy and the key to following through on his commitment to achieve a robust annual growth rate...

...The audits of major Pemex public works to see just where n from unions they stand, in addition to financial audits to see still consider it whether corruption at Pemex has been as widespread sure...

...A more serious sign that that Fox's "openings" are being taken seriously by foreign investors is the upbeat evaluation of Fox's policy ispheric energy ideas published by Daniel Yerjust as much a gin and Sondra Scott, influential analysts at Cambridge Mexican one...

...He may thus use his political capital trying to transform ways that would guarantee to private will hold sway there several years fr...

...It accounts for about 6% of Gross Domestic Product and about a third of all the government's tax income--perhaps even close to 40% in years such as this past one, when world crude oil prices were exceptionally high...

...since the inception of NAFTA, have often been very lucrative...

...Big spending on Cantarell--which has been the mainstay of Mexican oil production for 20 years now-has allowed crude oil output and exports to increase over the past three years...

...The board will no longer be dominated by political appointees, but rather by businessmen, industry specialists and competent technicians...

...This would allow foreign direct investment in gas production, b require amendments to the key constit which reserve exploitation of hydroc state...

...and off-limits to direct private investment...

...The project aims to increase capacity by drilling new wells, adding new platforms and pipelines, and injecting nitrogen into the oil field to maintain pressure in the wells...

...The Fox administration is looking toward private-sector partnership and alliances with a state industry that is tested by competition...

...This basic consensus was borne out by a poll conducted just before the elections by the Mexico City daily paper, Reforma, confirming that 82% of Mexicans still supported the public-sector status of the company nationalized by President LMzaro Chrdenas in 1938...

...rule as a Mexican one...

...Another noteworthy aspect of his statement was remarked upon by George Baker, a Houston-based observer of Mexican energy matters...

...1 Interestingly, this critical statement earned no rebuff from top energy sector officials...

...They are expected to seek ways of making Pemex operate competitively and efficiently with privatesector criteria...

...This past October, just weeks before the administration of Salinas' hand-picked successor, Ernesto Zedillo, left David Shields is a Mexico City-based writer and energy analyst...

...expected to remain constitutionally off-limits to Comprehensive alliances with international compa- direct private investment...

...It is not yet clear whether Mexico's new government will seek to reunify the subsidiaries into a single company, but what has become obvious is that President Vicente Fox, despite enormous pressures from the global oil industry, has ruled out privatization of any of the oil company's subdivisions...

...Fox does, however, despite his pragmatic commitment to public ownership, seem set on changing Pemex by giving it more of a business orientation, getting individuals from the private sector involved in its decision making and, as far as possible, getting private capital to finance its major projects...

...Greater efforts will probably be made to bolster exploration and to diversify areas of production...

...This intention was underlined by his decision to name Ernesto Martens as Energy Secretary and Rafil Munoz Leos as director general of Pemex...

...There has never been a clear declaration of the goals or principles prevailing in regional or bilateral energy policy...

...An early sign that the openings are taken seri36 NACIA REPORT ON THE AMERICAS ously north of the border was candidate George W. Bush's unexpected comment about Mexico's natural gas during the first U.S...

...to work competitively in the market, rather than like Fox's advisors an institution devoted to filling the government's tax Vol XXXIV, No 4 JANUARY/FEBRUARY 2001 33 coffers.2 Fox has said that this new, "autonomous public enterprise" will have an independent board of directors enabled to make long-term business decisions...

...though CFE assets will not be sold...

...He will also attempt to attract fresh investment into the building of new, 100%-privately-owned plants...

...Another energy area in which Fox I broad opening to private capital is the industry-a major gas consumer...

...See "Pemex, a contrapelo de la industria internationall" El Financiero (Mexico City), October 18, 2000...

...In recent years, Martens and Muhioz Leos have been successful leaders of major Mexican corporations...

...Strong candidates for joint-venture investment are Pemex's ethylene plants at the giant Cangrejera and Morelos complexes, at Coatzacoalcos, Veracruz...

