NotiEn - A Newsletter on Energy Policy Issues in Latin America
September 16, 2010
Vol 1, Issue 11

A Brief History on Mexico's Oil Industry...


Oil has driven Mexican politics and economics for more than seven decades, dating at least to 1938, when Gen. Lázaro Cárdenas nationalized the country's oil reserves, facilities, and production units.  The nationalization was codified in Article 27 of the Mexican Constitution, which declared that Mexico's natural resources, including oil, were the patrimony of all Mexicans.  The nationalization resulted in the creation of the state-run oil company PEMEX, an entity that in modern times remains the focal point of the government's decisions on the budget and international political and commercial relations.


This issue of NotiEn contains a series of articles related to the dilemmas facing PEMEX since 2000, including the debate on whether to allow the company to keep more of its revenues to help fund capital improvements on an outdated infrastructure.  Even though Mexico is a net exporter of crude oil, PEMEX is currently importing gasoline because of the country's lack of refinery capacity.


The Congress has on a couple occasions approved tax reforms that reduced the tax that PEMEX pays to the Mexican Treasury, but critics say the changes are insufficient to make the company financially viable.


The oil company is also seeking solutions to the sharp decline in oil reserves, primarily from the Cantarell field.  One possible solution under consideration is to replenish declining reserves with oil extracted from the deep waters of the Gulf of Mexico. 


Environmental concerns have come to the forefront during President Felipe Calderón's administration, and PEMEX is included in the plan to make Mexico more green.  The company is planning to offer ultraclean gasoline by 2012.


Sooner or later Mexico will have to wrestle with the problem of declining reserves and a lack of capital for PEMEX.  Will comprehensive fiscal reforms ever be implemented?  Will Congress allow some form of foreign investment in the company?  Will Mexico be able to access deepwater reserves before oil runs out in Cantarell?  These are issues that we will follow in upcoming editions of NotiEn during the next several years. 

Carlos Navarro - Editor


U.S. & Mexico Reach Agreement on Disputed Territory in Gulf of Mexico - Jun 07, 2000

After two years of difficult negotiations, the US and Mexican governments agreed to divide a disputed 17,790-sq km zone in the Gulf of Mexico. The area, known as the Western Gap or doughnut hole, is thought to hold some deep-water reserves of crude oil and natural gas, although the amounts are uncertain. Mexico and the US began discussions on the topic in April 1998, after the US Senate ratified a 1998 treaty that recognized the territorial limit of the disputed area (see SourceMex, 1997-11-05, 1998-04-22). The new agreement, announced in Washington by Foreign Relations Secretary Rosario Green and Energy Secretary Luis Tellez, gives Mexico control of 62% of the disputed area. The division was determined by measuring distances from each country's coast, giving Mexico 10,600 sq km and the US 6,594 sq km. The accord, which will become formal at a signing ceremony scheduled for June 9, must still be ratified by the Mexican and US Senates.  


Sens. Luis Mejia Guzman of the conservative Partido Accion Nacional (PAN) and Jorge Calderon of the center-left Partido de la Revolucion Democratica (PRD) said they expected the Mexican Senate to easily ratify the pact in a special session later this year. Mejia Guzman said the PAN delegation in the Senate was satisfied that President Ernesto Zedillo's administration successfully defended Mexico's sovereignty and promoted the well-being of Mexicans with this accord.  Read more... 

In This Issue...
A Note From the Editor
U.S. & Mexico Reach Agreement on Disputed Territory in Gulf of Mexico
PEMEX Crude-oil Exports Continue at Record Pace, but Imports of Gasoline and Other Processed Products Also High
Mexico Confirms Discovery of Vast Oil Field Deep in Gulf of Mexico
Mexico Wrestles with Declining Oil Reserves
Citizen Referendum, Concern About Deepwater Oil Reserves Could Influence PEMEX-Reform Legislation
Mexico Expects to Offer Ultraclean Gasoline by 2012
Congress Overwhelmingly Approves Legislation to Reform State-Run Oil Company PEMEX
Congress Seeks Investigation of Disappearance of Island in Gulf of Mexico More Than a Decade Ago
President Felipe Calderon, Center-left Opposition Parties Differ on Energy Policy, State-Run Oil Company PEMEX
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PEMEX Crude-oil Exports Continue at Record Pace, but Imports of Gasoline and Other Processed Products Also High - October 26,2005    

