The international oil industry: recent changes and their implications for Mexico

A number of interrelated changes in the five years since the Cold War ended have had a negative impact on Third World oil producers. First, the continuing stagnation of the world economy and the shift toward other energy sources have slowed the growth in demand for oil products. Second, the Communist bloc, which once offered material support for Third World countries trying to develop their own oil resources, has collapsed. Third, this collapse has accelerated a trend toward privatization in the oil industry, as state ownership has been labelled a failure and private ownership touted as the only way forward. The result of all these factors has been that Third World countries, including those of the former Communist bloc, have been opened up to the international oil companies on a scale not seen since the 1950s, and on terms which are a throwback to that era of oil company dominance. In short, the balance of power between these companies and the Third World countries has shifted sharply to the companies. How and why this shift has taken place and its implications for Mexico are the subject of this article.

The effects of the world economic stagnation of the 1980s and the shift away from oil resulting from the doubling of oil prices in 1980 and continuing environmental pressures can be summarized in two sets of numbers. Between 1970 and 1980, world crude oil production increased by one-third, from 45 million barrels a day to 60 million barrels a day. Since then, after falling and rising, world production in the 1989-1993 period was still at that same 60 million barrel level--in short, there have been thirteen years of zero net growth.(1)

The collapse of the Communist bloc governments--which turned away from state capitalism and toward private foreign investment in the oil industry--is most significant in the Commonwealth of Independent States (CIS) and in China. The profound effects of this shift, particularly in the former Soviet Union, cannot be overestimated. At a most general level, the bipolar world once afforded the underdeveloped countries an umbrella under which they could attempt to gain control of their national economies. As regards oil specifically, the USSR in an earlier era played a variety of roles, such as saving Cuba from a strangling U.S. oil boycott, providing lower priced oil products to India, providing technology and capital for exploration and for building up production and refining industries in India and Vietnam.

The disappearance of this general support for underdeveloped countries in the post-Cold war era, as the former USSR began to privatize its economy and establish good relations with the United States, had some immediate material effects in the oil area. Most dramatically, Cuba found itself having to pay much higher prices for Soviet oil, which reduced the amount it could buy. This has been a major factor in the collapse of its economy. But above and beyond that, it is clear that the collapse of the Soviet bloc has helped lead many socialist-oriented governments and groups to conclude that there is no alternative to capitalism and privatization, at least in the near term. Is there any doubt, for example, that the Soviet collapse has been a factor in the ANC's movement away from a socialist platform of state ownership of natural resources? Not only has state ownership been ideologically discredited, but the former USSR no longer can or will act as a subsidizing supplier of capital and technology for such state ownership or as a barrier to Western political and/or military intervention in opposition to state ownership.

The recent trend toward privatization in the oil industry needs to be seen in historical perspective. For most of the 100-year history of the international oil industry, private ownership was the rule rather than the exception. Until the 1970s, except for the former Communist countries and a handful of Latin American countries (notably Mexico, Brazil, and Argentina), the world's oil reserves and production were owned and controlled by the big international oil companies. At the middle of the century, the seven largest private companies alone accounted for almost three-fifths of the non-Communist world's crude oil production and refining capacity. As recently as 1970, the private companies controlled 94 percent of all crude oil production and an even higher percentage of crude oil reserves. The upheavals of the 1970s drastically changed this picture, so that by 1981 the state companies of the oil-producing countries accounted for about three-fifths of the non-Communist world's crude oil production.

Of even greater significance in the long run was the private companies' loss of ownership of the vast crude oil reserves of the Third World, particularly of the Persian Gulf reserves in the 1970s. Today the top 234 private international oil companies hold only about 5 percent of the world's crude oil reserves of 1,000 billion barrels.(2) The situation is similar with regard to natural gas, which is widely agreed to be the hydrocarbon fuel of the future because it is less polluting than oil. The world's total proven natural gas reserves equal almost 5,000 trillion cubic feet, equivalent in energy content to 800 billion barrels of oil.

