Felipe Calderon, Mexico’s apparent president-elect, holds a resume that on paper would appear to give him an edge in boosting Mexico’s energy fortunes. Harvard-educated and well-connected, Calderon served as energy minister under outgoing President Vicente Fox for nine months (see NGI, June 7, 2004; Sept. 15, 2003). But if Calderon succeeds Fox into office this December, his impressive credentials are expected to matter very little in a country apparently more concerned about national pride than its stagnant energy resources.
Calderon, a candidate of Mexico’s ruling center-right National Action Party (PAN), apparently snatched the presidency earlier this month by the narrowest of margins over opponent Andres Manuel Lopez Obrador of the Democratic Revolutionary Party (PRD). Calderon appeared to have won the election by less than 1%, or about 35.89% of the vote. If the election stands, Calderon will take over from Fox in December. Lopez is challenging the results in court because of “irregularities,” and a court ruling is expected by early September.
Calderon, a free-market advocate, is clearly favored by industry, and he knows the problems mounting within the country’s energy sector first hand. Although he only served as energy minister for nine months, Calderon’s tenure was an important time for Petroleos Mexicanos (Pemex), Mexico’s state-run oil and gas company, and for Comision de Electricidad (CFE), Mexico’s state-run electricity sector.
Calderon had little to do with the policies implemented during Fox’s tenure, but while he served as energy minister, Mexico’s oil and natural gas production reached historic levels. Calderon also presided over Pemex’s first multiple service contract (MSC) bids in late 2003, which allow private companies to contract for work within the country’s nonassociated natural gas exploration (see NGI, Oct. 20, 2003). During Calderon’s tenure, Mexico’s first wind farm was launched, and seven power plants began operations.
In a political move said to be geared toward his bid for the presidency this year, Calderon resigned less than a year after he was appointed by Fox. He may understand many of opportunities and challenges ahead for the country’s energy sector, but Calderon will have to put together some strong and doable initiatives to increase not only oil and natural gas production levels but to ensure the country has enough infrastructure in place for its growing power demands.
Calderon stressed during the campaign that he had no intention of taking Pemex or CFE private — something Fox also did not try to do. But like Fox, Calderon is keen on continuing to encourage more private industry participation within the energy sector and on continuing the initiatives Fox led to increase the supply of domestically produced electricity, natural gas and other fuels.
“My initiatives will allow the better use of the country’s resources; eliminate gas, petroleum, and petrochemical imports, and consolidate the national oil industry in the long term,” Calderon said. “The result will ensure not only our energy sovereignty, but also the inalienable ownership of our natural resources.”
Calderon also has called for “absolute transparency in Pemex,” and said, “we have to make clear that Pemex…is the property of all the Mexican people.” But he added, “We have to make Pemex a modern, secure, transparent, responsible and efficient company” that will contribute to Mexico’s development.
“Opening the door to private investment and operations in the energy sector under a clearly defined legal and regulatory framework, while maintaining state ownership of the energy companies, will help ensure that the energy sector realizes its promise of contributing to Mexico’s development,” Calderon said. “It is vital in a democratic society that major changes be debated fully and reforms implemented only after reaching a democratic consensus.”
Within his first 100 days of taking office in December, Calderon said he plans to introduce legislation to allow Pemex to enter into “technological associations” with businesses to explore Mexico’s deepwater Gulf of Mexico. Another top priority is to advance natural gas projects in the Burgos Basin, where most of the MSCs have been awarded. Pemex has slated US$14 billion for Burgos projects between 2007 and 2021.
“During my term, Pemex will continue being the fortress of the nation, its economy, and its people…but it has to continue and reinforce its modernization,” Calderon said.
Calderon also has stressed he does not intend to privatize the CFE — but here, too, he wants to encourage private investment.
According to Mexico’s Energy Ministry, the power sector alone will require US$46 billion in investments through 2014 just to meet the annual power demands. Power needs are expected to grow 5.2% over that period.
Within CFE, Calderon has said he wants to create a market system that allows businesses and consumers to buy electricity at competitive prices. He also wants to allow direct sales of privately generated electricity to customers and allow Mexico’s municipalities pursue “self-supply” power projects, including allowing bilateral contracts between large-scale users and electricity producers.
More renewable energy sources would be encouraged as well, especially in some of Mexico’s more remote areas. Pemex estimates the potential generation capacity from renewable resources is 14,650 MW.
Raymond James energy analyst J. Marshall Adkins said Calderon is “probably the optimal candidate” for Mexico’s petroleum sector. However, “even assuming that Calderon prevails [in becoming Mexico’s president], he will face probably insurmountable political difficulties in pushing through any major reform of Pemex.”