The state-run oil company PEMEX continues to rake in high profits thanks to the strong global oil market, but exports fell off in September because US refineries were incapacitated as a result of Hurricane Katrina. In a report released in late October, PEMEX forecast total revenues from oil and gas exports this year at a record US$80 billion because of a combination of high export prices and increased production. Oil-export revenues for January-September surpassed US$20.4 billion, US$5.2 billion higher than during the same nine-month period in 2004. PEMEX said exports of crude oil averaged 1.793 million barrels per day in the first nine months of this year, but the volume for September alone dropped to 1.677 million bpd because shipments to Louisiana were suspended in the aftermath of Katrina. The US accounts for 90% of Mexico's crude-oil exports. PEMEX is already planning to reduce production and exports during the fourth quarter of the year since several contracts were cancelled in the aftermath of Katrina and Hurricanes Rita and Stan.  


The suspension of shipments caused revenues to decline to US$2.59 billion in September, compared with US$2.76 billion in August. Still, revenues for the month were up about 31% from September 2004. The increase in the value of oil exports allowed Mexico to narrow its trade deficit in September to US$268 million from US$475 million in the same month in 2004, said preliminary statistics published by the Secretaria de Hacienda y Credito Publico (SHCP). The high oil prices proved to be a double-edged sword for Mexico, forcing the oil company to spend a record US$1.18 billion to import gasoline and other refined products. This continues a trend for the year, with imports for January-August already 74% higher than during the same period in 2004, said PEMEX. Mexico has been forced to import a portion of the gasoline sold in the country because of a lack of refinery capacity to process crude oil. Read more... 


Mexico Confirms Discovery of Vast Oil Field Deep in Gulf of Mexico - March 22, 2006

In early March, the state-run oil company PEMEX confirmed the discovery of a vast reserve of crude oil in the deep waters of the Gulf of Mexico. President Vicente Fox's administration was quick to promote the new discovery, given the name Noxal, as a possible substitute for the Cantarell oil field, whose production is projected to decline rapidly in the next several years.  


"Noxal begins a new stage of petroleum exploration in our country," Fox said during a visit to the industrial port city of Coatzacoalcos in Veracruz state.  


The new oil reserve would not be productive, however, for at least 10 years and possibly longer, depending on whether the Mexican government is able to obtain the financing and expertise necessary to begin developing the new reserve. The major problem is that the oil is located deep in the ocean, which would make extraction very costly. A test well was dug at 950 meters below sea level, with the oil reserves located another 3,000 m to 4,000 m under the surface of the sea bed.


PEMEX has no direct experience in deep-sea drilling. In its only venture into deep-water oil projects, PEMEX hired Diamond Offshore Drilling in 2004 to drill a well at a depth of 681 m in the Campeche Sound. The well has produced an initial flow of 1,200 barrels a day (bpd) of very heavy crude.


"We recognize that we should establish new mechanisms of collaboration with other petroleum companies with experience in deep waters," said PEMEX director general Luis Ramirez Corzo.

The newly discovered deep-sea reserve is believed to contain about 10 billion barrels of oil, although more tests are needed to determine its true capacity, said Ramirez Corzo. Read more...  

Mexico Wrestles with Declining Oil Reserves - March 07, 2007

Mexico may not be a major player on the global oil-export market for much longer because of dwindling crude-oil reserves. In February, the state-run oil company PEMEX confirmed a projected decline in output from in its Cantarell field in Campeche Sound, and in March it acknowledged that the potential for its deep-water reserves off the coast of Veracruz was significantly overstated. This led President Felipe Calderon Hinojosa to announce emergency measures to address the situation, including increasing production from a cluster of oil fields known as Ku-Maloob-Zaap and initiating a plan to expedite offshore exploration efforts through an expanded technical-cooperation agreement with the Brazilian oil company Petrobras.  


Decline at Cantarell oil field greater than anticipated

The Mexican government and the global oil industry had already known of the dwindling reserves at Cantarell, which supplies about 60% of Mexico's crude oil. The bad news for PEMEX is that reserves are falling at a much greater pace than originally anticipated. In early February, PEMEX director Jesus Reyes Heroles announced that Cantarell's production would drop 15% in 2007 to 1.53 million barrels per day. This compares with 1.79 million bpd in 2006. Last year's production was a decline of 12% from 2005. Reyes Heroles downplayed the trend. "It's a decline we all anticipated," he said at a news conference in Mexico City. "We need to administer the decline." But reserves at Cantarell have dwindled to such a degree that experts at the International Energy Agency (IEA) have warned that Mexico could become a net importer of oil by 2030 (see SourceMex, 2002-12-11). "As production from the giant Cantarell oil field is dropping rapidly, many forecast that Mexico soon will be out of the oil-exporting business," columnist Tom Whipple said recently. And some analysts suspect that the situation at Cantarell is worse than PEMEX is willing to acknowledge. Read more...  