With leading private companies like Exxon and Royal Dutch Shell having proven reserves of crude oil equal to only eleven or twelve years' production at current rates, compared to forty-six years for the world as a whole, it is little wonder that the companies see recent events as a golden opportunity to improve their reserve position and save themselves from medium-term extinction. In the developed world, where reserve-to-production rates average ten to eleven years, a combination of fewer opportunities in these already heavily explored areas and strong resistance from environmental groups in more virgin areas means little opportunity for the companies. Thus, for example, from 1988 to 1992 exploration and development expenditures in the United States by the top 234 private companies dropped from $18 billion to $13 billion, while outside the United States they increased from $23 billion to $31 billion.

The Arena of Privatization

At present, the companies' greatest long run hope for reaping benefits from privatization seems to lie in the former Communist bloc. Although the political climate in the CIS is far from stable, the opportunities are enormous, given the huge proven oil and gas reserves. As the Petroleum Economist noted recently, after a perceived setback to "reform,"

Oil companies are feeling downhearted, but, for most of them, Russia's huge oil reserves make the idea of going home emptyhanded unthinkable. Instead, they will hang around and wait and see what happens.

The best bet for the private companies in the CIS appears to be Kazakhstan, which is eager to export oil. The two largest projects which have been launched are an Elf production-sharing contract to develop a 19,000 square-kilometer area and a Chevron 50-50 production-sharing joint venture to increase production on the huge Tengiz field. Among the attractions of operating in Kazakhstan is that "President Nursuitan Nazarbayev aims to become an economic partner of the West and he is doing his best to achieve that." One result is that "the lack of legislation in Kazakhstan means that environmental considerations can generally be overlooked."(3)

More concretely, the two agreements appear to be on extremely favorable terms for the companies. Thus the Elf contract provides that the company gets 40 percent of all production up to 100,000 barrels per day, with its share declining in stages to 15 percent on all production over 400,000 barrels per day. Along with Chevron's 50-50 sharing arrangements, such agreements are a throwback to the pre-OPEC contracts of the 1950s. By way of comparison, typical production-sharing agreements of the late 1970s gave the companies no more than 15 to 20 percent, and in the case of Vietnam, no more than 3 to 5 percent. Moreover, these agreements were for exploration in relatively risky areas rather than proven areas like Kazakhstan.

Little wonder then that Chevron's general manager of finance for the Tengiz project exulted in the company's Annual Report (1993) that "Chevron is building on the potential here as it did in the Middle East in the 1930s and Indonesia in the 1940s."(4) Where else could one obtain, for a cash outlay of about $200 million, an immediate increase in proven reserves of over 1 billion barrels plus 1.5 trillion cubic feet of natural gas? Some idea of the potential significance of this contract for a company like Chevron may be seen from the fact that the Tengiz tract has reserves of at least 6 billion barrels, so that Chevron's half would be greater than its total oil reserves in the rest of the world.

The biggest obstacle to the oil companies' materializing these dreams is the fact that, as a recent survey by the Russian Academy of Sciences showed, two-thirds of the people agreed that "privatization is legalized theft" and that it was undertaken "for the benefit of criminals."(5) Still, the international oil companies are pushing on every front for privatization.

A similar process of opening up to Western oil companies has been going on for even a longer period in China. Since 1982 China had made over seventy agreements with foreign companies to explore offshore, but despite over $3 billion in investment, little was found. Now China is opening up onshore areas for exploration, including 73,000 square kilometers in the Tarim Basin, in which the Chinese state company has already discovered five large oil fields, the most recently discovered of which has estimated reserves of 750 million barrels. According to the Petroleum Economist, the Tarim Basin has been described by one Western oil company executive as an "incredible prize" and "is one of the last prospective areas in the world still to be explored by foreign companies."(6) Moreover, as the Petroleum Economist points out, exploration terms will clearly be attractive to foreign companies:

