Just Below the Surface : Reform of Mexico’s Oil Industry Is Underlying Issue in the Free-Trade Talks

MEXICO CITY — Mexican officials vow that they will respect the constitution in considering any new foreign participation in the nation’s oil industry under a proposed North American free-trade agreement.

“Nothing that violates the constitution,” they declare week after week when the issue arises in the press. But many Mexicans think that waving the constitution is just a bargaining chip in the ongoing free-trade negotiations. After all, a constitution that has been amended over 400 times since it was adopted in 1917 is hardly untouchable.

“The constitution has been touched more times than a woman of the street,” said constitutional scholar Efrain Polo Bernal.

That includes the 1938 amendment that nationalized the oil industry, making exploration, exploitation, refining and distribution the province of the state.

Even without constitutional amendments, Mexico’s oil industry is already changing radically, and many believe that the North American free-trade agreement is really about oil--their oil being sold up north.

Those suspicions are fueled by events that coincide with the free-trade talks, especially an April explosion caused by a gasoline line leak that killed hundreds of people in Guadalajara. The incident cost Petroleos Mexicanos, or Pemex as the oil monopoly is known, a significant loss of prestige, clearing the way for further reforms of the company. There are pressures for those reforms to include more private and even foreign influence in Mexico’s oil-related decisions.

The government is expected to announce a restructuring of Pemex today, and speculation is that it will be turned into a holding company with up to eight subsidiaries acting nearly independently.

Even without a free-trade agreement, Pemex has increased contracting with outside firms, including foreign contractors, and implemented massive layoffs, provoking an oil workers’ march on the capital last week.

Mexico has an ever-widening trade deficit. But it is being balanced out by foreign investment, particularly in the stock market. However, economist Rogelio Ramirez de la O predicts that the only way to keep investment flowing in large enough sums to balance the larger value of imports over exports is to permit foreigners to put money into oil exploration and development.

The United States is already Mexico’s biggest oil customer, buying 56% of all Mexico exports. U.S. chemical companies, such as Monsanto and DuPont, are important investors in the parts of the petrochemical industry where foreign investment is permitted.

U.S. oil tool and service companies, as well as engineering firms with petroleum expertise, are active here, either in partnership with Mexican firms or on their own.

U.S. and Canadian negotiators are thought to be pressing for an even greater presence in Mexico’s oil industry.

“The petrochemical sector is the most promising of a variety of opportunities in the energy sector, where Canadian firms have exhibited strong international competitiveness,” Reg H. Dorrett, Canada’s consul general in Los Angeles, said at a recent University of Southern California conference.

Mexican officials have said that they will make changes that will permit the industry to become more efficient and internationally competitive.

“Pemex will continue to be a state monopoly, but it should be an efficient state monopoly, as efficient as any international oil company,” said one senior administration official.

To achieve that efficiency, he said, Mexico will clarify rules for bidding on Pemex contracts.

Another area where Mexico is flexible involves reducing the number of petrochemicals that only Pemex in permitted to refine, he said.

Currently, Pemex monopolizes refining of 19 petrochemicals, forcing Mexican industry to depend on the company for supplies of those petrochemicals and to stick with antiquated, multi-facility operating methods that increase costs and decrease quality.

In the United States and Canada, changing such a system is good business sense. In Mexico, any discussion about oil is a discussion about sovereignty and nationalism, values that cannot be summed on a calculator.

Mexico nationalized its oil industry in 1938 after U.S. and British oil companies refused to obey a Supreme Court ruling in a labor dispute. To raise money to indemnify the international oil companies, the government collected coins from school children and jewelry from matrons in an outpouring of national pride.

People tell their grandchildren stories of lining up in front of the Palace of Fine Arts to drop their centavos into the collection box for the oil nationalization. And for schoolchildren whose grandparents forget, textbooks provide illustrated accounts.

Those collective memories, that pride, is what Mexican officials are negotiating when they sit down to talk about oil. Many Mexicans fear that those concepts are being dealt away.