Citizen Referendum, Concern About Deepwater Oil Reserves Could Influence PEMEX-Reform Legislation - August 06, 2008     

The Mexican Congress will consider two very important and potentially conflicting factors when taking up legislation to reform the state-run oil company PEMEX during the fall legislative session, which begins in September. First, legislators will have to take into account a nonbinding citizen referendum. Although participation was fairly low, those who cast a ballot rejected any private participation in PEMEX. A second factor is the "efecto popote" (drinking-straw effect) by which Mexico could lose potential deepwater reserves in the Gulf of Mexico to multinational oil companies if it does not act to access those reserves. However, the only way to access the reserves is with technology and expertise provided by foreign companies.


Referendum voters reject privatization, but participation very low

Reaction to the first phase of the citizen referendum, sponsored by the center-left coalition Frente Amplio Progresista (FAP), was mixed. The vote was held in Mexico City and nine other states, with votes elsewhere in the country to follow during August (see SourceMex, 2007-07-16).


Turnout was much lower than anticipated, but the organizers and supporters of the referendum cited the strong opposition to private-sector involvement in any facet of PEMEX operations. Roughly 80% of the 1.5 million Mexicans who cast ballots in the first round of voting on July 29 voted against private participation in PEMEX, whether by Mexicans or foreign parties. Referendum promoters, including ex-presidential candidate Andres Manuel Lopez Obrador and Mexico City Mayor Marcelo Ebrard, warned Congress against ignoring this huge "mandate" from the people when the PEMEX-reform legislation is considered. Lopez Obrador said he was prepared to continue protests if the legislation contained any proposals whatsoever to turn over any functions to the private sector.  Read more...  


Mexico Expects to Offer Ultraclean Gasoline by 2012

- September 17, 2008     

Mexico took an additional step to clean up its air quality by announcing a program to boost production of gasoline with extremely low levels of sulfur. A major part of the plan includes constructing two refineries in central Mexico to produce gasolina Magna UBA (Ultra Bajo Contenido de Azufre), which should be available to the public in about three years. The effort to reduce harmful emissions has been sporadic in recent years, with authorities pushing stricter standards for automobiles in the country's three largest cities and also encouraging the use of cleaner fuels like ethanol. Even with the push toward cleaner fuels, Mexico still lags behind other countries in making hybrid cars available to its consumers, said a recent report published by the news wire CNN Expansion.  



Construction of new refining facilities scheduled in 2009 

The push for cleaner air during the past decade has been led by Mexico City, which has greatly improved air quality by imposing tougher standards on motor vehicles (see SourceMex, 2000-01-12). The Mexican Congress and President Felipe Calderon's administration have also taken steps to clean up the air in Mexico City, Guadalajara, and Monterrey by requiring that gasoline sold in the country's three largest metropolitan areas be oxygenated.


The clean-fuel requirement was part of legislation promoting the creation of an ethanol industry in Mexico (see SourceMex, 2007-06-06 and 2007-09-05). The Calderon administration's plan to launch production of Magna UBA is part of the Proyecto Integral de Combustibles Limpios, a campaign to promote the use of clean fuels in Mexico. Under the initiative, Mexico plans to refurbish and expand facilities at six existing refineries to produce the Magna UBA blend, which will be distributed primarily in Mexico's three largest cities. At present, Magna Sin is the cleanest gasoline offered by the state-run oil company PEMEX. In 2007, PEMEX successfully introduced Magna UBA diesel, a clean fuel used primarily by the trucking industry. Read more...  


Congress Overwhelmingly Approves Legislation to Reform State-Run Oil Company PEMEX - October 29, 2008

In what many consider a historic step toward changing Mexico's antiquated petroleum sector, the Congress approved legislation to overhaul the state-run oil company PEMEX. The measure was approved overwhelmingly in both houses of Congress in October, although there was some dissent within the ranks of the center-left Partido de la Revolucion Democratica (PRD). Some members of the PRD broke with their moderate colleagues because of opposition to a provision that allows PEMEX to hire private and foreign companies for key activities in the oil sector. Another key change that allows the company more control of its revenues received overwhelming support. But some critics say the reform plan, which was diluted from President Felipe Calderon's original proposal, is insufficient to help reverse Mexico's declining production.


President Calderon first offered plan in April.