Few oilmen expect China to depart from the flexible and pragmatic approach that has previously characterised negotiations with companies. Current terms, which include some element of production-sharing, are reasonably attractive and the Chinese authorities have proven willing, in the past, to liberalise terms to maintain investor interest, claimed one oil executive. "During the last couple of years, for instance, onerous training requirements of nationals during the exploration stage have been eliminated and royalty payments adjusted downwards, to make it more attractive for companies to explore for marginal oilfields."(7)

What is impelling the Chinese government to bring in foreign oil companies, despite its own state company's long record of success in raising China's oil production from virtually nil in 1950 to almost 3 million barrels per day? The most obvious answer is that in the post-Mao era the government, which has been increasingly pursuing rapid economic growth at any price, has been exporting its oil resources to pay for capital imports. Even though China has been a net exporter of oil for the last two decades, that position has now ended, and in 1993 the country imported 10 percent of its crude oil supply.(8) This is because, "while oil production has remained virtually stagnant in recent years, consumption, fueled by rapid economic growth and low domestic oil prices, has been growing by around 8 percent per annum."(9)

Aside from the former Communist bloc, and closer to home, Latin America has also seen a push for privatization. The most advanced case is Argentina, where Gas del Estado, the state monopoly of gas transmission and distribution, was privatized at the end of 1992. According to the executive who managed the process, it "succeeded because of the World Bank's involvement from the outset."(10) More significantly, last year 45 percent of the shares in YPF, the country's monopoly oil and gas producer and refiner, were sold off for $3 billion to local and foreign private investors. Peru is attempting to follow closely on Argentina's heels, with plans to sell off the state oil company, Petroperu, in its entirety. In Colombia and Ecuador, the state oil companies have been under heavy pressure to open up attractive areas for exploration by private companies.

Overall, a competition is being set up among countries to lower their terms, particularly in the light of recent changes in the industry described previously. As the Petroleum Economist noted:

With profit levels squeezed by soft oil prices and demand for products stagnant, companies are becoming more selective in their choice of exploration venture. What compounds South America's problems is that the squeeze on company investment funds has coincided with a flood of new exploration opportunities in eastern Europe and the Far East where conditions are deemed more attractive.(11)

While not insignificant in terms of setting precedents, these countries are relatively unimportant compared to the countries with the three largest oil reserves in Latin America--Venezuela, Mexico and Brazil--which together account for about 12 percent of the world's reserves. Venezuela is the first to begin to succumb to pressures to let private companies into oil exploration and development. Thus far negotiations have taken place only in the areas of developing and upgrading heavy Orinoco crude, which is a highly capital-intensive task. While the Venezuelan government has also expressed interest in having private companies "reactivate" marginal fields, this would only be on the basis of service contracts under which the private company would have to sell the oil back to the state oil company.(12) As for Brazil, while the pressures are great, including, for example, the World Bank's refusal to fund a proposed gas pipeline from Bolivia to Brazil if Petrobras is involved, nothing is likely to be decided until after the presidential elections in October.

Pemex and Mexican Oil

This brings us to a subject I am sure is dear to the heart of this audience, namely the pressures for privatization of Mexico's oil industry. While I am sure that many of you have a much better understanding of the situation than I do, let me indicate what it looks like to an outsider, and perhaps we can discuss this in more detail later. The sacred principle that Pemex should own and control the country's oil industry is slowly being nibbled away. A consortium led by Valero Energy Corporation of San Antonio, Texas, is building a $350 million gasoline additive plant in Veracruz, thereby breaking into Pemex's monopoly of refining facilities. Diamond Shamrock of San Antonio is opening up 200 gasoline service stations with Mexican operators, thereby "skirting a ban on foreign ownership of service stations."(13) Other U.S. oil companies, such as Amoco and Texaco, have been doing technical studies, providing engineering services, and drilling offshore wells for Pemex.

