Oil

Oil

Although explorers drilled Mexico's first petroleum well in 1869, oil was not discovered until after the turn of the twentieth century. Commercial production of crude oil began in 1901. By 1910 prospectors had begun to define the Panuco-Ebano and Faja de Oro fields located near the central Gulf of Mexico coast town of Tuxpán, and systematic explorations by foreign companies came to supersede the uncoordinated efforts of speculative prospectors. Mexico began to export oil in 1911.

Article 27 of the constitution of 1917 gives the Mexican government a permanent and inalienable right to all subsoil resources. The government's efforts to assert this right produced a lengthy dispute with foreign oil companies that was not resolved until the companies were nationalized in the late 1930s. The 1923 Bucarelli Agreements committed the United States and Mexico to regard titles held by foreign oil companies as concessions by the Mexican government rather than as outright ownership claims. In 1925 President Plutarco Elías Calles decreed that foreign oil companies must register their titles in Mexico and limited their concessions to a period of fifty years.

Despite disruption caused by the Revolution, Mexico's oil production peaked in 1921 at 193 million barrels (some 25 percent of world production), largely as a result of increased international demand generated by World War I. During much of the 1920s, Mexico was second only to the United States in petroleum output and led the world in oil exports. By the early 1930s, however, output had fallen to just 20 percent of its 1921 level as a consequence of worldwide economic depression, the lack of new oil discoveries, increased taxation, political instability, and Venezuela's emergence as a more attractive source of petroleum. Production began to recover with the 1932 discovery of the Poza Rica field near Veracruz, which became Mexico's main source of petroleum until the late 1950s.

In 1938 President Lázaro Cárdenas nationalized the petroleum industry, giving the Mexican government a monopoly in the exploration, production, refining, and distribution of oil and natural gas, and in the manufacture and sale of basic petrochemicals. Although Cárdenas offered compensation, United States oil companies pressured the United States government to embargo all imports from Mexico in order to discourage similar nationalizations in other countries. The boycott was in effect briefly, but the United States government soon pressured the oil companies to come to terms with Mexico as a result of President Franklin D. Roosevelt's Good Neighbor Policy and United States security needs arising from World War II. In 1943 Mexico and the oil companies reached a final settlement under which the companies received US$24 million (a fraction of the book value of the expropriated facilities) as compensation. Nevertheless, the oil nationalization deprived Mexico of foreign capital and expertise for some twenty years.

Mexico's oil output expanded at an average annual rate of 6 percent between 1938 and 1971. Production increased from 44 million barrels in 1938 to 78 million barrels in 1951. Domestic demand progressively exceeded output, and in 1957 Mexico became a net importer of petroleum products. Production rose to 177 million barrels by 1971 with the exploitation of new oil fields in the isthmus of Tehuantepec and natural gas reserves near the northeastern border city of Reynosa, but the gap between domestic demand and production continued to widen.

Extensive oil discoveries in the 1970s increased Mexico's domestic output and export revenues. In 1972 explorers discovered deep oil wells in the states of Chiapas and Campeche that showed huge reservoirs of petroleum extending for 200 kilometers northeast below the Bahía de Campeche, and possibly in the opposite direction toward Guatemala. Almost every drilling operation conducted after 1972 struck oil. In 1973 oil production surpassed the peak of 190 million barrels achieved in the early 1920s. In 1974 Pemex announced additional petroleum discoveries in Veracruz, Baja California Norte, Chiapas, and Tabasco.

By 1975 Mexico's oil output once again exceeded internal demand, providing a margin for export. President López Portillo announced in 1976 that Mexico's proven hydrocarbon reserves had risen to 11 billion barrels. They rose further to 72.5 billion barrels by 1983. López Portillo decided to increase domestic production and use the value of Mexico's petroleum reserves as collateral for massive international loans, most of which went to Pemex. Between 1977 and 1980, the oil company received US$12.6 billion in international credit, representing 37 percent of Mexico's total foreign debt. It used the money to construct and operate offshore drilling platforms, build onshore processing facilities, enlarge its refineries, engage in further exploration, prove fresh reserves, and purchase capital goods and technical expertise from abroad. These investments helped to increase petroleum output from 400 million barrels in 1977 to 1.1 billion barrels by 1982. Between 1983 and 1991, Mexico's petroleum exports by volume remained roughly constant at 1.4 million barrels per day (bpd), while total production increased from 2.7 million bpd to 3.1 million bpd.

