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Barriers to Foreign Investment in PEMEX

Despite substantial capital investments in recent years, Petroleos Mexicanos (PEMEX,, the Mexican oil giant, faces huge additional spending requirements, in order to upgrade vital pipeline infrastructures and to get its finanical ship back in order.

One potential source of funding is foreign investment. But to date, the Mexican Congress has failed to take action that could lift barriers to such investment.

In an address on March 2005 to Vicente Fox Quezada, President of Mexico, the General Director of PEMEX, Luis Ramirez Corzo, summarized the current investment situation. This address took place in Ciudad del Carmen, an important oil area in southeast Mexico.

Ramirez Corzo stated that the accumulated PEMEX investments of the last four years reached $9 billion, more than twice the investments of the last two decades. With those investments, new oil resources have been identified, totaling 54 billion barrels of crude oil, worth $300 billion. The production of crude oil during last year reached the historical high of 3.4 million barrels per day; 1.8 million of this amount was exported, with a market value of $21.2 billion. Natural gas production reached 4.6 billion cubic feet per day. Total PEMEX sales for fiscal year 2004 were $70 billion.

President Fox explained that upgrades of huge refineries in Tula, Salalanca, Cadereyta and Madero have been completed, and that Minatitlan and Salina Cruz will follow shortly. He also indicated that during the last four years, PEMEX has completed five plant enlargement and construction projects for petrochemical plants, worth 2.1 billion Mexican pesos (about $186 million). Eight additional petrochemical projects are underway, with an investment of 6.7 billion Mexican pesos (about $600 million). One large project, “El Fenix,” with an initial scope that comprises the construction of two petrochemical mega-complexes, calls for an investment of $2.5 billion. The above figures notwithstanding, PEMEX faces a difficult financial situation and complex operational environment. It is the oil company with the largest debt in the world, with liabilities that amount to 860 billion Mexican pesos (about $77 billion). In addition, the fiscal operating environment forces PEMEX to allocate 70 percent of its income to pay for taxes.

This PEMEX operating situation has given way to losses of 170 billion Mexican pesos (about $15 billion). Assets have gone down from 167 billion Mexican pesos to 58 billion Mexican pesos (about $5 billion) within the same timeframe. This financial decline has led to a lag in the maintenance of PEMEX installations, which in turn fosters deterioration of critical areas, technological lag, and a weakening of support systems and infrastructure. This situation can be ascertained from recent accidents that have occured in the 33,000-mile PEMEX pipeline network.

A huge capital investment is required for PEMEX to solve its financial problems and modernize its infrastructure to the level required to position the enterprise as one of the main oil companies in the world. Capital required should come from foreign sources; but current legislation blocks foreign investment in strategic areas such as exploration and exploitation of oil deposits, and this has turned critical now, because most Mexican crude oil reserves are located in deep waters of the Gulf of Mexico.

One of the most important areas for discussion by the Mexican Congress is the modification of the Mexican Constitution to allow foreign investments in certain strategic areas, such as the oil industry and electric power generation. Such modifications will not be an easy task, but progress can not be overlooked.

Modesto Vazquez,, is executive editor for “InTech Mexico Automatizacion” and a member of the Editorial Board for “Manufactura” magazine, the largest industrial magazine in Mexico.

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