The hope of the foreign oil companies is that these steps, while undoubtedly profitable in themselves, will set the precedent for their ultimate goal:

Of course, what the oil majors really want is to explore for oil, take a percentage of the find, and help manage Mexico's vast fields. They lobbied heavily for such privileges during negotiations over the North American Free Trade Agreement last year, but Mexico held firm. Hopeful that Mexico will eventually soften, they are waiting in the wings--and snapping up whatever peripheral business comes along.(14)

The ultimate imperialist dream is that Mexico would follow a recommendation in a study prepared for the conservative U.S. "think tank," the Heritage Foundation, that Mexico privatize all of Pemex's assets and use the estimated $150 billion in proceeds to retire the country's foreign debt! The foundation's study is worth examining in some detail as a blueprint for the goals of the big oil companies. These goals, in ascending order of importance, are:

(1) Allowing "risk contracts" for oil exploration and development.

(2) Allowing majority foreign investment in petrochemicals.

(3) Dividing Pemex into separate, competitive companies.

(4) Allowing domestic and foreign competition with Pemex.

(5) Privatizing Pemex.(15)

The study's case for these various proposals rests on three arguments:

(1) Pemex does not invest enough, either in oil exploration and development or in petrochemicals, so foreign capital is necessary.

(2) Breaking Pemex into separate companies, each of which operates on its own and operates solely for profits, and then allowing domestic and foreign competition, would make Pemex more efficient.

(3) Privatizing Pemex entirely would allow Mexico to pay off its entire foreign and domestic debt. Also, Pemex has a poor environmental record and private companies would do better.

The basic fallacies in these arguments are:

(1) As the study admits, the government takes 94 percent of Pemex's profits as taxes, so it is not surprising that Pemex has little money left for capital investment in exploration and development or refining. Moreover, the study fails to note that if foreign investment is allowed in, and conservatively speaking it seeks at least a profit rate of 20 percent per year, compounded, then for each $1 invested, over a twenty year period the foreigner would seek to take out of Mexico $95.

(2) While the study wants Pemex broken into separate companies, the private oil companies operate in the opposite way, seeking full vertical integration in order to coordinate as much as possible their oil production and refining and marketing activities. Moreover, separating Pemex into separate companies and allowing in foreign competition would greatly weaken Mexico, since the new entities would be smaller and have less flexibility; for example, in the recent period of relatively low crude oil profits, the big private companies are using their higher refining and marketing profits to keep overall profits level, and Pemex would not have that option. So splitting up Pemex would simply weaken it, which is probably the study's real goal.

(3) Finally, if Pemex were sold for $150 billion, most of that would by necessity have to come from foreigners. If they are seeking a 20 percent profit rate on their investment, then Mexico would need to pay $30 billion per year just for profits, and the huge foreign debt would soon be restored and surpassed. (As for the environmental record of Pemex, given the record of Exxon in Alaska, for example, I doubt that the private companies would do any better, and likely would do a lot worse.)

I would like to add that the case being made by foreigners today for privatizing Pemex is amazing to me because it is virtually the same case that was made against Pemex thirty years ago, before Pemex turned Mexico into a major oil-producing country. Thus, in a book I wrote twenty-five years ago I noted that the World Bank had commissioned a study which "discussed Pemex's performance between 1938 and 1959, and concluded that in the past Pemex had failed in a vital area since it had been unable to earn an adequate return on its capital investment; as a result Pemex also was unable to accumulate funds for steady future expansion."(16) I went on to show that this conclusion was based on the same kind of false analysis used by the Heritage study, since it analyzed Pemex like a private company and failed to take into account that Pemex's profits and subsequent ability to reinvest were greatly reduced both by the government's setting low oil prices and its taxing away most of Pemex's profits. In fact, if you analyze Pemex's experience correctly in terms of its contribution to the Mexican economy, the social rate of profit on its investment comes out somewhere in the range of 25 to 35 percent per year.

