By Deborah Van Hoewyk

About last month: Did you emerge from the mental fog induced by St. Patrick’s Day on March 17 in time to face the festivities of March 18? Completely missed it? March 18, what’s that?

Mexico’s Oil Belongs to Mexico – via PEMEX

In Mexico, March 18 is “Expropriation Day,” the anniversary of President Lázaro Cárdenas’ 1938 nationalization of the country’s oil fields and production facilities. It seemed like “a good idea at the time,” and many Mexicans think of the expropriación petrolera as a second Mexican Revolution, one that liberated Mexican workers from low wages and oppressive working conditions imposed by the foreign companies that dominated the oil industry in Mexico. It is taught in schools as a story of resistance to American imperialism, a source of great national pride.

Before expropriation, there were 17 international firms producing oil in Mexico, dominated by the Mexican Eagle Company (a subsidiary of the Royal Dutch/Shell Company, now just “Shell”) and various U.S. firms (Jersey Standard, a branch of Standard Oil, and Standard Oil Company of California, SOCAL, now Chevron); together the Dutch and the Americans (basically, the Rockefellers) controlled 90% of the production of Mexican oil; Gulf Oil added another 5%.

Under Cárdenas’ plan, the Mexican government would control the production and commercialization of all petroleum resources derived from Mexican territory, significantly increasing government income while shoring up public finance and the social benefits it provided. To do this, he created a government corporation, Petróleos Mexicanos – that would be PEMEX, for those of us who drive in Mexico.

PEMEX was designed as a country-wide monopoly, jointly owned by the state and the Sindicato de Trabajadores Petroleros de la República Mexicana (petroleum workers’ union). It was tasked with all phases of oil and gas production in Mexico: exploration, development, transportation, refining, storage, distribution, and sales. It was designed to partner with the Comisión Federal de Electricidad, known far and wide as CFE, which had been set up in 1937.

Mexico as Petrostate

And what has 84 years of government control of the oil and gas industry done for Mexico?

International oil companies had been encouraged to come to Mexico by President José de la Cruz Porfirio Díaz Mori, who ruled Mexico in dictatorial style from 1877 to 1911 (with a four-year hiatus due to term limits, which he canceled after his re-election). Porfirio Díaz was overthrown by the Mexican Revolution (officially fought from 1910-17). In 1917, there were 440 oil production companies working in Mexico, they produced 55 million barrels a day, and Mexico was the world’s second-largest producer of crude oil.

In 1917, Mexico voted in its Constitution, which restored national control of the oil industry. Foreign companies could produce oil from Mexican wells, but needed to obtain official government concessions, which the largest companies refused to do. Both sides succeeded in ignoring the tensions, but oil production began slipping away to Venezuela, where it was cheaper to extract the crude.

Two decades later, the event that brought on expropriation was a labor strike against the international petroleum companies; after a year of negotiating, the petroleum workers’ union walked off the job for 11 days, and the government sent the contract to federal arbitration, which defined a new contract. The international companies refused to accept it, expropriation had been established by law in 1916, and there you go – Mexico took it all.

Over time, that hasn’t worked out all that well. The greatly simplified explanation is that, had the motivations for expropriation, the establishment of PEMEX, and tying it to CFE, been strictly economic, all might have been well. But the public monopoly was also intended to support Mexico’s socioeconomic programs – health, housing, education, recreation, retirement. (PEMEX revenues also funded Mexico’s repayment of loans incurred during the financial crisis of the late 1970s.) Ultimately, PEMEX has been used to pay for everything but financing the company itself: there has been little exploration for new sites, there is no infrastructure to develop them, and lack of maintenance has produced huge oil spills, particularly into the Gulf of Mexico. Moreover, PEMEX has been heavily subsidized by the government to keep retail prices low, thus obscuring real production production costs, so there is no government or public appetite for “remodeling” PEMEX to do a better job.

Back to the Future in the Oil Industry

Every so often, especially when the petroleum industry teetered and later as NAFTA was being negotiated (1994, renewed 2020), figures in the Congreso de la Unión (the federal legislature) or various presidents would make noises about letting international oil companies return. Between 2004 and the beginning of the presidential term of President Enrique Peña Nieto (2012-18), oil production had dropped from 3.4 to 2.5 million barrels a day, and continued to drop, but the nation’s budget depended on PEMEX for a third of its revenues.

If the nation’s oil industry were left to PEMEX on its own, “Much of Mexico’s estimated 30 billion barrels of oil and 500 trillion cubic feet of natural gas” would “simply remain locked in the ground” (Forbes, October 30, 2013). PEMEX was hamstrung, without “sufficient technical expertise” for exploration, and was legally denied the ability to acquire the expertise. Even if PEMEX could have brought in outside expertise, “big oil” wouldn’t come without financial guarantees, which PEMEX of course could not provide.

In 2013, Peña Nieto managed to amend the Mexican constitution to permit private international investment in oil, gas, and electricity production and distribution, including in the retail fuel market. Mexico auctioned off blocks of deep and shallow water exploration concessions, and welcomed international gasolineras – indeed, those of us who drive in Mexico saw BP (née British Petroleum), RepSol (Spain), and Gulf (U.S.) stations on our southbound treks to Oaxaca.

Not So Fast!