...The state has been slow to add infrastructure, to explore for new oil and gas fields and to modernize refineries and petrochemical plants in recent years...

...The role of foreign companies in exploration and production is expected to remain restricted to service work contracts, which, Cows graze by a Pemex oil pipeline in Tierra Dentro, Tabasco, Mexico...

...While the oil workers union ed support for may no longer have as much political power as it once had, it still has considerable ability to mobilize its has promised a membership to resist any proposed job cuts...

...The new administration may also seek to create incentives for new investment in petrochemicals and may try to achieve different kinds of associations between Pemex's petrochemical subsidiary and private companies, allowing some degree of private involvement in administering the Pemex plants...

...The only known bilateral U.S.-Mexico energy accord, signed in 1996, is basically limited to a constant exchange of information between the energy authorities of both nations...

...In his maiden REPORT ON OIL speech to Congress upon taking office on December 1 of last year, he was absolutely emphatic, repeating three times that Pemex would remain under government control...

...Refinery just after winning the presidency, Vicente agreements like Deer Park are at the heart of the still Fox told businessmen that he would act to imprecise concept of the "internationalization of eliminate all barriers to foreign investment in power Pemex" that Fox and his economic advisers have spo- and petrochemicals...

...Fox will inherit an energy industry that is "fundamentally capacity-challenged," wrote Yergin and Scott, due to chronic underinvestment in recent years that caused a tight balance between supply and demand...

...Investment in Pemex overall has been insufficient, except in the case of the country's only supergiant oil field, known as Cantarell, which lies in shallow waters of the Bay of Campeche, close to Ciudad del Carmen in the southeast of Mexico...

...This would be a delicate matter Fox's advisors have not yet expressed such a policy...

...It has never been known, for instance, what criteria (if any) should define how much oil Mexico should export to the United States, or whether Mexico should feel that it has a longterm obligation to continue those exports...

...The Zedillo Administration made some recent signals to foreign companies that production might be opened up totally to risk capital in the not-soprofitable, dry-gas basins of northern Mexico, and that Pemex might leave that region...

...er been a clear The piece was written after f the goals or Fox's energy transition team made a visit to Houston, meetr regional or ing with representatives of the international energy industry.4 ergy policy...

...He has also stated that Mexico would continue to defend a fair price for oil by working together with other oil exporters to make joint decisions on oil supply to world markets...

...Pemex remains vital to the Mexican economy...

...d allow private Fox's government is expected to carry out technical astructure...

...rule as a He is a man I know from Mexico...

...Close to $5 million has already been spent on this project and by 2003 that figure will be over $8 billion...

...It must ensure that the company remain a major oil producer and exporter, as well as an efficient supplier of fuels to the domestic market...

...And even if Fox is successful in finding ways to get greater involvement of private companies in exploration and production of natural gas, it does not necessarily follow that the n n 0 n gas produced would be exported north, especially as domestic demand for gas is growing in Mexico...

...However, Energy Secretary expanding abroad have never come to much in the Martens has said that new policies in these areas will past, nor have these efforts ever had sufficient, long- not go to the legislature until the spring session of term government support...

...Aside from Bush's remarkable exemption of Mexico from the category of "foreign sources," the most significant aspect of his comment was the implication that private-sector negotiations would be strongly encouraged by a Bush administration...

...home...

...However, with will to send encouraging signals to foreign investors the exception of Deer Park, Pemex's attempts at in the energy sector...

...office, a top Pemex official said publicly that the division of the company into four subsidiaries had been a "monumental error," mostly because it weakened the company's ability to compete against the merged and consolidated giants of the global oil industry...

...Indeed, by pledging to rein in oil prices and by promoting foreign investment in Mexico's energy industry, Fox's energy policy points towards a harmonious relationship with his presidential neighbor to the north, as the new administrations in both the White House and Los Pinos, within different sets of historical and political limits, pursue their agendas of expanded private investment and greater bilateral trade...