Buried treasure: Mexico's state oil company could make a killing in natural gas--if it could only get the stuff out of the groun

Even as the U.S. economy slipped in the past few years, its need for natural gas rose as supply from Canada declined. As the U.S. recovery begins, surely with major trading partner Mexico to follow, Mexican state oil giant Petroleos Mexicanos (Pemex) wants to be first in line to meet that market, not to mention their own rising domestic demand. The Mexican government sees its demand almost doubling to 93.89 billion cubic feet a day by 2012.

Meanwhile, officials estimate that Pemex has to spend US$130 billion daring the coming decade to keep the lights on at home, nearly half of that on electricity generation and transmission. Electricity demand in Mexico alone will rise 5.6% annually during that period, estimates Felipe Calderon, Mexico's recently resigned energy secretary.

Reforms, long stalled, are coming, he predicts. "We want to more faster, but I think it's good news to be on the way," says Calderon.

Mexico is pushing hard to invest as never before, says Dionisio Perez-Jacome, president of the Energy Regulatory Commission in Mexico. "With respect to trade between the United States and Mexico, it's foreseeable that Mexico, during the coming years, will be a net exporter due to our importing gas from other sources in the Pacific and in the Atlantic," he says.

That is, if Pemex can get the gas out of the ground. Big global oil companies that could help are staying on the sidelines, since federal law prohibits them from exploring for and pumping oil. South American oil giants Venezuela and Brazil both found ways to involve foreign capital and know-how in their operations in recent years, yet Mexico lags just when it could be making a killing.

The bottleneck is in the Mexican Congress, where reforms depend on opposition support. In the meantime, the government is relying on what are known as multiple-service contracts to move gas to Mexico's own power plants. Such contracts allow private companies to go in and get the gas and sell it to Pemex for a fee. So far, they're not too popular with global petroleum producers. Investment. Pemex expects companies awarded the multiple-service contracts during the first round of bidding to invest $4.30 billion. "Of course, the contracts are not attractive enough for a lot of companies, but I think it's a first step in the fight direction," Calderon told participants at an energy conference in La Jolla, California in May. Calderon later resigned his post, ostensibly to run for president of Mexico.

"We purchased data packages--that's public information--and we evaluated the opportunities and in the end we decided not to bid,' says Joseph A. Newhart, president of ExxonMobil Ventures Mexico. "It's an internal business decision. It had a number of factors associated with it: the quality of the opportunities, the contract terms, We expected greater return on all those things that we were taking into consideration."

Part of the problem is that, while companies involved can earn money, they don't own the assets. In late 2003, the government held a tender for seven natural gas multiple-service contracts in the Burgos basin. Five were assigned, to large companies like Brazil's state-run oil company Petrobras and to smaller companies like Lewis Energy of San Antonio, Texas.

Leaving the heavy lifting to a few companies is going to hurt, and soon. Natural gas does everything from heating stoves to fueling multibillion-dollar power plants. Pemex officials have said that they would like to explore for natural gas in deep water, although the company does not have the technology that an ExxonMobil has. Off of Mexico's Gulf coast, many areas are virtually unexplored and could contain vast amounts of gas and oil, Newhart says. In the meantime, the company will wait and see what happens with multiple-service contracts.

"Pemex wants to get into deep water; they've publicly stated it. Their General Director Raul Munoz Leos has been saying since last October that they see a need to be able to have strategic associations with others," Newhart says.

Pemex says multiple-service contracts are a step in the right direction, yet uncertainty surrounding the newness of the plan has limited tender results. "It hasn't been as compelling as hoped" says David E. White, executive vice president at Pace Global Energy Services, an energy management consultancy.

The problem is, multiple-service contracts cannot produce enough gas to meet even domestic demand; they merely lower the deficit, says White. Nor can new natural gas plants on Mexico's Pacific coast produce enough to meet domestic needs, White says. "I am not saying it's a bust," White says. "When you look at supply and demand balance, they really are relying on that to fill a significant supply gap."

Looking south. While the industry waits to see if multiple-service contracts pay off or not, Mexico is looking toward natural gas-rich South America as another source of energy. Countries such as Peru and Bolivia are developing their natural gas resources and could soon send liquefied natural gas (LNG) via ship to the Pacific coast port at Lazaro Cardenas, where the liquified gas would be decompressed. Natural gas is cooled and condensed to a liquid to make its export via ship economic. Similar plans are under consideration at a port in Altamira, on the Gulf of Mexico.

Pemex for now will focus heavily on bringing LNG in at Lazaro Cardenas due to its proximity to Peru and Bolivia, which will ship out gas via the Pacific Ocean, according to Marcos Ramirez, general director at Pemex Gas and Basic Petrochemicals.

Ramirez says that steel plants in western Mexico could also benefit from gas coming in from Lazaro Cardenas, although analysts caution that such a plan would supply 500 million cubic feet daily, only a partial solution to Mexico's coming gas crunch.

"We have been approaching companies to explore the possibility that Peruvian of Bolivian gas could be [shipped to] the west coast of Mexico," says Ramirez. "[These] are what kind of steps we need to take into account in order to build LNG plants in the Mexican west coast and, of course, to trade that natural gas in Mexico."

While Pemex waits for a green light from Congress--which is far from guaranteed--it is taking action to get its own house in order. Pemex owes its creditors $40.14 billion and recently laid off 3,000 workers, 2% of its workforce--quite a feat for a state-owned operation. The government may also consider tinkering with multiple-service contracts to attract more energy companies to the Burgos basin. The opposition, Calderon hopes, will realize that lukewarm results during the bidding for the contracts reflects inefficient, energy laws.

Theft continues to be a problem, too. To ensure the nation's energy supply, the company cracked down on corruption, especially on gasoline theft. The fight against corruption saved the company $300 million in only two months, says Calderon. Corruption has plagued Pemex in the past. In 2000, Pemex's then-CEO Rogelio Montemayor was accused of stealing $150 million from the company to finance the Partido Revolucionario Institucional political party's electoral campaigns for that year.

"The sales of gasoline in Pemex increased dramatically, which means maybe $1.5 billion in a year," says Calderon. "Additional revenues for Pemex refineries is amazing--it gives us an idea about the size of the corruption in this area."

FORREST JONES-LA JOLLA, CALIFORNIA

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