Domestic Appetite Casts Pall Over Future of Mexico's Oil

Prosperity in The North American Oil Patch

`OIL,'' said Mexico's president, Carlos Salinas de Gortari, recently, ``will continue to be the bastion of our sovereignty.'' And, he might have added, Mexico's prosperity. During the Persian Gulf crisis, Mexico's state-owned oil company Petro'leos Mexicanos (Pemex) pumped US$10.2 billion in taxes into government coffers. That's US$2.6 billion more than in 1989, according to the "Memoria de Labores," Pemex's just-released annual report.

Pemex export revenues of $10 billion (up from $7.6 billion in 1989) helped salvage a current-account deficit of early 1990.

So far, the Mexican government has prudently used the oil windfall to bolster international reserves and retire internal debt. "We're saving it for a rainy day," as one government official put it.

In other words, if oil prices fall below the $17-per-barrel average used in fashioning Mexico's 1991 federal budget, last year's bonanza could be this year's hedge.

And while Pemex may be the bulwark of Mexico's economy today, it's influence is waning. Due to falling production, lower petroleum prices, and growing nonoil exports, Pemex no longer accounts for 70 percent to 80 percent of Mexico's export earnings, as it did 10 years ago. It now makes up 35 to 40 percent of total export revenues.

Indeed, without major investments in exploration and production, in about 10 years Mexico will be an oil importer, according to US and Mexican oil consultants.

Domestic demand is growing rapidly and now consumes half of Pemex's output. Gasoline sales in Mexico rose 12.8 percent in 1989 and nearly 10 percent last year. In 1990, Pemex had to import almost US$1 billion worth of petroleum products. That figure is certain to jump with the March 18 closure of the refinery in Mexico City for environmental reasons.

Pemex chief Francisco Rojas says the oil giant has budgeted US$500 million to pay for imports and expanding other facilities to compensate for the lost refinery output.

Making the most of price hikes during the Gulf crisis, Pemex managed to boost total production last year by 1.4 percent. Nonetheless, the production trend for Pemex is at best level. Internationally, Mexico has slipped from fourth to seventh place in world oil production in the past two years. Proven oil reserves continue to fall.

"Pemex needs to invest US$2 billion to $3 billion a year in exploration and production to maintain exports levels. And that will only postpone the day of reckoning when domestic demand outpaces production," says George Grayson, author of two books on Mexican oil policy.

In recent years, most of Pemex's revenues have been swallowed by a debt-laden nation which spent most of the 1980s trying to crawl out of an economic hole. As a result, investment in oil exploration and production fell from some $6 billion in 1981 to just over $1 billion in recent years. Pemex's infrastructure has steadily deteriorated.

But a turning point for Pemex may be at hand. The economic needs of the government are apparently less dire. Last year's debt renegotiation, under a plan named after US Treasury Secretary Nicholas Brady, gave much needed relief to Mexico by cutting external debt and debt-servicing charges. The Mexican economy had its most robust year since 1984. And Merrill Lynch International predicts a 3.5 to 4 percent rise in national output this year.

For 1991, the Mexican government has given Pemex a budget of US$2.6 billion, of which Pemex officials say 50 to 60 percent ($1.3 billion to $1.5 billion) will be spent on production. Coupled with an unprecedented US Export Import Bank loan guarantee of US$1.5 billion, the Pemex exploration budget will hit the US$3 billion mark. This would mark the first significant increase in exploration spending in years.

"This could substantially change production figures," says George Baker, a petroleum consultant based in Berkeley, Calif. The Exim Bank loan guarantee, under negotiation, is expected to be granted shortly. When announced in November, it reignited the politically controversial issue of foreign control of Mexican oil. Since 1938, Mexico's Constitution has enshrined oil as exclusively state business.

The US$1.5 billion won't violate the Constitution, say Mexican officials. Its purpose is to hire US firms (which have before provided some equipment and services to Pemex) to drill for Mexican oil. It does not give US petroleum companies the rights to oil profits through "risk contracts."

But this small welcome mat does offer US firms some hope of getting greater access to Mexican oil. "If in five years Mexico decides to put oil contracts on a risk basis, the US oil companies there on behalf of Pemex will be in a better position to put their hands up," notes Mr. Baker.

US Commerce Department officials have suggested Mexico's petroleum be included in the pending North American free-trade talks. While the petrochemical industry may be included in this forum, exploration and development have been repeatedly ruled out by President Salinas. "The sovereignty of the nation's hydrocarbons is not being discussed," he said at the refinery closing.

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