- The Washington Times - Monday, January 27, 2003

Mexico was sure it struck black gold when it expropriated foreign oil companies in 1938. The anniversary of the expropriation continues to be celebrated there. But the fiscal woes facing the country's state oil monopoly, Petroleos Mexicanos (Pemex), should give Mexicans little cheer.
This is quite a shame, not only for Mexico, but for the United States as well. The Bush administration had other hopes. Two years ago, President Bush outlined a bold vision of energy integration between the United States, Canada and Mexico. This union could help relieve America's reliance on Mideast oil and ensure a steady supply of energy in the country's backyard, Mr. Bush said.
In terms of actual oil reserves, this vision is feasible. Pemex is the world's fifth-largest oil company, producing about 3.2 million barrels of oil a day, and provides the United States with almost as much oil as Saudi Arabia. "There may be a great deal of [oil] reserves out there in deeper waters," said George Baker, director of the Houston-based Mexico Energy Intelligence. But unfortunately, Mexico's complicated political realities conspire against the development of its potential oil resources.
Pemex lacks the commercial ability to drill for oil in deep waters and is legally hamstrung from allowing foreigners to do the exploration. According to Mexico's constitution, foreigners, and even private industry in Mexico, are in effect prohibited from controlling energy production. And Mexican President Vicente Fox lacks the two-thirds majority in congress to alter this law.
So, Pemex must pay for this exploration itself. Unfortunately, the oil company's tax burden currently exceeds its profits, and it was therefore $3.5 billion in the hole in 2001. Pemex generates more than a third of Mexico's annual budget. So, in order for Pemex to be able to privatize, or even reinvest more of its profits into exploration or modernization projects, the Mexican government would first have to wean itself of its dependence on the firm. But Mr. Fox's efforts to reform Mexico's tax system were watered down to inconsequence by Mexico's congress.
The company's head of refining, Juan Bueno Torio, said Wednesday that Mexico must relax its oil-sector rules and allow foreign companies to own and operate their own refineries and service stations to prevent the oil sector from "falling behind." Under Mr. Fox, foreign companies have been allowed to provide Pemex with drilling and exploration services. But with Pemex's tax burden, the company is hard-pressed to pay for these kind of services.
Perhaps the best news for Mexico and Pemex is that the current system is unsustainable, given the company's tax burdens. As important as Pemex is for the United States, particularly now with uncertainty surrounding production in Venezuela and the Middle East, the Bush administration must be careful to address its concerns about the company's future only in private. A nationalized energy sector is still a source of strident national pride in Mexico, even though the current strains on Pemex are crippling Mexico's development hardly a cause for celebration.

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