Mexico is opening its oil industry to foreign investment. But many Mexicans are skeptical—for good reason.
On Dec. 12, 2013, Mexican legislators approved controversial, far-reaching reforms to the country’s energy sector. Outside the federal legislative chambers in Mexico City, protesters pounded on metal barriers with rocks and spoons, while phalanxes of riot police stood guard behind the barricades. Many felt their country’s patrimony and fiscal independence were being sold at a fire sale. Mexico was opening up its energy sector to private, foreign interests for the first time since President Lazaro Cardenas had tossed out foreign companies and nationalized oil reserves to wide and enthusiastic support in 1938.
For the past 75 years, Mexican oil has been controlled exclusively by the state-owned oil firm Pemex, the second most profitable company in Latin America, according to the Fortune 500 index. Almost all of Pemex’s profits go back into national coffers. But the state-owned company is also notoriously corrupt. One of the figures most associated with corruption at Pemex is its longtime union leader, Carlos Romero Deschamps. His daughter sparked a scandal in 2012 by flaunting her inexplicably opulent lifestyle on social media. Romero Deschamps has led the oil workers union since he was appointed to the position more than 20 years ago by then-president Carlos Salinas de Gortari. But good luck charging him for his alleged crimes. As a senator for the ruling PRI party, Romero Deschamps enjoys immunity from prosecution under a shield law for elected officials known here as fuero.
Then there’s Francisco “Pancho” Colorado, who was tried, convicted and sentenced in Austin for his role in a Zetas money laundering operation. Colorado became wealthy as the head of an oil services company that received lucrative contracts from Pemex. An FBI agent testified in federal court in Austin that informants said Colorado received multi-million dollar contracts with Pemex in exchange for acting as an intermediary between a former governor of Veracruz and a founder of the Zetas cartel.
But energy reform, as passed, does virtually nothing to remedy corruption within and surrounding the state-run company. As often happens to public companies ahead of a push to privatize or denationalize, Pemex was portrayed as an ailing dinosaur of a monopoly whose only hope is an injection of private capital into the sector it has dominated for decades.
Proponents of energy reform say foreign companies are needed to help Mexico exploit vast oil and gas reserves in ultra-deep offshore reserves and locked in shale formations. Foreign companies can currently receive contracts to provide services to Pemex, but the legislation allows for profit-sharing arrangements and for private energy companies to bid for drilling licenses. Specifics are to be worked out in secondary legislation currently underway. But even without the details, the business press has predicted energy reform could bring in $20 billion in private investment in Mexico. How that figure was reached is unclear, as is how much money investors expect to take out of Mexico.
The opening of Mexico’s oil and gas fields to private companies is perhaps the country’s most significant economic change since the implementation of the North American Free Trade Agreement (NAFTA) two decades ago. Mexico’s oil wealth is the cornerstone of its economy. Revenue from Pemex funds a third of the federal budget, including healthcare, schools and infrastructure.
As was the case for factories drawn to Mexico after NAFTA, looser environmental regulations for practices like fracking could also be an investment draw to the Mexican extension of Texas’ Eagle Ford Shale play. Fracking is new to Mexico, with only three wells currently in operation near the Texas border. But Mexican President Enrique Peña Nieto argues that technical expertise from foreign companies is needed to allow Mexico to capitalize on its shale oil and gas deposits.
It’s not hard to see why Mexico’s oil and gas reserves would be attractive to energy companies, especially those in Texas. Northeastern Mexico and Texas are geologically similar in many ways, from vast offshore reserves in the Gulf to large shale formations that straddle the border. Mexico is also the third largest exporter of crude oil to the United States, ranking just behind Saudi Arabia and ahead of Venezuela.
But unlike the robust international news coverage that surrounded the passing of NAFTA, the coverage of Mexico’s energy reforms has been an echo chamber of think tanks, PR strategists and consultants who support the changes, while the journalists who interview them fail to disclose or question these sources’ possible conflicts of interests.
U.S. readers are left with the sense that seismic changes are occurring in Mexico, yet there’s little examination of the implications or acknowledgement of how unpopular the changes are. The chorus of consultants and PR strategists dominating the media discourse are selling a rosy picture of reform in Mexico—one that happens to align perfectly with the interests of American energy companies.
The American media has almost universally portrayed the restructuring of Pemex as a bold measure that will benefit both Mexico and private investors while breathing new life into an ailing monopoly.
“Mexican Oil And Gas: Christmas Arrives Early” read the headline in Forbes announcing the passage of energy reform through the Mexican Congress. The piece was written by Duncan Wood, director of the Mexico Institute. The advisory board of this innocuous-sounding organization is co-chaired by the VP of Pioneer Natural Resources and includes the president of Exxon Mobil Ventures-Mexico as well as the CEO of Hunt Oil. The think tank’s staff are often quoted in The New York Times, Washington Post and Wall Street Journal on Mexican energy matters.
