Oliver L Campbell : Mexico: the price of nationalism
That the pen is mightier than the sword is well known but, if I may add a corollary, it now seems income generation is more powerful than nationalism. It was on 18 March 1938 that the President of Mexico, General Lázaro Cárdenas, nationalised the oil industry. Since then it has been a fiesta day and the Mexicans are very proud of the fact they have run the oil industry themselves, without any private partners, through their state company Pemex. In this respect, they have differed from Venezuela and Brazil where PDVSA and Petrobras have invited private investors to participate in exploration and production, albeit as minority partners.
Both countries have benefitted from the know-how and cash the foreign oil companies have provided while still maintaining control over the operations through PDVSA and Petrobras. But Mexico, with the memory of its struggle against the foreign oil companies still fresh in many minds, has steadfastly refused to contemplate private investment. The result is that oil production has fallen from a peak of 3,400,000 b/d in 2004 to 2,550,000 b/d in 2011, the main reason being a lack of sufficient investment. Though the effect on income has been mitigated by a substantial rise in oil prices, Mexico needs to raise more income from its oil industry.
The leading contenders for the presidential election on 1st July, Enrique Peña Nieto and Josefina Vazquez Mota, have both said they support private investment. If this happens, it means a 74 year-old "taboo" will have been broken and nationalism will have given way to economic necessity. Many Mexicans will still oppose this--they are a proud race and their nationalistic stance is understandable. However, we live in a global society where even the most advanced economies welcome foreign investment. Mexico should be encouraged by the fact Venezuela, Brazil and Columbia have all accepted private investment in their oil industries as a matter of practical economics.
Offshore drilling in the Gulf of Mexico or in the Atlantic ocean a hundred miles off the Brazilian coast is an expensive business. Though both Pemex and Petrobras have the expertise for drilling in deep water, they need the funds private oil companies can provide. Also, by creating joint venture with private investors, both companies can spread the risk inherent in offshore drilling
Venezuela has invited state and private companies to take minority interests, up to 40 percent, in the development of the Orinoco Belt. The government has taken a practical approach by recognising foreign investors are needed to provide funds so as to increase production sooner rather than later which would be the case had PDVSA decided to go it alone.
But there is nothing new in this. Readers will recall the United Kingdom found oil in the North Sea in 1965 and the giant Forties field was discovered in 1970.
The British economy was going through a bad patch at the time, with substantial balance of payments difficulties, so the government also wanted to increase production as quickly as possible. Though the UK had both the expertise and capital, it did not have them on the scale required for rapid North Sea development. The answer was to grant licences to British, European and USA oil companies and to make the economic return attractive. The result was that, by 1985, production reached some 2,600,000 b/d.
If Mexico accepts private investment and allows the investors an adequate return, I am sure production can exceed the previous peak of 3,400,000 b/d within ten years. Is not an extra million barrels per day worth putting your nationalism aside? If oil remains at around $100 a barrel, that would give extra sales revenue of some $36 billion. The new government must weigh the political disadvantage against the economic advantage. Just occasionally, pragmatism must take precedence over principles, so I hope the Mexican people do not feel too aggrieved if the government decides private investment is the right course of action.
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Oliver L Campbell , MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.
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Petroleumworld News 05/09/2011
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