Moreover, Pemex's success at this time was clearly seen by the Wall Street Journal, whose 1967 story on Pemex was headlined "Model monopoly--nationalized oil agency in Mexico so successful it worries the industry--firms fear other lands may follow example of Pemex," and continued as follows:

Private oil company executives are worried about the impact an increasingly efficient Pemex might have on private oil operations in the rest of Latin America and in the Mideast. "As a successful government venture, Pemex is the model for other countries wanting to nationalize their oil," says an apprehensive vice president of a United States-based international petroleum concern.(17)

And all of this was prior to the Pemex discoveries which increased the country's known reserves tenfold and turned it into a major oil exporter.

The internal pressures on Pemex to privatize seem ultimately to come from the same abandonment of self-sufficiency principles that took place in China. Thus for many years Pemex's goal was to find enough oil to meet internal consumption demands, and when self-sufficiency was reached production was thereafter matched to consumption. However, in the mid-1970s the decision was taken to export crude oil, and the great growth in these exports was used to pay for capital imports. Now, like China, with domestic oil at a low price and demand growing rapidly, Mexico has to spend huge sums it does not readily have (particularly since it already has a huge foreign debt burden from the oil boom of the 1970s) simply to stand still--with Pemex estimating it needs $23 billion over five years just to maintain reserves. This, then, opens the door to the foreign investor. In Business Week's words, "For Pemex, it's a matter of survival. Analysts warn that Mexico could become a net importer of oil and natural gas by 2000 if investment in capital-starved Pemex isn't forthcoming soon."(18) Thus, by pushing up production well beyond internal consumption needs in order to finance rapid economic growth, Mexico has mounted a tiger from which it is hard to get off safely; had it conserved its oil reserves, there would have been less of a boom, but Mexico could have had a slower but more orderly development and not become so dependent on foreigners, particularly in terms of debt.

The Problem of Growth

In my view this is a part of a very fundamental problem in development economics in general. The reality is that the faster the rate of economic growth sought, the greater the danger to the society, and especially to the lower classes, who in principle are supposed to be the main beneficiaries of this rapid growth. Pushing for rapid growth generally goes hand in hand with increasing reliance on the most advanced technologies and large amounts of capital, both of which are normally only found in the hands of foreigners. This is especially true when the rapid growth is based on market forces, because the initial growth spurt inevitably leads to greater income inequality, with the first beneficiaries being those most closely connected with foreign capital. This in turn leads to increased luxury consumption, further increases in imports and debt, and then to foreign dependency. The ultimate contradiction is the boom in a Third World country where oil is discovered, with foreign technology and capital providing the basis, and the result is massive imports of luxury cars, pollution where none existed, and a new dependency on foreigners and on oil production just to keep the economy going.

The negative environmental effects of rapid economic growth of course go beyond mere pollution. There is also the disruption of the communities and lives of people, particularly when these changes take place in an unplanned manner and the poor and powerless are left at the mercy of the heartless market.

Ten years ago I argued that in resource-rich countries of the Third World, where the state itself accumulates large amounts of capital, there is a strong tendency for private elites to use their control over the state to transfer this capital to the private sector. In the resource boom decade of the early 1970s to early 1980s when the state sector was flourishing, the characteristic manifestation of this tendency was a deliberate drive toward over-rapid economic growth. This translated into contracting for too many large projects and subsequent inflation, which effectively transferred the state's capital to the private sector, both domestic and foreign. Now, however, in an era of stagnation if not depression, and with the state sector foundering, the same push for over-rapid economic development can directly transfer to the private sector not only the state's capital flows but the assets that give rise to them.

