Mexico, oil privatisation at any cost

A piece in Foreign Policy notes the relationship between Mexico and oil, “When, in 2013, Mexican President Enrique Peña Nieto announced a broad reform package that would end the government’s monopoly over the country’s oil sector, his argument was fairly straightforward: Foreign investment could be just the thing to reverse a decade of production declines and revitalise a state that has historically relied heavily on oil for its income. Dazzled by the promise of numbers, Peña Nieto suggested that, by wrenching open the long-closed sector, Mexico could attract more than $60 billion in investment within just a few years, while adding at least a percentage point to its annual GDP growth and creating 2 million jobs”.

The author goes on to mention that “The president’s idea was a revolutionary one in a country whose modern identity was forged thanks to the nationalisation of its black gold in 1938. Critics, unsurprisingly, were quick to argue that Peña Nieto’s reform was nothing less than a wholesale dismantling of Mexico’s heritage. But the president knew that, without a shock to the system, his country could soon turn into a net importer of oil. That meant giving up, at least in part, the keys to the energy industry. Mexico, along with Russia, has long been a poster child for resource nationalism, or the tendency for governments to claim outright ownership of all mineral resources and to monopolize pretty much all parts of the energy sphere. Nearly 80 percent of global oil reserves are under the control of national oil companies, according to a 2007 report by the Baker Institute at Rice University, leaving relatively little energy in the hands of multinational corporations”.

Of course that is not to say that due to this nationalisation policy oil production has stopped. Instead a balance has been found in places as diverse and Norway and Saudi Arabia where the state and oil companies can work together rather than oil companies both owning and producing the resources that should belong to the people of the country in question.

The author controversially claims that “Argentina, Brazil, and Venezuela have little choice but to track Mexico’s experiment closely, considering that they all compete for the same investment dollars and that Big Oil will go where it sees the best prospects with the best terms. What’s more, these countries have an even stronger, inescapable reason to follow Mexico’s lead: Resource nationalism is a long-term recipe for disaster”.

Such strong wording is not only dangerous but his examples are highly questionable with no mention of European countries such as the Norway that has taken a very different route to what the author has claimed and been hugely successful. Thus it is not that nationalisation is bad but the conditions under which it takes place and the kind of deal agreed between the oil companies and the state.

He goes on to note “Take Argentina. It has the world’s second-largest shale reserves but is currently a net energy importer after nearly a century of whipsawing between nationalism and an open market. Foreign capital created windfalls in the 1920s and 1930s, but greedy governments snatched back those oil wells in the 1940s, until production dwindled; they then returned, cap in hand, to wildcatters and oil majors just a decade later—a Groundhog Day pattern that continues today. Most recently, in 2012, Argentina lurched toward nationalism again, expropriating its former national oil company from Spain’s Repsol. Argentina now has the unenviable task of trying to lure foreign money and know-how to help tap Vaca Muerta (Dead Cow), a shale formation roughly the size of Belgium that it cannot develop on its own”.

His next example only demonstrates his point, “Venezuela has the world’s largest crude reserves, yet it too must import some basic fuel. For a brief period in the liberalizing 1990s, the government attracted foreign capital and boosted production. But in the 2000s, under strongman Hugo Chávez, resource nationalism returned with a vengeance; oil production in the country has fallen by about one-quarter from its peak levels in 1997. Much more than in Mexico, such decline threatens societywide economic and political meltdowns because Venezuela gets about 95 percent of its export earnings—and half of government revenues—from oil sales. The shrinking pie has imperiled social programs and has limited the country’s ability to import basic staples, such as toilet paper, and even to keep the lights on”.

He argues that “Mexico, of course, has also been crippled by resource nationalism. It coasted for years on the back of hugely prolific offshore fields discovered in the 1970s, but production at those fields peaked around 2004, falling by about three-quarters the following decade. That left Mexico with a bloated, inefficient state oil company that was responsible for a big chunk of the Mexican treasury but had little wherewithal to reverse the slide or to embrace new technologies. So in 2013, when Peña Nieto proposed upending the energy industry, he managed to pass reforms without any real challenge in the legislature. Fast-forward to last July, when, for the first time in nearly 80 years, Mexico auctioned off some shallow-water tracts in the Gulf of Mexico to foreign firms; onshore tracts in northern and eastern Mexico will be awarded this winter. Mexico didn’t offer attractive enough terms, however, and the auction in July flopped. As a result, the country has postponed the auction of deep-water blocks, while it tries to strike the right balance between enticing foreign firms and ensuring that enough revenue still makes it to the national treasury”.

Pointedly he notes that “Of course, such change won’t be easy, particularly because global oil prices have recently tanked, dampening investment appetite everywhere. Then there are security threats from narcotraffickers, especially around Mexico’s potentially energy-rich northern fields. And while proximity to the United States is in many ways a blessing—the world’s best service companies are a short flight away—it’s also a curse: Why make a risky play south of the border when the U.S. shale revolution remains steady? Even still, for Latin America’s once and future oil giants, there’s something to be said for being in the right place at the right time. Demand for energy, especially oil and natural gas, is shifting east: In 2013, for the first time ever, oil demand in developing countries (led by China) surpassed that of rich countries”.



One Response to “Mexico, oil privatisation at any cost”

  1. Brazil opens up its energy sector, at the worst time? | Order and Tradition Says:

    […] notes that in response to low prices Mexico and a host of other nations are reverting to privatisation, “Argentina, under new President […]

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