The proposal to overhaul PEMEX had been in the works since April of this year, when Calderon first introduced his plan to Congress. At that time, the plan met strong opposition, with legislators from opposing parties concerned that the proposal potentially violated the Mexican Constitution (see SourceMex, 2008-04-30). Even with those concerns, Calderon pushed for the Congress to vote on the legislation to reform PEMEX in a special session during the summer months. Legislators rejected that proposal, saying they needed more time to consider an initiative with such far-reaching implications for the country (see SourceMex 2008-07-09). As legislators were considering the various proposals for PEMEX reform, a faction of the PRD along with allies from the Partido del Trabajo (PT) and Partido Convergencia por la Democracia (PCD) pushed to have Calderon withdraw his plan altogether. This group, which was allied with the PRD's ex-presidential candidate Andres Manuel Lopez Obrador, opposed any form of private participation in PEMEX (see SourceMex, 2008-07-16). Read more...  

Congress Seeks Investigation of Disappearance of Island in Gulf of Mexico More Than a Decade Ago - November 12, 2008

The mysterious disappearance of a small island off the coast of Yucatan more than a decade ago is being linked to a 2000 agreement negotiated between the US and Mexico that redefined the territorial limits in the Gulf of Mexico. The pact negotiated by former Presidents Ernesto Zedillo and Bill Clinton established boundaries in previously undefined areas in order to determine drilling rights for crude oil. Some Mexican legislators contend that the Mexican government ceded a large part of its territorial rights to the US during the negotiations. A key to determine Mexico's boundary was the tiny Isla Bermeja, which had been 160 km off the coast of Yucatan and Campeche states but was no longer visible when the negotiations were concluded in 2000.


Island was key to territorial accord with US

Six senators from the governing Partido Accion Nacional (PAN) raised the question about Isla Bermeja on the floor of the Senate in early November, citing "plentiful suspicions" that the island may have been caused to vanish on purpose. The senators said the island disappeared "mysteriously" some time before the Zedillo and Clinton governments began negotiations on an agreement on the disputed area. Under the agreement, the US and Mexican governments divided a zone spanning 17,790 sq km in the Gulf of Mexico known as the Donut Hole (see SourceMex, 2000-06-07).


Negotiations on the Donut Hole were a follow-up to a 1978 treaty that established maritime limits between the two countries. There are some suggestions that the US and Mexican governments purposely waited 17 years between the signing of the original agreement on territorial limits in 1978 and the negotiations on the Donut Hole to allow Isla Bermeja to disappear. Read more... 

President Felipe Calderon, Center-left Opposition Parties Differ on Energy Policy, State-Run Oil Company PEMEX - April 07, 2010

President Felipe Calderon's administration and the opposition parties have different ways of observing the 72nd anniversary of the expropriation of Mexico's oil industry, which many also mark as the birth of the state-run oil company PEMEX. In a ceremony marking the milestone decision by President Lazaro Cardenas (1934-1940), President Felipe Calderon and members of his administration used the occasion to announce the discovery of new reserves in the Gulf of Mexico and to present a cautiously optimistic view of the future. This is in contrast to the center-left opposition parties, which are pushing for a stronger PEMEX. They warned that Mexico has followed erroneous policies in the past that have led to a crisis in the Mexican oil industry. At the center of controversy is the Calderon administration's decision to pursue performance-based exploration contracts with foreign companies. Even though Congress approved such contracts in 2008, critics argue that the door has been left open for foreign companies to earn profits from Mexican oil, which would violate the Constitution.


Calderon marks PEMEX anniversary at site of new refinery

Calderon marked the PEMEX anniversary with a ceremony at the site of the company's planned refinery in Tula, Hidalgo state. Construction of the refinery, which would be the first such facility developed in Mexico in three decades, is scheduled for completion in 2015 (see SourceMex, 2009-04-22).


PEMEX officials said that the design work and environmental and security reviews had been concluded and that construction would begin in April 2011. The Mexican president said the government plans to devote about 5 billion pesos (US$408 million) to preparatory work on the new Refineria Bicentenario, which will have the capacity to refine about 250,000 barrels per day when it comes online in 2015. The government has yet to announce details of a bidding process by which private companies would be hired to construct the facility.  Read more... 

Energy Policy, Regulation and Dialogue in Latin America


NotiEn is an original newsletter with breaking news that analyzes and digests relevant and contemporary information in energy, alternative energy and energy policies in Latin America. A complimentary service provided by the University of New Mexico as part of LA-ENERGAIA Project funded by the US TICFIA Program