Slippery slope: despite high oil prices, lack of investment at state-run Pemex means Mexico could soon become a crude importer.

After being a virtual gusher of cash for Mexico for many decades, state-run oil company Petroleos Mexicanos (Pemex) seems to be on the verge of drilling a dry hole. The company faces serious challenges in terms of infrastructure and a critical financial situation that, among other things, keeps it from making the exploration investments it needs to counteract a gradual production decline at its existing deposits. If the situation remains unchecked, in a decade Mexico could become an importer of crude oil, warns Pemex General Director Luis Ramirez Corzo.

For now, the two main problems at Pemex are high levels of debt and the decline of its known oil reserves, according to oil analysts. More money is needed, clearly, but it's less clear from where that cash will come--outside or inside Pemex. New private financing, although not voting shares, is one route, although allowing Pemex to keep more of the cash it generates is another, less politically painful choice, and the more likely path, according to Pemex observers.

That subject of money leads directly to the second issue: If Pemex doesn't increase revenues, it won't be able to spend enough to explore deposits that could compensate for expected declines in the Cantarell oil field, the world's second-largest such deposit after the Ghawar field in Saudi Arabia. Beginning in 2006, Pemex foresees production in Cantarell declining by 2% annually, while beginning in 2009 the annual decline will rise to 10%. Cantarell, located in the state of Campeche in the southern Gulf of Mexico, is responsible for 2 million barrels a day of oil--60% of Mexican crude oil production. A wrong move here makes nearly unavoidable the privatization of Pemex, a sharp decline in Pemex's payments to Mexico's public budget, or both.

That's because the company's current tax regime strictly regulates how it operates, making it competitive in terms of contracts, how it incorporates private capital, how it bids out contracts and how it spends on technology. In addition, the structure of the company includes a heavy government payment that weakens both the amount it can spend on new investments and its flexibility in doing so. In the past year alone, Pemex sent US$44 billion to the public coffers, a figure 18% higher than in 2003. That's a huge amount of money, considering that in 2004 Pemex's total revenues were $69.38 billion, on which it posted losses of $2.29 billion.

A lack of autonomy for the state-run oil company is based on a regulatory framework and corporate structure that, according to Pemex Director Ramirez Corzo, impedes the company from acting like a competitor against its peers in the world and prevents it from generating greater economic value for the country. To this add Pemex's huge labor force. The company has 140,000 workers, which works out to be 27 jobs per oil well it operates. The industry average is just 10 workers per well.

In December and January, three big oil spills around Pemex pipelines reinvigorated calls by critics for an immediate decision on additional resources to update infrastructure now two decades out of date. Ramirez Corzo says Pemex needs $3 billion right away just to do maintenance during the next six years on the company's pipeline network.

That's just the beginning. Pemex has said it also needs to spend at least $10 billion a year on technology and exploration to avoid a drastic decline in reserves, currently at 48 million barrels of crude oil, of which 39% are proven. In 2004, investment in the company reached $10.10 billion, of which 92% was spent on production and exploration and 4% on refining.

Nevertheless, in order to meet domestic demand for crude oil, gas and petroleum derivatives, yet still export, the company needs annual investments north of at least double that--$20 billion a year. Right now, Mexico is importing natural gas and liquid propane, among other petroleum products, the added cost of which is a drag on the domestic petrochemical industry.

Pemex is the least profitable oil company in the world--as well as the most in hock. Pemex's debts now reach $85.20 billion, including nearly $30.80 billion in liabilities associated with its workforce. "The company needs the structure of a private company in order to obtain the definite commercial framework it needs to turn itself into a business with strict business standards," says George Baker, president of Houston, Texas energy consultancy Baker & Associates.

In October, the Mexican Congress took into consideration a change in the law that would let Pemex keep a bigger cut of its earnings. However, the bill got bottled up in the Senate. Mexican President Vicente Fox lacks the support of opposition parties he would need to open Pemex to private investment. Energy analysts believe that reforms will be made in the next administration, but until elections in 2006 and the end of Fox's government, any advances made will be limited in scope.

In February, Chris Salden, vice president of exploration and production for British Petroleum in Mexico, said that Mexico would need to invest approximately $200 billion during the coming decade to explore deepwater wells in the Gulf of Mexico, where reserves could total 54 billion barrels.

While it's clear that Mexico has the reserves, it's also clear that known reserves are being steadily tapped out over time. Oil analysts expect it will take at least six years to get oil from new, deepwater wells--and those investments have to take place in the next two years to meet even that timetable. If nothing happens, analysts say, expect reserves to decline beginning in 2010.

To do the exploration work, Pemex might need to work with companies that have the technology and experience. But to bring these types of companies to the table means giving up part of the oil that might be found, not allowed under current Mexican law. Tim Cejka, president of ExxonMobil Exploration Company, part of ExxonMobil, the world's biggest oil company, says that in terms of deepwater exploration, Mexico has more potential than has yet been realized. "In the coming 20 or 30 years there's a lot of room to grow," says Cejka.

Cooperation. ExxonMobil is interested in working with Pemex if it opens the door to private investment. He points to Brazil's state-run oil giant Petrobras as a model, citing its very successful history of cooperation with the world's private oil majors. It's a model Pemex could replicate, Cejka says. "ExxonMobil is very interested in Mexico, but it's Pemex's decision," he says. "We have operations in Brazil, Venezuela, Bolivia and Colombia, but in terms of future potential, nothing compares to Mexico."

Oil sector analysts concur with the view that Pemex has to come up with a system similar to that of its Brazilian counterpart yet not lose control of the business. Current law only allows Pemex to offer what are called multiple-service contracts, through which the company pays a fixed amount to private companies but not a portion of potential earnings.

Carlos Tadeu da Costa, executive manager of exploration for Petrobras, says that both Brazilian legislation and Petrobras have changed in order to extract the maximum advantage of associating with other companies. "We choose with whom we want to do business, where and when," he says. "Sharing risks in a risky industry and sharing the benefits is something that's totally reasonable."

Petrobras, like the private oil giants, is waiting for Mexico to open its market and to take full advantage of the current high price of oil. "Petrobras is very interested in doing business with Pemex. We have similar histories, similar cultures and lots of synergies," says da Costa. "We're just as nationalist as the Mexicans."

MARISOL RUEDA, VERACRUZ