Mexico's Oil Company Could Be Bankrupt By 2005

by Diego Cevallos

(IPS) MEXICO CITY -- Mexico's state oil company, Petroleos Mexicanos (Pemex), is sinking in a sea of debt and overwhelmed by a heavy tax burden, technological backwardness and a dearth of badly needed investment.

Analysts warn that it could go under in 2005 if it fails to find a lifeline soon.

Not even the current soaring oil prices, the highest Mexico has seen in 14 years, have been able to strengthen the company that was nationalized in 1938, and is seen by the country's political leaders as "the bulwark of national sovereignty and pillar of national development."

Mexico is the world's fifth-largest oil producer, and Pemex, which generates 3.4 million barrels a day of crude oil, remains one of the 10 biggest oil companies in the world. But it also has the biggest debt of any oil firm: over $60 billion, accumulated to pay the interest on previous debt, make investments and cover labor costs.

Mexico's proven oil reserves have been dropping fast, to the point that it is now estimated they will be depleted in 13 years -- 47 years sooner than anticipated in 1985.

Those reserves could more than double if the estimate were to include probable unexplored oil fields or deposits located deep in the Gulf of Mexico, which Pemex is unable to exploit because it lacks the necessary investment and technology.

The main problem facing the firm, which its directors say is using technology outdated by at least 25 years, is the fact that most of the revenue it generates is claimed by the state.

Last year, around 70 percent of Pemex's earnings went into the national government's coffers and were used to pay 33.4 percent of its expenses.

"Pemex's tax burden is madness. Any company in the world would go bust that way," Marcelo Contreras, a private consultant to the energy industry, told IPS.

Lacking the resources to reinvest and update its exploration and drilling technology and equipment due to its heavy tax obligations, the company sinks deeper into debt to maintain production and invest in exploration.

The oil monopoly's assets have thus plunged from $150 billion in 2000 to $73.6 billion this year.

If that trend continues, as experts predict, Pemex will be declared in technical bankruptcy as soon as 2005, because it would be impossible for it to pay off its debts even if it were to sell all of its assets.

The outlook is grim if the current critical level of indebtedness is not reduced, warned Standard & Poor's, a leading credit-rating agency.

The government of Vicente Fox, a group of lawmakers and a majority of analysts agree that without legal reforms granting it financial autonomy and opening it up at least partially to private investment, Pemex does not stand a chance.

But there is no easy solution.

Most of Mexico's legislators do not even want to hear the word privatization when discussing the state-owned oil monopoly, nor do they want to permit it to receive private investment through some kind of joint venture.

The national government says that without revenues from Pemex, it would simply be unable to meet its expenses.

The solution would appear to be fiscal reforms to allow the state to take in more taxes through other channels. But the government and parliamentarians have been working in that direction for over two years, without reaching an agreement.

Mexican collects taxes equivalent to 11.5 percent of Gross Domestic Product (GDP) -- the lowest level among the 30 members of the Organization for Economic Cooperation and Development (OECD), whose average is 37 percent. (Mexico joined the OECD, known by some as the 'rich countries' club,' in 1994).

"Pemex, Mexico's goose with the golden eggs, is dying under our gaze, and no short-term solution is in sight," said Contreras.

According to local financial analyst Enrique Quintana, "Pemex is heading towards a cliff."

If nothing is done, he added, "within a few months, the company will start to run into difficulties obtaining funds, because investors will be facing the question of whether to lend money to a company that nominally has no value."

Nevertheless, the firm has pledged to raise oil output to four million barrels a day and increase exports from the current 1.8 million barrels, most of which goes to the United States, to over two million barrels daily by 2006.

Given the difficulty in obtaining funds to invest, Pemex continues to refine part of Mexico's crude oil in plants in the United States.

It also imports large quantities of natural gas from its northern neighbor, because Mexico lacks the technology to tap into its natural gas reserves, which it burns.

To continue exploration efforts, Pemex has contracted private transnational corporations through complex legal procedures to circumvent laws prohibiting private investment.

To give the company a temporary respite, the government proposed allowing Pemex this year to retain the difference in earnings between the price estimated in the annual budget and the actual revenues resulting from the unexpectedly high oil prices.

But the governors of several states that would normally benefit from the surplus funds, which totalled $900 million in the first quarter of the year, are staunchly opposed to that idea, complaining that without the cash they would be unable to meet their expenses.

The price of Mexican crude currently stands above $32 a barrel, 12 dollars more than the estimate in this year's budget.

"The only possibility for PEMEX to survive as a company is through reforms of its fiscal regime that would allow it to increase its assets without falling further into debt, and would leave it sufficient resources to carry out successful exploration efforts and increase reserves," said Quintana.

Contreras, who advises foreign oil companies doing business in Mexico, says that if nothing changes, the state oil company will fail.

Pemex was created in 1938, when then president Lazaro Cardenas expropriated the oil industry from foreign companies. Since then, it has been Mexico's main symbol of national sovereignty.

But according to the nation's business interests, leaving the oil industry in the hands of the state in order to preserve national sovereignty is one of the myths of Mexican politics that will crumble in time.