Mexico, which in 1938 was the first country in the world to nationalize its oil and gas sector, formally began the process to amend its constitution on August 12th to end the state-owned-monopoly for energy exploration, development, and distribution known as Pemex.
Over the last ten years, Mexican oil and gas production fell by 30%, while U.S. and Canadian production leaped by 50%, due to new technology and capital investment. Forming joint ventures with U.S. and foreign oil companies will allow Mexico’s to stabilize its production and offers huge opportunities for growth through deep-water exploration and fracking. Modernization of the oil industry heralds a coming economic boom for Mexico and North American energy security for the United States.
Commercial production of crude oil in Mexico began in 1901, and Mexico began exporting oil after substantial investments by U.S. oil companies in 1911. Following the bloody Mexican Revolution, the new government passed the Constitution of 1917 that granted the Mexican government under Article 27 the permanent and complete rights to all subsoil resources in the country. In 1925, the Mexican government decreed that foreign oil companies must register their titles and limited their concessions to fifty years. Thirteen years later, the government expropriated all oil rights and assets.
This nationalization led to a boycott of Mexican oil by the U.S. and the U.K. Mexico responded by exporting oil to fascist regimes in Germany and Spain, until WWII began and exports ceased in 1940. Mexico’s oil output expanded at an average annual rate of 6%, but in 1957 the country became a net petroleum importer after domestic demand exceeded domestic production. In 2007, Mexico was the sixth largest producer of oil, but over time it has dropped to the 14th largest producer. This is despite quadrupling annual investment from $5 billion to $20 billion during the period.
Pemex has always been known for high levels of corruption. The state-owned enterprise officially has approximately 150,000 employees. But tens of thousands of these workers are “aviadores” (aviators): this is the Mexican nickname corrupt ghost workers who are paid each week but never show up to work. To get a job at Pemex, Mexicans have been required to pay cash bribes in U.S. dollars. The cost for a Pemex manual labor union job through the Sindicato de Trabajadores Petroleros de la República Mexicana as a gas station attendant is $6,000. The cost for an administrative management job through the Unión Nacional de Técnicos y Profesionistas Petroleros is $33,000. Pemex also provides the unions $20 million per year to pay for expenses for celebrations such as the anniversary of petroleum expropriation and May parades, economic support for the general executive committee, travel, promotion of cultural and sporting activities, and contract costs associated with the annual revisions to the national collective bargaining agreements.
According to Agencia EFE, a Spanish-language news agency, a Pemex Deputy Comptroller stated that between 2006 and 2010, within Pemex’s largest unit, Pemex Exploración y Producción, there were 153 cases of fraud detected. The corruption reportedly includes: inflating multimillion dollar contracts, giving contracts in exchange for favors, and giving contracts without a license to friends, giving contracts to unqualified firms, and helping criminal groups to steal fuel.
President Peña Nieto and his Institutional Revolutionary Party (PRI) are acutely aware that falling oil production and reserve replacement will accelerate if Article 27 is not amended to encourage joint-venture foreign investment and introduction of proprietary American technologies. Mexico intends to continue to own all subsoil minerals, but foreign firms will now be allowed to form profit-sharing contracts. Pemex lacks the technology and expertise to expand production, such as in the deep waters of the Gulf of Mexico and the shale gas plays in the northeast of the country. To provide political cover for the reform, joint ventures will require 30% Mexican content for equipment purchases to stimulate Mexican manufacturing.
President Peña Nieto and the PRI have partnered with the pro-business National Action Party (PAN) to gain the 2/3 majority in parliament that is necessary to amend the Mexican constitution. The PAN tried unsuccessfully for 12 years to change Article 27 to eliminate monopolies in oil, gas and electricity. With few major disagreements between the PAN and the PRI on the proposal, and with the major pillars of the ruling party apparently in favor of the reforms, Peña Nieto’s efforts now are more of a public relations campaign than anything else.
The United States stands to be a huge economic winner in the modernization of Mexico’s oil and gas industry. American companies uniquely have the capital and the technology to grow Mexican production, and every barrel of oil produced in North America reduces the United States’ reliance on Middle East oil.