Another go-to pundit in U.S. coverage of Mexico’s energy reform is Antonio “Tony” Garza, who is usually identified as a former U.S. ambassador to Mexico by journalists who quote him. But perhaps the more salient fact of Garza’s bio is that he now heads Vianovo Ventures, the investment arm of ViaNovo, “a boutique management consultancy that counsels companies and causes on high-stakes brand, policy and crisis issues.” ViaNovo is packed with former Bush/Cheney associates, including founding partner Matthew Dowd, former chief strategist for the Bush re-election campaign.
ViaNovo doesn’t publish the names of clients on its website, but its Ventures arm lists large energy infrastructure projects as an area of focus, and places emphasis on US-Mexico market entry as one of its strong points.
Just after the congressional passage of energy reform, Garza penned a puff piece arguing “Mexico took a giant leap toward a new economic future” with the legislation. The piece, distributed as a “press release” by Marketwired, was picked up and published verbatim by Texas outlets, including the Houston Chronicle, the Fort Worth Star-Telegram, and the Austin American-Statesman.
Not mentioned by the papers that published his commentary—or any of the national outlets that interviewed him about energy reform—is that Garza also sits on the board of directors of Basic Energy Services Inc., an oil and gas well services company headquartered in Fort Worth.
Last year, Time magazine named Enrique Peña Nieto one of the world’s 100 most influential people in a glowing profile that lauded the president’s reform agenda and hugely exaggerated his domestic approval rating. The profile’s author, Bill Richardson, was identified as “a former governor of New Mexico.” A former secretary of the U.S. Department of Energy, Richardson is currently (and at the time of penning the profile) the chairman of APCO Worldwide’s executive advisory service Global Political Strategies. According to public documents known as FARA filings, the communications consultancy firm APCO Worldwide is currently under contract to provide public relations services to the Office of the President of the Republic of Mexico.
Despite the promises that energy reform will unlock wealth for the benefit of the nation while lowering energy costs, many Mexicans are skeptical. Past moves to privatize the telecommunications sector, railroads and the Bank of Mexico did more to turn a handful of politically connected individuals into billionaires than benefit the average citizen.
The celebratory rhetoric in the U.S. press about energy reform failed to touch on what are key concerns for many Mexicans opposed to the de-nationalization of hydrocarbons reserves.
Foremost is the uncertainty around what could happen when the most profitable sector of the economy is opened up to foreign companies. Currently, most of the profits earned by Pemex go directly into national coffers, supporting the social safety net, education and middle class jobs in the public sector. Will the government be forced to take “austerity measures,” cut social spending and downsize its bureaucracy when part of the oil and gas profits flow toward foreign shareholders? If energy reform fails to produce the economic success its supporters promise, would its failure trigger a domino effect of wider economic collapse within Mexico?
Then there’s the issue of the rushed—and some would say undemocratic—way in which energy reform was passed. The legislation zipped through both houses of Congress and a majority of state legislatures over the course of just one week. Past attempts to open up Mexico’s energy sector had been stopped by well-organized opposition. This time, a legislative coalition including the country’s two largest political parties ensured easy passage of the reform, steamrolling the opposition and ignoring calls to put the controversial measure to a popular vote in a nationwide referendum.
Another issue is that some of the most significant oil and gas deposits are located in—or just offshore of—areas known in Mexico as zonas de silencio or silence zones.
In silence zones, organized criminals operate with little hindrance from local authorities; civilians face economic and physical violence; open criticism and adversarial journalism can be life-threatening; and impunity is systemic.
Residents of silence zones often regard organized criminals and local government authorities as different facets of the same power structure. This is particularly the case in the Gulf Coast border state of Tamaulipas, where organized criminals control many secondary roads to gas fields; fuel theft from state-owned pipelines is rampant; and stolen gas is sold openly out of the backs of vans in border cities like Matamoros, Rio Bravo and Reynosa.
Just how foreign companies will go about their business in oil and gas fields in territories with already entrenched armed actors is an open question. But experiences in Iraq, which de-nationalized its oil reserves after the U.S.-led invasion, have shown that some American energy companies are willing to do business in violence-plagued areas if the reserves and the potential gains from them seem to justify the risks.
The energy reform story is still developing. Mexico, plagued by corruption and an insecurity crisis, is embarking on one of the most controversial economic reforms in its modern history. In February, legislators will draft secondary legislation to nail down licensing and other details. No doubt there’ll be protesters outside the legislative chambers once again clamoring for a say in how the nation’s oil and gas wealth is administered and distributed. But whether anyone in the U.S. will read about their concerns is another story.