Mexico's Oil Addiction Hinders the Liberalization of PEMEXTue, 01/22/2013 - 13:15
Even though Mexico’s economy is showing healthy growth, its taxation policy has placed the country firmly at the bottom of the Organization for Economic Co-operation and Development’s (OECD) country ranking for total tax revenue as a percentage of GDP. Although Mexico’s tax-to-GDP ratio increased from 17.7% in 2007 to 19.7% in 2011, Pemex still provides between 30% and 40% of the Federal Government’s annual budget through the high level of taxation.
Ernesto Marcos Giacoman, Founder and Senior Partner of Marcos y Asociados, firmly believes that the high dependency of Mexico’s federal budget on oil revenue has to be tackled. Marcos Giacoman, who served as Pemex CFO in the early 1990s, is convinced there is a high cost in maintaining the energy monopoly in Mexico. “It is very costly for Pemex to develop the entire oil and gas sector by itself.” This eventually interferes with its ability to be e·cient in budget management and to be profitable in all the activities it performs. “There are so many opportunities that Pemex can look at, but it does not have su·cient budget to invest in them, since it is pushed to explore other opportunities that will not bring extra value or profits.”
The way the NOC allocates its budget is closely related to the country’s energy needs and the agenda of the government. “The oil industry in Mexico is operated according to fiscal targets,” Marcos Giacoman explains. “With that in mind, Pemex’s budget allocation is as rational as it can be. If you construct a mathematical model with the objective of maximizing tax revenues for the year in question, activities such as exploration have to be minimized. The closer the exploration budget gets to zero, the more taxation can be leveraged from production.” He speculates that, although this is what justifies the way the government allocates Pemex’s funds, it is also why current regulations need to be changed, starting with the fiscal regime. With this in mind, liberalizing the oil and gas industry in Mexico would also mean liberalizing Pemex. “It would be very reasonable for Pemex to operate as a company: focusing more on running itself as a business, and not as a government entity.”
Giacoman suggests that energy reform should be focused on opening up investment in areas that would not be attractive for Pemex as a profit-oriented company. “I do not mean limiting Pemex’s exclusivity in the areas the NOC covers adequately with its expertise and budget,” he clarifies, “but to open the market in three dierent areas where Pemex is not being successful: unconventional resources, deepwater, and refining.” When talking about unconventional resources, Giacoman is not shy about saying that it is not a very appealing subject for Pemex. “Shale gas development is going to be very costly, so it requires an operating flexibility that is obstructed by its current structure and lack of specific managerial expertise required, although Pemex has the required technical capabilities.” Regarding deepwater, Marcos Giacoman thinks that oil discoveries in Perdido open up the opportunity to oer production-sharing contracts for development and production with better conditions than before finding anything. “It is the ideal time to look for joint venture schemes from a position of strength. Pemex would not be giving up concessions, but rather participating together with other companies, distributing risks and allocating them in a more rational way to maximize potential returns.” Finally, Marcos Giacoman considers that, under the current structure, the Mexican government has exhausted its justifications to pour additional investment into refining. He believes the government should stop paying gasoline subsidies, and, instead, gradually increase prices by decree and push for liberalization of the refining sector.
If this opening up were not to happen, Giacoman proposes alternatively to free Pemex to operate in a commercial way. Freedom to act as a business would allow Pemex to choose its own financing structures, without having to rely on what the government or the public think. Marcos Giacoman is convinced that this is the right way to correct the Mexican energy sector’s course. “Pemex is not really sacrificing anything by opening up these areas. Every investment coming from the private sector would be in addition to the US$30 billion that Pemex has to invest,” he explains. With liberalization, Pemex can continue to concentrate on being profitable at what they do best, while providing extra resources in collaboration with the private sector.