COLUMN: Could Shale Rescue Mexico’s Oil Industry?
NOTE: this article originally appeared in Forbes
On Monday, Mexican President Enrique Pena Nieto of Mexico introduced a plan for opening up his country’s languishing but potentially huge oil and natural gas reservoirs to investment and development by foreign companies. In doing so, President Pena Nieto became the latest in a long string of Mexican leaders to offer such a plan for consideration by the Mexican congress and people. He hopes to succeed where all of his predecessors have failed.
The cultural bias against foreign oil companies is heavily ingrained in the Mexican psyche, and past congresses that have considered such offerings from Mexican chief executives have always found themselves under great public pressure to vote against them. The history behind the nationalization of the Mexican oil industry has been taught to every generation of Mexico’s school children since the 1930s as a story of great national pride and liberation from American imperialism. As such, the action has almost as sentimental a place in Mexico’s national mindset as the Mexican Revolution, and thus always becomes a very steep hill for Mexican policymakers to overcome. (A very good example of how this history is taught can be found here.)
Mexico became the first country to nationalize its oil industry and create a national oil company (today known as PEMEX) in 1938. The action was taken by then-President Lorenzo Cardenas when foreign oil companies operating in Mexico chose to defy a Mexican Supreme Court decision that came after decades of bitter labor disputes and strikes that had rendered the mostly marginal (at that time) Mexican oil fields near-uneconomic, despite the extremely low wages paid to Mexican oil field workers. The government seized the oil companies’ assets, forced them to leave the country, and offered compensation that the companies considered to be inadequate.
The initial reaction of the Franklin Roosevelt Administration – no friend to the oil industry – to the nationalization was initially tepid, but the companies involved exerted leverage in the U.S. court system and at the State Department that ultimately forced the Administration to intervene more forcefully on their behalf. This resulted in an informal boycott of Mexican oil imports into the U.S., and a propaganda campaign discouraging U.S. citizens from visiting Mexico. By 1940, the Mexican tourist industry had declined by almost a third. Meanwhile, the British government ruled the nationalization to be illegal, and Mexico formally broke relations with London in May 1938.
Ultimately, all of this pressure from the U.S. and British governments resulted in an April 1942 agreement under which Mexico paid the ousted companies $23.9 million as compensation for their seized assets, which most in Mexico considered to be excessive. Obviously, this entire episode was not the oil and gas industry’s finest hour, and it created a lingering cultural bias and set of Mexican laws that no subsequent Mexican president or congress has been able to overcome.
According to this article in the August 12 New York Times, “A survey taken last year by CIDE, a Mexico City University, found that 65 percent” of those polled opposed opening up Mexico’s oil and natural gas fields to foreign investment. That’s a heavy bias for any politician or party to overcome. And that’s a shame, because PEMEX currently lacks the monetary capital and in-house expertise to fully develop those reserves.
One result of that reality has been a precipitous decline in Mexican oil production from a peak of 3.4 million barrels of oil per day to just over 2.5 million per day now. Another is that, despite the probable existence of very large natural gas deposits in Northern Mexico, the country must rely on imports for most of its natural gas needs. Conventional sands like the Wilcox and Frio, and shales like the Eagle Ford and Pearsall do not stop at the Rio Grande River. But the country’s current laws and PEMEX’s lack of monetary and human resources serve to deny the Mexican people not only the use of their own oil and gas resources, but the economic development benefits that development of those resources would inevitably produce.
Much attention has been paid to the fact that the Eagle Ford Shale region of South Texas, forever an economically-disadvantaged part of the State, has now become one of the hottest economic development areas in the country. Similar economic development could be taking place just across the river – a region that is infinitely more economically-disadvantaged – with the right set of legal reforms and resulting major investments from foreign oil and gas companies.
President Pena Nieto, like so many of his predecessors in office, sees that potential and wants to make it happen. His PRI party has a majority on congress, and if members of PAN follow through on their current commitment to vote for the plan, analysts believe he has the votes to succeed. But, as the New York Times points out, the road to success is neither straight nor simple:
“The left-wing leader, Andres Manuel Lopez Obrador, who won more than 30 percent of the vote in last year’s general election, is planning street marches to protest the change. If he succeeds in filling the streets of the capital it may be harder for party leaders to stand behind the plan.”
But changes of this import and magnitude are seldom simple or easy: if this proposed change was, it would have happened long ago. President Pena Nieto certainly understands all of this, but considers the potential rewards to his country and people well worth the fight.
We should all wish him the very best of luck, and hope he is able to succeed where his predecessors have failed.