The Slippery Slope of Fuel

Screen Shot 2016-04-07 at 4.15.35 PMBy Julie Etra

Pemex, short for Petroleos Mexicanos, is the state run supplier of petroleum products and by definition a monopoly. It is responsible for exploration, production, refinement and distribution.

Pemex has its origins in the United Kingdom when in 1919, Shell (Royal Dutch Shell, with headquarters at The Hague, Netherlands but registered in London with 60% Dutch ownership and 40% British) took control of the Mexican Eagle Petroleum Company and formed Shell-Mex Limited. As of 1935, oil companies were still under control of foreign owned companies who tried to prevent the formation of unions. Despite their efforts the Union of Oil Workers was formed and they held their first meetings in late January 1936 and their first convention in July, when they demanded a series of improvements, calling a strike until new contracts were signed. This first strike was delayed six months but resumed in late May 1937 with dire consequences, as gasoline was not available for 12 days. Arbitration followed with the Supreme Court deciding in favor of the workers, but the British and North American companies refused to meet what they deemed to be unreasonable demands, threatening to take their capital and hard improvements out of the country. In fact Mexican resources and output exceeded those of the United Sates. On the 18th of March 1937, the President of Mexico expropriated all 17 privately held oil companies and declared it property of the Republic of Mexico.

The first refinery opened in 1946. In 1948 oil and gas were discovered near Salamanca, Guanajuato, but the real boom came in the early 1970s. In 1971 a fisherman in the Bay of Campeche discovered oil and thus began the exploration and exploitation of the largest offshore fields in the world at the time, Cantarell, which went into full production in 1977.

By 1986 average daily production of crude oil reached 1,298, 000 barrels. In 1990 lead-free gasoline was produced. By 2,000, Pemex was the 5th largest producer in the world. Between 2001 and 2009, its workforce increased 7.6% reaching with 145,461 employees with approximately 150,000 by 2013. Although the statistics vary a bit with the source, today Pemex is ranked 9th in production (crude and natural gas liquids) and 17th in exports. At the end of 2012 Pemex reported a net profit of 5 billion pesos. However, production has been in decline over the last 5 years and internal consumption has increased due to an expanding middle class. Today the United States obtains about 7.5% of its oil from Mexico. Pemex has greatly expanded its services since the early days and today consists of 47 subsidiaries including two credit unions.

Shortly after his inauguration Enrique Peña Nieto and the new administration made it clear that re-organization and privatization of Pemex were at the top of their agenda. Following a visit to Brazil in September, Peña Nieto indicated that he favored the so-called Brazilian Petrobras model.

Starting in 1997 Petrogas Brazil was reorganized from a 100% national oil company, to an investor-owned and supported company in which the state still owns 60% percent of the shares. However, like Pemex, the government did not make the necessary investments to modernize.

Pemex has been most recently plagued with problems, although it is not clear that privatization is necessarily the solution. Among other technical issues, broader problems with the state-run company include the over encompassing charge of corruption, poor management, lack of maintenance of infrastructure and inefficiency. More detailed irregularities reported by the press following an audit by the Superior Audit of the Federation (ASF) in 2011 included improper payments (bribes?), poor record keeping, unacceptable contractor delays due to lack of personnel and specified materials, inadequate maintenance of pipelines in the Gulf of Mexico and in the states of Tabasco and Campeche, and lack of technical assistance to Pemex Exploration and Production (PEP). Technical decline in production is due to the difficulty of exploiting new beds, the need for more advanced technology, the lack of modernization of existing facilities and infrastructure and lack of investment. Simply stated Pemex currently does not have the resources for optimum production and associated infrastructure improvements even though exploitable fields still exist.

Legally privatization is a very complex process as Pemex has 41 divisions, but the company is also a source of Mexican pride, has a strong union and substantial pension for retirees. According to the Mexican constitution all subsurface minerals belong to the state. Approximately 30% of the revenues of the federal budget come from fossil fuels and associated products and 10% of export earnings. A Constitutional referendum would be required for privatization to proceed. So far the closest Pemex has come is to sub-contract, and outsource components of its operation with private companies and investors. Privately owned foreign companies run over 60% percent of well drilling operations.

Pemex supports six environmental programs as part of Pemex Green, including the Lacandon Jungle Project, a research, education, and conservation program in the Middle Basin Hydrological System of the Tabasco plain. Another project is the Jaguaroundi Ecological Park, a nature reserve of 960 hectares.

Regarding spills and leaks, by far the most environmentally damaging incident occurred in 1979 with the explosion of Ixtoc 1, the exploratory well in the Bay of Campeche, Gulf of Mexico. The spill volume was 3,000,000 barrels, covered an area of over 1,100 sq. miles, with a shoreline impact of 162 miles. In December 2010, 28 people were killed when a giant spill caused by an illegal pipeline tap east of Mexico City caught fire and exploded. In early January 2012 there was a spill from a leaking pipe on the Coatzacoalcos River. And on August 24, 2012, there was another spill on the Oaxacan Coast near the Salina Cruz refinery.

This article is a compendium from various sources obtained on the Internet, including the official Pemex web site, newspapers journals, and blogs. Special recognition to authors Andrew Smolski and Rafael Azul (18 December 2012)

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