Many – notably, future presidential candidate Andrés Manuel López Obrador (AMLO) – opposed the constitutional reform on the grounds that oil and gas were a treasure of Mexico’s national heritage. “Treason,” said AMLO. When AMLO won the 2018 election on the basis of his populist nationalism, cloaked in the language of the left, he immediately set out to dismantle Peña Nieto’s energy sector reforms and restore PEMEX and fossil fuels to a position of pride – although not necessarily productivity, and certainly not to the benefit of the environment.

However, AMLO’s approach to Mexican energy – restore PEMEX/CFE and achieve self-sufficiency, the environment be damned – has brought on sharp criticism from analysts concerned with environmental protection. Combined with the environmental impacts of other AMLO strategies in tourism and economic development, Mexican energy policy is raising alarms at home and abroad; the policies are seen as detrimental, if not disastrous, in a country as “mega-biodiverse” as Mexico.

Mexico is party to the 2015 Paris Agreement, a UN-sponsored international treaty that records voluntary “nationally determined contributions,” or NDCs, from its signatory nations to meet targets for (1) reducing greenhouse gas emissions and (2) adapting to climate change through developing sources of alternative energy. Mexico was the first “developing country” to submit a plan for participating in the Paris Agreement, including an NDC of cutting emissions 22% by 2030 and obtaining 35% of its energy from alternative sources by 2024.

Countries are supposed to boost those targets every five years; new targets were announced in October 2021 at COP26, the second UN-sponsored climate change conference (Glasgow, Scotland, October 2021). Despite a visit from U.S. climate envoy John Kerry in advance of COP26, Mexico – along with Russia and Brazil – said it would work on increasing targets, but would not raise them. Mexico is the 14th-largest emitter of greenhouse gases in the world, and the 2nd-largest in Latin America, bested only by the Brazil of Jair Bolsonaro, who promotes “land use change” in the form of slash-and-burn conversion of jungle to agriculture and industry. Climate Action Tracker, an international research partnership, finds that, given its policies and performance, Mexico’s emissions will rise, not fall, and the Mexico’s targets are “not at all consistent with the Paris Agreement’s 1.5 degrees Celsius temperature limit.”

AMLO and the Environment

It would, of course, be difficult to lower emissions when you are “pouring money into PEMEX, at the environment’s expense” as Bloomberg analysts put it in January 2021. In search of an energy-independent Mexico, AMLO has also made regulatory changes that “cut the knees off a booming renewables market” by ordering regulatory agencies to favor PEMEX/CFE by means of over-regulation of about 200 wind farms, solar arrays, natural gas plants, and other private projects.

AMLO is promoting two major infrastructure projects. First, to shore up oil production, he is building an $8 billion US mega oil refinery at Dos Bocas in his home state of Tabasco, on what was a protected mangrove forest. The refinery has been opposed by both business and environmentalist groups, and has been prejected to fail on financial grounds. In addition, AMLO has asked PEMEX to increase output at the country’s six current refineries, which burn highly polluting fuel oil. CFE is using high-sulfur fuel oil, and has bought tons – 2 million tons – of coal as a further source of fuel.

And then there’s the (in)famous Tren Maya, a tourism initiative that is laying over 1,550 kilometers of rail tracks across Tabasco, Campeche, Yucatán, Quintana Roo, and Chiapas – right through the rainforest that is home to the endangered Mexican jaguar. The price tag is now $200 billion mxn (about $9.8 billion US); in a bid to add utility to the Tren Maya, freight capacity has been added to the original vision. The Tren Maya is opposed by both indigenous and environmentalist groups.

AMLO’s strategies for meeting Mexico’s NDCs are to plant trees and update 60 hydroelectric plants. The Sembrando Vida (Sowing Life) program, funded at $3.4 billion US, pays farmers to plant trees for fruit and timber production. Intended to bring income-producing agriculture to degraded land, the program actually encourages farmers to clear the jungle (that would be slash-and-burn again) to plant the program-provided trees.

Modernizing the hydroelectric plants receives high marks from agencies and experts in general, but in the first quarter of 2019, hydroelectric produced 6.4% of Mexico’s power, other alternatives (wind, nuclear, solar) produced 9.6%, and fossil fuels produced the remaining 84%. Hydroelectric power is much more expensive to produce than wind or solar; all the plants involved are over 50 years old, and modernization will be complicated and expensive. Many areas of Mexico face drought conditions, and dammed water is diverted to agricultural use rather than the hydroelectric plant. Promoting hydroelectric power with these improvements is a policy with only minor benefits.

When his policies and programs are criticized on environmental grounds, AMLO is dismissive, conspiracy oriented, and attacks the opposition: “There’s a lot of deception. I would tell you that they have grabbed the flag of clean energy in the same way they grab the flag of feminism or human rights. Since when are conservatives concerned about the environment?”

When he was elected, AMLO said he would have a mid-term review of his presidency. On April 11, 2022, he is holding a consulta de Revocación de Mandato, a consultation with voters on whether to “revoke his mandate.” The ballot question is carefully awkward, if not confusing, in its wording; it conflates the issues of whether or not a voter approves of AMLO’s policies with whether AMLO should stay in office. Given a general social bias towards continuity, AMLO is likely to win in a landslide.