May 25, 2007


Latin America: Beating The Oil Curse: Mexico's troubled national oil company could siphon some good ideas from Brazil's petroleum success story (Geri Smith, 6/04/07, Business Week)

With oil prices as high as they are, you'd think Mexico's state-run oil company, Petróleos Mexicanos (Pemex), would be awash in cash. But it lost money five out of the past six years and racked up just $3.9 billion in profits in 2006 on a record $97 billion in sales. Why? Because it had to hand almost $54 billion in taxes and royalties to the national treasury last year, accounting for nearly 40% of the government's revenues.

Pemex is Mexico's piñata. Politicians are so accustomed to the steady flow of cash from the company that they've never mustered the discipline to cut government spending or carry out major tax reform. Now, after years of underinvesting in exploration, Pemex is watching helplessly as output from its biggest oil field, Cantarell, declines by 20% a year. At current production rates, Mexico's oil reserves will last less than 10 years, meaning the world's sixth-largest oil-producing country runs the risk of becoming an oil importer.

Contrast Pemex's woes with the situation in Brazil. At the time of the price shocks of the 1970s, Brazil imported all its crude and the economy nearly collapsed. Since then, state oil company Petróleo Brásileiro (PBR ) (Petrobras) has been driven with a missionary zeal that led the country to become self-sufficient in oil last year. The richest deposits were offshore, at depths that hadn't been attempted even by Big Oil multinationals. But Petrobras' engineers developed innovative techniques and equipment that allowed them to pump crude in more than 6,000 feet of water—a record at the time and still among the deepest operations worldwide. To help pay for the effort, Brazil's political leaders floated Petrobras shares on the New York Stock Exchange (NYX ) in 2000, raising $4.1 billion while keeping 56% of voting power under government control. Investors have been rewarded: The stock has since quadrupled in value.

Two state-owned oil companies, two different stories. Pemex and Mexico represent a classic example of what economists call the "oil curse" that plagues countries endowed with so much of the valuable resource that they become complacent—and dependent. Mexico, which nationalized its oil industry in 1938, has spent decades "administering the abundance," as one former President put it, with little planning for the future. The result: By some estimates, production could fall as low as 2 million barrels daily by 2012 from a peak of 3.8 million barrels a day in 2004. Petrobras, in contrast, started from scratch in 1954, pumping just 2,700 barrels of oil daily. Today it produces 1.9 million. "Pemex is like a well-fed dog that has never needed to search for its next meal," says John Albuquerque Forman, a Brazilian energy consultant. "Petrobras is that lean, scrawny dog that has to rummage through the trash cans to survive."

Now Pemex is turning to the hungry hound for help. With 60% of its reserves in deep water, Mexico needs Petrobras' knowhow. The companies signed a broad cooperation agreement last year that may give Pemex a helping hand. "The situation in Mexico is desperate—they are losing their reserves very quickly," says Guilherme Estrella, Petrobras' chief of exploration and production.

John Ghazvinian's new book, Untapped, is excellent on the oil curse, as it applies in Africa.

Posted by Orrin Judd at May 25, 2007 7:38 PM

IIRC, there's this little problem of the Mexican Constitution which impedes modernization.

And they don't call their northern neighbors for help???

OTOH, OJ keeps talking about periodic amnesty. After this round there may not be another, the 70% just might not give in to the tyranny of the minority.

Posted by: Sandy P at May 25, 2007 10:51 PM