Unfortunately, in today's world, economic growth has been identified as possible only with privatization and the free play of market forces. From virtually every direction, the push for privatization is almost overwhelming. Spearheading the drive are the multinational corporations, not least of which are the oil companies supported by their home governments. These companies, in pursuit of an ever quickening drive for profits and capital accumulation, having despoiled much of their home countries but, having generated strong opposing forces there, are now concentrating on the Third World for their resources and environmentally destructive activities. Of course, they are aided by the World Bank and the IMF, which use the Third World countries' huge debts to pry them open to privatization and foreign investment. But even leaders of countries which might once have chosen paths of growth through state control and planning are now being forced, insofar as they adhere to goals of rapid economic growth, to turn to the foreign sector, for reasons discussed earlier. And when societies shift their ideologies from "everything for the common good" to "it's good to get rich," it's very easy for corruption to be rationalized by government leaders.

What Is to Be Done?

In the fact of such a dismal situation, it is time to ask this famous question again. In my opinion, at the most general level, progressives who genuinely desire to see the lives of the masses in the Third World improve need to shed their illusions about economic growth in the conventional sense. What are needed instead are strategies for increasing the well-being of the masses, primarily in areas which do not involve vast production of manufactured commodities--areas such as food and housing, health, education, and recreation. The focus needs to be on maximizing the use of the vast amounts of unemployed and underemployed labor and on generating a much more equal distribution of income. If the pressure for rapid economic growth can be reduced, then in my opinion it would be possible to generate a slower but steadier improvement in a kind of economic growth that would directly improve the well-being of the masses.

Realistically, in today's world the forces pushing in the opposite direction are so strong that few if any countries are likely to feel in a position to pursue such a strategy. But the one thing I feel certain about is that the international market system will not be able to provide the rapid growth it promises, and that ultimately it will be seen as a false hope for improving the lives of the masses of Third World people. In the meantime, several things can be done. First, it is necessary to dispel the illusions of market-driven successes in the Third World, like the "Brazilian miracle" of the 1960s and early 1970s, which collapsed under the burden offoreign debt into today's stagnation. Even in its boom period a Brazilian president admitted that "the economy is doing fine, only the people are suffering." Second, we need to recall our history, and to analyze the successes where coordinated governmental planning and action led to far more positive results than the actions of market forces--for example, in China from 1950 to 1975, where massive hunger, illiteracy, and poverty were largely eliminated while they remained rampant in neighboring India; or closer to home, in Cuba, where despite all its problems, the health and education standards are the envy of Latin America. Finally, we must support all efforts by Third World countries to break out of the system of the international market and to develop innovative ways of raising their peoples' standards of living.

In the oil area specifically, there is a need to analyze the performance of public sector enterprises like Pemex objectively. From my studies I believe that such an analysis would show a history of considerable success, particularly when compared to the historical record of private oil companies in the Third World. Moreover, where there have been failures, such as corruption or environmental disasters, the solution is not to destroy the public enterprise and turn it over to private oil companies--after all, they have some dismal records in these areas also. Rather, in my opinion, the solution is much more democratic control over the enterprises.

NOTES

(1.)UN, World Economic Survey, 1991, p. 95, and Oil and Gas Journal (27 December 1993): 45.

(2.)Top 234 company data is from Petroleum Economist (September 1993): 10-13.

(3.)PE (February 1994): 5, 21.

(4.)Chevron Company's Annual Report, 1993, p. 10.

(5.)New York Times, 19 June 1994, Sec. 6, p. 30.

(6.)PE (April 1993): 12.

(7.)Ibid.

(8.)Wall Street Journal, 18 May 1994, p. all.

(9.)PE (April 1993): 12.

(10.)PE (June 1993): 23.

(11.)PE (March 1993): 44.

(12.)PE (June 1993): 19.

(13.)Business Week, 16 August 1993, p. 85.

(14.)Ibid.

(15.)"Oil and Prosperity: Reforming Mexico's Petroleum Monopoly," The Heritage Foundation Backgrounder, no. 923 (15 December 1992): 4.

(16.)Michael Tanzer, The Political Economy of International Oil and the Underdeveloped Countries (Boston, MA: Beacon Press, 1969), p. 288.

(17.)Wall Street Journal, 26 January 1967.

(18.)Business Week, 16 August 1993.

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