The New York Times
February 17, 2002

As National Oil Giant Struggles, Mexico Agonizes Over Opening It to Foreign Ventures

By TIM WEINER

CIUDAD DEL CARMEN, Mexico Mexico's state-run energy company, Pemex, certainly looks like a world-class operation. Its rigs pump billions of dollars of crude from the Gulf of Mexico, spewing flame and smoke into the sky, as helicopters shuttle skilled engineers from this port to some of the world's richest oil fields.

But Pemex, a pillar of the old governing party during its seven- decade rule, is still mired in patronage and intrigue.

Today Petróleos Mexicanos, the company's full name, is "a combination of an oil company and a bureaucracy," said its director, Raul Muñoz Leos. It was created in 1938, when Mexico nationalized its oil operations. Foreigners, chiefly Americans, had controlled every drop of oil in the country, which at its peak represented one-quarter of the world's production. Mexico's Constitution was amended to forbid foreign exploitation of its oil and gas.

But now Pemex desperately needs billions in new investment for exploration and refining, financing that Mr. Muñoz Leos said could only come from foreign sources. And that would require an ideological shift as radical as the one back in the 1930's.

What is at issue is whether Mexico is ready to open Pemex, a symbol of nationalistic pride, to foreign participation or influence. President Vicente Fox, who ousted the Institutional Revolutionary Party, or PRI, in elections in 2000, has made promises to modernize the company by allowing some foreign participation. But he faces formidable opposition from Pemex's powerful labor union and other nationalist forces, whose accusations that Mr. Fox is selling out to foreign exploitation could easily become overwhelming.

The PRI, which ruled for 71 years, addicted Mexico's government to Pemex's money. Taxes and duties on Pemex now finance more than one- third of the federal budget. For years, the government has taken almost every peso Pemex made and sometimes more, forcing the company to borrow to pay its tax bill. Pemex made $20.9 billion in the first nine months of 2001, and the government took $22.1 billion away.

That practice leaves little for exploring new fields. Nor can Pemex easily repair old plants, Mr. Muñoz Leos said, so pollution is pervasive and fatal accidents are not uncommon.

"Pemex has been on a declining trend," Mr. Muñoz Leos said. "We have practically reached the limit."

For Mr. Fox to reform Pemex, he will have to confront the old system's byzantine legacy. The company has been shielded from change by its hallowed status as protector of the nation's oil wealth. Schoolchildren still learn that the creation of Pemex after the oil expropriation was the culmination of their nation's independence.

In Mexico, Pemex is power, the "most important entity in the Mexican economy," to quote a United States Energy Department report. It franchises every gas station, fuels every factory and affects every family's pocketbook. Its progress directly affects the United States, which buys about one-sixth of its imported petroleum from Mexico.

For decades, Pemex stoked the political machine of the PRI. The oil workers union, with more than 130,000 members today, was one of the foundations of the party.

"Pemex and the oil union were considered the right arm, financially and ideologically, of the PRI," said George Baker, an independent oil analyst. "One of Fox's goals is to see if you can disassemble that, make the government stand on its own two feet. And the old guard is trying to see that nothing changes."

Mr. Fox pledged to make Pemex a "successful, competitive, honest and transparent" company. But Mexico's Congress has stymied his efforts.

Last year he appointed a new outside board of businessmen to oversee Pemex. Congress spurned it and the board was dissolved. Last month his government charged that the party illegally took $120 million from Pemex during the 2000 campaign against Mr. Fox. Party leaders denied the charges, saying they were politically motivated.

Manuel Bartlett Díaz, a powerful senator from the party, said the accusations were part of a scheme by Mr. Fox "to privatize Pemex." He vowed to block any effort to open up the company to foreign capital.

But within this decade, Mr. Muñoz Leos said, $20 billion to $30 billion in new investment may have to come from abroad.

In March, Mr. Fox will test Mexico's capacity for change when he asks Congress to approve new contracts to allow foreign companies the right to run operations in Mexico's largest natural gas fields. The proposed service contracts, Mr. Muñoz Leos argued, are "well within the Constitution."

"If we were dumb enough to just scratch one of the edges," he said, "that would kill us."

That edge is the one that separates foreign participation from foreign exploitation. The fear that Mexico's prime natural resource might once again go to enrich others "is a ghost we have always been fighting," said Javier Hinojosa, Pemex's subdirector for exploration and production in the Gulf of Mexico.

But if Congress does not allow more foreign investment, Mr. Muñoz Leos warns, Pemex's production will start to plummet, creating severe problems for Mexico's economy.

Mr. Fox staked a good deal of political capital in his first year in office on trying to change Mexico's tax system to reduce its reliance on Pemex and enable the company to spend more of its earnings on its own operations.

But Congress, where the former governing party still holds a plurality, blocked Mr. Fox's tax initiative.

Although Congress in January granted Pemex more money for exploration, it was loath to make the "huge structural changes" required to revamp an "inflexible creature of the state," said Juan Camilo Mouriño, a member of Mr. Fox's National Action Party and the chairman of a congressional energy committee.

Although Pemex employs many talented people, its inefficiencies are huge. Mexico is sitting on the second- largest oil reserves in the Western Hemisphere, after Venezuela, and Pemex pumps about 3.5 million barrels of oil a day, exporting roughly 1.6 million. But its refining capacity is overwhelmed: Mexico must import more than a quarter of its gasoline.

Pemex employs about twice as many workers as Venezuela does to produce about the same amount of oil.

With virtually all its profits going to run the government, repairs and renovations can be hard to finance. Asked if that system affects Pemex's safety record, Mr. Muñoz Leos replied, "I cannot envision how it would not."

This can result in tragedy, as happened recently in a dirt-poor neighborhood on the edge of Acatzingo, about 110 miles west of Mexico City.

Laura Nolasco Sambrano, 28, was asleep in her shack with her two daughters, María Teresa, 4, and Claudia, 10, about 30 feet from a 50- year-old Pemex oil pipeline. At about 11:30 p.m., "an avalanche of black" filled the village, in the words of her sister-in-law, Norma Angelica Gonzáles Juárez, 30. Fumes from the spill killed María Teresa.
 

Pemex will have difficulty cleaning up its safety record without new investments in infrastructure. But the corruption charges brought by Mr. Fox's comptroller general in the alleged campaign finance scheme have some senior congressional figures saying they will refuse to help pass his initiatives to open Pemex. The charges accuse the president of the oil workers' union, Carlos Romero Deschamps, who is also a prominent PRI senator, of scheming with a former director of Pemex, Rogelio Montemayor, a former party governor in the state of Coahuila, to divert millions to the party's presidential campaign against Mr. Fox.

Roberto Madrazo, a Gulf Coast politician from the PRI's old school, is using the scandal to try to become the party's leader and its next presidential candidate. Mr. Madrazo, a former governor of Tabasco, whose leaders have long been awash in oil money, is encouraging an investigation of Pemex, calling for an end to "the old vices that hurt the party, like corruption."

Yet those who oppose change at Pemex remain a powerful force. "Even a small change is interpreted as meaning that expropriation was wrong," said Andrés Antonius, a former undersecretary for energy policy who now works as director of strategic planning at the Autonomous Technological Institute of Mexico. "It was perhaps a very good idea at the time. But it's not a good idea forever."