The constitution is already being violated, said Polo Bernal. Pemex has fired thousands of workers and signed contracts with foreign companies that will perform their jobs, from seismic studies to offshore drilling.

There are also reasons to suspect that the constitutional question is a negotiating tactic.

The current administration is not averse to constitutional amendments. Since taking office 2 1/2 years ago, President Carlos Salinas de Gortari has sent Congress constitutional changes that liberalized restrictions on the Church and changed the course of agricultural reform, both historically sensitive areas.

Whatever the government decides, Pemex and oil workers are in a poor position to fight for their turf if Mexico decides to wager the oil chip in the free-trade talks.

“Our union is worse than no union at all,” complained one fired worker. The jailing of the allegedly corrupt boss of the oil workers shortly after Salinas’ inauguration left the once-proud union without independent leadership, he charged.

Oil workers are taking their case to the streets in demonstrations--such as the march toward the city during the weekend--and to the people--through leaks to the press.

One such story that appeared in the political magazine Proceso in December and was reported by international wire services caused Mexican stocks listed on foreign markets to plummet. Two former Pemex engineers charged that the oil company has overstated its reserves: More than half the oil included in its figures cannot be recovered economically.

Such incidents have contributed to a decline in Pemex’s prestige and to an erosion of popular support for the company. Those feelings came to a head with the explosion in Guadalajara.

Since then, cities and towns throughout the country have demanded that Pemex installations be removed from their communities.

The government has responded by announcing a massive review of Pemex systems. Significantly, much of the work is being done by foreign firms, such as San Francisco-based Bechtel and Irvine-based Fluor-Daniel Corp.

In addition, a decade of austerity has left many citizens resentful of oil workers, who acknowledge that they earn three times the wages of their private-sector counterparts.

“This industry as we are running it--as Pemex is running it-- is out of whack with the rest of the country,” said economist Ramirez de la O. “Everything thing else is changing, and somehow this big lump Pemex seems to be above all that.”

Moreover, Pemex has failed to find oil at the same pace it pumps. The country’s oil reserves, the source of 30% of Mexico’s export revenue, have steadily declined the past eight years.

That is not the kind of scenario likely to lead to a citizen’s revolt in favor of maintaining the status quo at Pemex.

Nor are Mexicans getting the kind of support that many anticipated from Canada--at least not publicly.

Mexicans had expected an alliance with Canada against the United States on energy issues. Instead, Canada in March unilaterally loosened restrictions on oil investments, permitting U.S. companies to make takeovers worth up to $150 million without a government review. The review threshold for other foreigners is $5 million.

Critics said the move was a gift to the United States, another tool for pressuring Mexico on oil issues in the trilateral talks.

Against those pressures are Mexican traditions and pragmatic considerations, such as a secure energy supply.

As Polo Bernal pointed out, “We need to consider not only whether the constitution can be changed, but also whether it should be changed. Is Mexico really in circumstances to permit other countries to exploit our oil? Oil has allowed Mexico a certain independence, a certain stability. Is it time to cut the umbilical cord?”

U.S.-Mexico Oil Flow

Mexico is a major exporter of crude to the United States. However, the U.S. is sending an increasing supply of refined oil products to Mexico as stricter environmental policies there have increased the need for unleaded gasoline faster than it can be produced.

Voices: Ramon Centeno

Ramon Centeno, 37, was an engineer in the cost-estimating department at Pemex for 10 years. He was laid off Feb. 27.

“Our department did the feasibility and cost studies for 300 to 400 projects a year. Last year, there were only 125 projects because the government is assigning projects to foreign companies and they do their own estimating or subcontract it.

“When private companies are assigned design and construction contracts, they take away the raw material of our work.

“My life has changed completely since I lost my job. I felt proud of working in the oil industry. But without work, my tranquil world has ended. I have problems with my wife, problems with social acceptance. I had to take my children out of private school and put them in public school.