The oil sector's share of total export revenue fell sharply from 61 percent in 1985 to 38 percent in 1990 because of higher domestic demand and lower total output. The volume of exports fell from 1.4 million bpd in 1987 to 1.3 million bpd in 1990. Oil prices rose briefly to more than US$35 per barrel in 1990 as a result of loss of supplies from Iraq and Kuwait, and Mexico's oil export revenues rose significantly to US$10 billion before falling back some 15 percent in 1991. The volume of oil exports rose slightly to 1.4 million bpd in 1991, then held steady along with production in 1992, as the oil price fell to below US$15 per barrel.

By early 1993, both crude oil production and exports had begun to decline. The drop in exports resulted from both increased domestic demand and lower total production. For all of 1993, Mexico's oil exports averaged 1.3 million bpd, 2 percent less than in 1992. Exports fell even more sharply in terms of value--to US$7 billion--because world oil prices fell steadily during much of 1992 and 1993. In 1994 Mexico's revenue from oil exports was more than US$7 billion.

In 1995 the oil sector generated slightly more than 10 percent of Mexico's export income (down from almost 80 percent in 1982). The United States bought 54 percent of Mexico's crude oil exports in 1991, Western Europe bought 25 percent, and Japan bought 11 percent. In mid-1993, heavy Maya crude accounted for 67 percent of total oil exports, the lighter Isthmus crude accounted for 20 percent, and the high-quality Olmeca type accounted for 13 percent.

In 1995 Mexico was the world's sixth-largest producer of crude oil. In the Western Hemisphere, only the United States produced more oil than Mexico. Directly behind Mexico was Venezuela, which in 1992 produced an amount equal to 89 percent of Mexico's crude oil output. The oil sector's share of overall GDP rose slightly from 5 percent in 1985 to more than 6 percent by 1992. In 1993 petroleum provided nearly 30 percent of central government revenues. Oil output rose steadily from 2.5 million bpd in 1989 to 2.7 million bpd in 1991, partly in response to the Persian Gulf crisis. Production held steady in 1992, then began to decline in early 1993. Mexico consumed 61 million tons of oil equivalent in 1992. Its total petroleum consumption amounted to 1.8 million bpd in 1992.

For the first ten months of 1995, total mineral production (including oil) contracted by a modest 1 percent. For all of 1995, oil production fell to an average of 2.6 million bpd from 2.7 million bpd in 1994. However, oil output in the first quarter of 1996 increased by 6 percent over the first quarter of 1995 to an average of 2.8 million bpd.

In 1993 Pemex operated seven oil refineries with a total capacity of more than 1.5 million bpd, the eleventh largest in the world. Mexico's average annual oil refining capacity grew steadily from 63 million tons in 1983 to 84 million tons in 1990. The country's largest oil refineries in terms of refining capacity were those at Salina Cruz (330,000 bpd) and at Tula (320,000 bpd) in the state of Hidalgo. Other refineries were located at Cadereyta (235,0900 bpd refining capacity), Salamanca (235,000 bpd), Minatitlán (200,000 bpd), Ciudad Madero (195,000 bpd), and Reynosa (9,000 bpd).

By the early 1990s, some 40 percent of Mexico's crude petroleum output was refined domestically. The government invested heavily to increase the capacity of existing refineries and construct new ones in order to retain within Mexico the maximum possible amount of value added in processing crude petroleum. In the early 1990s, financial difficulties prevented Pemex from expanding refinery capacity along with demand, forcing Mexico to consume more of its oil output internally and also to import oil. Petroleum imports rose from 2 billion liters in 1991 to almost 5 billion liters in 1992. Fuel oil imports rose from less than 3 million tons in 1991 to almost 4 million tons in 1992.

During the 1980s, Pemex constructed national pipeline distribution systems for crude and refined petroleum products and for natural gas. In 1989 an oil pipeline across the Tehuantepec isthmus opened to carry 550,000 bpd of Maya crude petroleum to Salina Cruz on the Pacific for export to the Far East. Two enormous petrochemical complexes were being built at Pajaritos and La Cangrejera in Veracruz to supply raw materials for manufacturing fertilizers, detergents, acrylic resins, polyester fibers, emulsifying agents, and other petroleum products.

