Brazil, Venezuela, and Mexico: three ways to nationalize oil

"Nationalization is an old story in Latin America," says Larry Birns, director of the Council on Hemispheric Affairs. "Almost as old as oil itself." When countries choose to nationalize natural resources there are usually dire predictions that investors will flee and economies will crumble. These three cases of oil nationalization illustrate that investor panic can be shortlived and that a country's approach matters. But nationalization can hamper innovation and constrain a country's potential for investment.

MEXICO

President Lázaro Cárdenas nationalized Mexico's oil industry in 1938, kicking out US and European firms and setting up state-run Petroleos Mexicanos (Pemex). Today it still ranks as one of Mexico's most popular decisions.

Pemex was not the first national oil company in the Americas – YPF of Argentina was – but Mexico's expropriation is the region's first example of a classic state takeover. Since then Pemex's door has, under Mexico's constitution, been tightly sealed to foreigners.

Although foreign governments boycotted Mexican oil in retaliation, over time nationalization was considered a boon for Mexico. With the finding of the massive Cantarell field in the 1970s, Pemex grew into one of the largest oil companies in the world. Its revenues pour into Mexico's coffers, funding about a third of the federal budget.

"Because Mexico nationalized so early ... it created a system in which nationalization became part of the political identity of Mexico," says independent energy analyst Roger Tissot.

But after its peak in 2004, Cantarell production suddenly slowed, which hit the entire industry. Mexico went from producing more than 3 million barrels a day to just over 2 million. Inefficiencies, mismanagement, and taxation rates that cripple the state-run company's ability to reinvest in technology and exploration came to the fore.

Suddenly, the company that was once considered the antidote to Mexico's dependence on the United States was fighting for its own survival. Today, its proven reserves are running out, and it lacks refining capacity, so it must import billions of dollars in products like gasoline. Its hydrocarbon potentials are enormous, but it lacks the technology and expertise to exploit deepwater reserves in the Gulf of Mexico, as the US has done. Most other countries would call in experts from the multinationals, but Mexico is constitutionally barred from doing so.

Any talk of "privatizing" Pemex still means political suicide. But facing Pemex's demise, Mexico has moved to make the company more enticing to foreign participation in recent years.

In 2008, Mexican President Felipe Calderón passed a reform opening up incentives for more private contracting, instead of the fixed-service contracts that dissuaded many would-be participants. That could open the way for international partnerships in the Gulf of Mexico.

1 | 2 | 3

Next