Hot spots: Mexico.(INTERNATIONAL SECTION)

A massive oil windfall has been making it easy for the government to keep the fiscal ledgers in good shape, but it is also making it easy for politicians to sidestep pressing reform needs, including those that pertain to the structure and good health of the state oil corporation, Pemex. The Federal budget deficit Last year was the smallest since 1996, as record-high oil prices boosted the country's revenues from petroleum exports. Mexico, in fact, has reduced its budget deficit every year since President Vicente Fox took office, and this has gone a long way in bolstering the confidence of local and international investors.

The state oil company, Petroleos Mexicanos, exported crude at an average USD 42.65 per barrel in 2005, yielding the government USD 10.2 billion more oil revenue than anticipated. But despite this bonanza, Pemex is in bad shape and in dire need of an overhaul. For one thing, it is grossly overstaffed. For another, of its 11 board directors five are labor union representatives and the other six represent various government departments of which each has its own agenda and not one has a primary interest in seeing the company run as a profitable business.

Not surprisingly, Pemex is suffering from poor management and waste. It has "lost money" every year since 1998, because the government has been using it as a cash cow. In 2004, for instance, the entity had net operating revenues of USD 69.4 billion and posted USD 40.8 billion in profits before taxes, but the government siphoned off USD 42.1 billion. Left with virtually no financial resources, Pemex, in order to finance the exploration and development needed just to maintain production, has been forced to borrow heavily, so much so that its bonded debt was up to USD 28.63 billion by mid-2005 from only USD 172 million at the end of 1999.

Most of the production has been coming from the offshore Cantarell field, where output has started to decline. Pemex Last year announced the possible existence of up to 54 billion barrels of oil reserves in the deep waters of the Gulf of Mexico, which could more than double its current proven reserves. But the company has neither the technological resources nor the financial ones to exploit these deposits. It urgently needs to join forces with one or more of the world's oil majors, which could provide both. The problem is, none of the multinationals are willing to enter into deals with Pemex until joint-venture contracts are made legal.

Well aware that both of the attempts by President Fox to open up the energy sector to private investment failed in Congress, Roberto Madrazo, the presidential candidate of the Institutional Revolutionary Party or PRI, once expressed support for a proposal to sell 20 percent of Pemex to Mexican institutional investors, which would raise cash for the company (or the government?) while allowing the authorities to postpone tricky ideological questions. The candidate of the Left-wing PRD, Andres Manuel Lopez Obrador (AMLO), thinks that all Pemex has to do is save more in order to come up with USD 5 billion annually that could be used to finance investments.

Unfortunately, with oil prices being so high and providing the government with so much in windfall revenues, there is not much incentive for politicians to push for difficult reforms of any kind, not just those pertaining to Pemex. Of the three main contenders for the presidency, only the one representing Pres. Fox's National Action Party (PAN), Felipe Calderon, seems to believe that ...