In 1993 Mexico had the world's eighth largest crude petroleum reserves, amounting to some 5 percent of the world's total. Its proven crude oil reserves amounted to some 51 billion barrels in 1993, and it had potential reserves of some 250 billion barrels. The Gulf of Mexico contains approximately 56 percent of Mexico's proven reserves; 24 percent are located in the Chicontepec region, 15 percent are located in Tabasco and Chiapas, and the remainder are elsewhere. Mexico's reserves are sufficient to guarantee current production levels for fifty years.

Since the nationalization of the oil industry in 1938, the state-owned Pemex has monopolized the production and marketing of hydrocarbons. For decades the government tolerated Pemex's waste and inefficiency because the company produced nearly all public revenues. Problems mounted, however, as a result of Pemex's poor administration, low productivity, overstaffing, and corruption. By the late 1980s, Mexico's economic recovery had come to depend heavily on reform of the state oil sector.

After becoming president, Salinas moved swiftly to modernize and reorganize the oil industry. He began by breaking the power of the oil workers' union, which had contributed to Pemex's overall inefficiency by forcing the hiring of tens of thousands of unnecessary workers. In January 1989, Salinas had the union's notoriously corrupt chief, Joaquín Hernandez Galicia (nicknamed La Quina), arrested on weapons and murder charges. He was subsequently convicted and received a thirty-five-year jail sentence. Salinas then ordered Pemex to monitor and account for its internal finances. To reduce expenses, the company began massive employee layoffs, slashing its workforce by 94,000 (some 44 percent of the total payroll) by mid-1993.

In April 1992, natural gas from a Pemex pipeline leaked into the Guadalajara sewer system, triggering an explosion that killed more than 200 people. The tragedy underscored Pemex's bureaucratic unwieldiness and lack of public accountability. Following the explosion, Salinas accelerated the organizational restructuring of Pemex. The restructuring resulted in the company's division in 1992 into four subsidiaries: Pemex-Exploration and Production (E&P), Pemex-Refining, Pemex-Gas and Basic Petrochemicals, and Pemex-Petrochemicals. Each unit became a semiautonomous profit center, directing its own budget, planning, personnel, and other functions. The subsidiaries deal with each other on the basis of formal contracts and market-based transfer prices. The governing board of each subsidiary is composed entirely of public-sector officials.

Pemex's new focus on profitability and cost-cutting allowed the company to save US$50 million in 1990, US$70 million in 1991, and US$100 million in 1992. Moreover, Pemex reduced its total labor force from 210,000 workers in 1989 to 116,000 in 1992, with more dismissals expected later. A new collective contract permitted the company to seek the lowest bidder for maintenance, transport, slop oil disposal, and other work formerly reserved for the official oil workers' union. Pemex's new focus on efficiency and productivity also cleared the way for previously unthinkable foreign involvement in Mexico's oil sector. Several United States oil exploration companies received permission to drill under contract in Mexico, and foreign partnerships were authorized.

In August 1993, it became known that the government was considering proposals to allow private companies to buy, sell, and distribute imported gasoline, natural gas, and petrochemicals, and to invest in new pipelines. Although the government reiterated in 1992 its longstanding pledge not to denationalize the oil industry, some observers viewed the reorganization of Pemex as a move to improve the company's efficiency and profitability as a prelude to privatization. Denationalization would require amending the constitution of 1917, which mandated state ownership and exploitation of hydrocarbons.

During 1995 Pemex proceeded with its plans to divest its secondary petrochemicals plants and allow private investment in the storage, transportation, and distribution of natural gas. In late 1995, Pemex began to divest itself of sixty-one petrochemical plants.

In early 1996, the government unveiled its Program for the Development and Restructuring of the Energy Sector. The program estimates the minimum investment required by the petroleum sector by the year 2000 to be 250 billion new pesos (at 1995 prices). The private sector is expected to provide 49 billion new pesos of this amount. The plan is intended to increase Mexico's petroleum exports, improve its competitiveness in the international energy market, and contribute to more balanced regional development.


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