As Adkins pointed out, Fox tried to liberalize the energy sector in the country for the past six years with little effect. The problem, he said, is that because the oil sector is a nationally owned company, any decision allowing direct foreign investments would require a constitutional amendment, and thus a two-thirds majority in Congress.
Calderon’s PAN party picked up seats in the election, but it will not hold a majority of the legislature when the next president takes office. Calderon will have to negotiate with Mexico’s various political parties — a vocal and fractious bunch that frequently defeated reform proposals by Fox. Together, a majority of the Congress now oppose making structural changes within Pemex.
“Calderon has clearly said he does not favor privatization, although he supports allowing Pemex to form joint ventures with foreign operators,” said Adkins. “However, even this is a political hot potato, and Calderon’s party will have only about 40% of the seats in the newly elected Congress. No other major party supports even this limited reform proposal.” Because of this, “domestic political dynamics do not favor a private-sector solution to Pemex’s production difficulties.”
Sergio Rosado, a Mexico City-based energy analyst for Cambridge Energy Research Associates, said Calderon’s energy plans are “the most liberal in terms of private participation.” But Rosado also noted that the tight election results “will make political reforms a priority over economic reforms in the immediate future…” Rosado said it’s still “too early” to foresee the future and to know exactly what Calderon could — or would — accomplish.
Bond Snodgrass, an analyst with Riedel Research Group, is not optimistic about Calderon’s — or anyone else’s chances — in achieving any type of reforms within the energy sector.
“Oil or gas…forget it,” Snodgrass told the Washington Post. “There isn’t a single politician in the country with enough political capital to reform Pemex.”
But push is coming to shove in a country rich in resources but lacking in capital investments.
In a research note, Houston-based energy analyst George Baker said, “The current organization and course of the oil industry in Mexico are unsustainable.”
Calderon does not only plan to try and reform the country’s energy sector through the legislature. In a briefing following the election, Calderon said he wanted to boost Mexico’s trade and diplomatic relationships with other energy-rich Latin American countries. Mexico does not hold the type of oil reserves commanded by Venezuela, nor does it hold the type of gas production Bolivia has privatized to improve its impoverished population. But Calderon does want to reach out for advice, if nothing else.
“I’m very interested, for example, in learning from the technology that [Brazil’s state-owned] Petrobras (PBR) has been developing so that Mexico, Petroleos Mexicanos, can advance in exploration and production in deep waters.”
Shelly Shetty, a senior director at FitchRatings, said, “The main challenge confronting his administration would be to negotiate structural reforms in the areas of fiscal, energy and labor sectors. In light of the gains that PAN has made in Congress, we expect him to have more space to negotiate.”
Mexico, which exports about 8% of its oil supplies to the United States, is not running out of oil and gas. But Pemex has long lacked enough of a budget for exploration and production. Along with taking about 60% of Pemex’s revenue — which account for about 30% of Mexico’s total revenue — the government also has saddled the company with enormous debt — estimated at more than $75 billion, including pension obligations.
Pemex has had a negative net worth since 2002. In May, Pemex reported 1Q2006 net income of $700 million on high commodity prices. However, even on stronger prices, Pemex lost $6.75 billion overall in 2005.
In 2000, when Fox took office, Pemex began to increase its capital spending toward a goal of increasing oil and gas production from about 2.9 million boe/d to about 4 million boe/d by the end of 2006. According to data compiled by RigLogix, there were only six jackup rigs and one semisubmersible rig under contract in Mexico in mid 2001. By 2005, the rig count stood at around 30 jackups and 10 semisubmersibles. The rig count began to decline late last year.
While the increase in spending improved oil and gas output, Pemex is not expected to meet its goal to boost production by 1.1 million boe/d by the end of this year. Between 1999 and 2004, output only rose by about 500,000 boe/d. Since 2004, production has increased only marginally. Most of the increased output has come from Mexico’s gigantic Canterall field. That field, according to energy experts, has peaked and may be producing only 1 million boe/d by the end of 2008.
Ernesto Marcos, a retired Pemex CFO, said a colleague recently told him that the “next president” should be told “as soon as possible that we may soon not have enough oil for our own requirements. and none for exports.”
“We made that decision [to nationalize the oil industry] in 1938, when the circumstances in Mexico and the world were dramatically different,” Arturo Sarukhan recently told the Dallas Morning News. Sarukhan, a Calderon adviser, said today, a privatized energy sector is “no longer a guarantee of what this country needs to grow.”
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