Analysis: Pemex blast a cautionary tale but no investor deterrent

Reuters News
Posted: Feb 12, 2013 12:59 PM

By Simon Gardner

MEXICO CITY (Reuters) - A deadly blast as workers fumbled with improvised wiring in a dark office basement filled with gas is the latest in a litany of disasters at state oil giant Pemex, but it won't deter private firms hoping to cash in on an overhaul of Mexico's oil industry.

The massive explosion that destroyed part of Pemex's headquarters in Mexico City on January 31 killed 37 people and cast a glaring spotlight on the behemoth's abysmal safety record.

Most of the dead were crushed by debris when reinforced concrete floors caved in after the blast, which investigators say was caused by a build-up of methane gas either from an underground sewer, the ground or a long-disused gas pipe.

Mexico's new government, which took office in December and is preparing a series of key economic reforms including a shake-up of the energy sector, says the accident was an isolated tragedy and is still investigating what caused the gas build-up.

For oil majors, however, it's the crude that matters. They are more interested in how deep the overhaul of Pemex will be and what sort of foothold they will gain.

"It's an incident which we have followed closely. But no, it won't give anyone pause," said a senior oil company executive in Mexico, asking not to be named.

President Enrique Pena Nieto wants to open up Pemex to more private investment and has floated the idea of selling a minority stake in Pemex, but a partial privatization in the mold of Brazil's Petrobras is seen a hard sell.

The government has made clear that Mexico's oil resources will remain in state hands, and it has not yet revealed the main planks of its planned energy reform.

Opposition senators on a cross-party commission debating its composition say it could potentially offer the private sector concessions or joint exploration opportunities. But it could come down to just paying private firms more for their services.

"I think the most ambitious you can get is risk contracts. Even concessions I think is a bit of a stretch," said Daniel Kerner, a Latin America analyst with the Eurasia Group consultancy.

In risk contracts, a third party shares risks and rewards related to results rather than receiving a flat fee.

"They have to devise it in a way that's almost a production sharing agreement, just that it's not a production sharing agreement ... and devise it in a way there's enough upside and maybe in a way you can book reserves," Kerner said.

Private oil firms want to be able to book reserves for their balance sheets, as investors look closely at that figure when assessing a company's health.

Analysts say oil theft by criminal gangs who illegally tap Pemex oil pipelines is a bigger concern to oil companies looking to invest in Mexico than accidents at installations, and point out that other countries are riskier to operate in.

"International oil companies go to Iraq, so they can easily come to Mexico as long as it is sufficiently profitable," said Miriam Grunstein, an energy specialist at Mexico City's CIDE research center.

She said safety concerns over the blast at Pemex's headquarters could even give foreign oil companies leverage to negotiate more operational control over any deep sea exploration ventures with Pemex in future.


Mexico's government has warned that without a major energy reform that opens up the industry to private investment, the world's No.7 oil producer and a top supplier to the United States could become a net crude importer itself by 2018.

It had aimed to present its energy bill in the first half of the year, and Pena Nieto said in December he expected it to be approved by the end of 2013.

However, some lawmakers and industry insiders believe the timetable could slip as the government seeks to avoid any suggestion it is trying to capitalize on the blast.

And a state election in Baja California in July, in which the opposition National Action Party, or PAN, looks set to lose control of one of its strongholds, could strain a cross-party pact aimed at building consensus over reforms.

Unions and left-leaning politicians are focused on maintaining state control of national oil assets and are unlikely to make a fuss about Pemex's safety record.

Leftist politician Andres Manuel Lopez Obrador, who was the runner up in last year's presidential election and then broke with his party, is handing out cartoon pamphlets casting Pena Nieto's energy reform plan as a fire sale of Mexican resources.

The explosion in the middle of Mexico City follows a raft of past deadly blasts and underscores years of under-investment in the state-run giant, which has struggled under a heavy tax burden and years of mismanagement.

"We need ... to put in place measures, security protocols that are better supervised to ensure they work," Senate vice-president Jose Rosas Aispuro from the conservative PAN told Reuters.

The lion's share of Pemex's profits pass straight to the government, funding about a third of the federal budget. As a hulking state money-maker it is unaccountable to shareholders or regulatory filings required of the private sector.

Pemex typically under-spends its peers when it comes to investment in existing and new infrastructure. Last year, it planned to invest about $19 billion across its businesses, less than half the total amount budgeted for investment by Petrobras.

For 2012, Pemex said its refining unit expected to spend about 29 percent of its almost 46 million peso investment budget on industrial safety and environmental projects. Pemex does not disclose the safety budget of its other four business units.

Pemex's corporate unit had a budget of 700 million pesos for capital expenditure last year.

The government and Pemex have been at pains to cast the blast as a freak accident.

"This is a totally isolated event," Pemex's chief financial officer, Mario Beauregard, told investors.

David Penchyna, a senator from Pena Nieto's ruling Institutional Revolutionary Party (PRI) and president of the Senate energy commission, said the blast at Pemex's headquarters was no reason in itself to revise protocols.

"It is a tragedy ... but there's no reason it should speed up or slow down a structural reform," he said.

Pemex has been plagued by deadly accidents and safety lapses over the years.

Some 30 people were killed and dozens more were injured last year in a fire at a Pemex gas storage facility in the northern state of Tamaulipas, while 22 people were killed in 2007 at an accident on an oil platform.

In one of the worst accidents in memory, a blast at a liquid petroleum gas plant on the northern outskirts of Mexico City in 1984 killed at least 650 people.

And yet bound together by a very strong union bitterly opposed to the idea of privatization, workers remain fiercely loyal to Pemex, seeing it as a cornerstone of national pride.

"What can I say? I can't speak for what I didn't see and don't know," said Gloria Garcia, 53, who works in Pemex's telecoms department and whose son, who worked in human resources, was killed in the explosion on January 31.

"Right now, we have support for all we need," she added. "The union has always supported us."

(Additional reporting by David Alire Garcia, Elinor Comlay, Alexandra Alper, Miguel Gutierrez, Dave Graham, Ana Isabel Martinez and Adriana Barrera; Editing by Kieran Murray and Andrea Ricci)