Reeling from job cuts, Mexican oil country pins hopes on a rebel

Amy Stillman May 02, 2018

MEXICO CITY (Bloomberg) -- In the wetlands of Tabasco in southeast Mexico, indigenous farmers stand guard outside oil wells. They have no official status -– but anyone who wants to do business there has to pay to get past.

At Well 144 in the massive Sen field, for example, owned by state-run Pemex, service companies say they have to pay off two such groups, who claim to represent local communities and landowners. In some areas there are as many as ten. They charge fees that can reach 50,000 pesos ($2,670) a month for the larger international firms.

There aren’t too many other ways for the province’s people to make money out of oil. In the four years since Mexico opened its energy industry to global business, more than 100 exploration and production contracts have been signed. But the promised wave of investment hasn’t arrived, while Pemex and its contractors cut jobs as crude prices fell and haven’t restored them in the current rally.

That’s one reason why voters in Mexico’s oil heartland are deserting the government in the run-up to July’s presidential election. They’re swinging behind the only candidate who’s promising a more nationalist energy policy -– one that’s alarmed investors.

'He understands'

It helps that Andres Manuel Lopez Obrador is a local boy.

“Andres is from Tabasco, he understands the poverty we live in,’’ said Pablo Osorio, one of the indigenous farmers watching over the well. “There are no hospitals, no big supermarkets. The only thing the oil reforms have brought us is polluted land.’’

Lopez Obrador says he’ll review contracts already signed with private oil companies, and may stop awarding new ones. He also promises to strengthen Pemex, and to build two new refineries –- one of them in Tabasco. Gasoline and electricity prices will be frozen for three years.

It looks increasingly likely that the 64-year-old will get the chance to implement that agenda. He’s headed for a landslide win, according to Bloomberg’s Mexico election tracker, which compiles local polls. It has Lopez Obrador on 47% -- almost 20 points clear of closest rival Ricardo Anaya, who backs the energy reforms.

'Error and brake'

In the industry, there’s concern that Lopez Obrador would return Mexican oil to the bad old days.

The reforms haven’t halted a slide in Mexico’s crude output, but supporters say they should be judged over the longer term. Reversing course now would be “an error and a brake on the country,’’ said Javier Zambrano, CEO of local oil company Jaguar Exploracion y Produccion.

Foreign capital is starting to arrive, ranging from global giants like Royal Dutch Shell Plc and ExxonMobil Corp. to small drillers with big ambitions. Canada’s Renaissance Oil Corp. was among the pioneers. It took part in just the third competitive auction ever held in Mexico, in December 2015, winning three onshore blocks.

The company’s current output of 1,650 bpd is just the start, said founder Craig Steinke -- provided the reforms continue. “What’s important is a steady flow of new opportunities.’’

Who'll play?

Economists also worry that Lopez Obrador’s plans will drain the public coffers. His refineries would cost billions of dollars each –- but Mexico already has six, operating at below 40% of capacity. Pemex is the world’s most indebted oil major.

Freezing fuel prices has political appeal after a sharp hike last year, known locally as the “gasolinazo’’ or price-slam. It was part of a liberalization that’s encouraged companies such as Chevron Corp. to invest in gas stations and fuel-import facilities.

That Lopez Obrador policy could be costly, too. “Who is going to subsidize it?” said Federico Garcia, an industrial equipment manufacturer in Villahermosa. “And what about the companies investing in Mexico? You can lose competitiveness if you drop the price.” Garcia also dismissed the refinery plan, saying the government doesn’t have the resources and “isn’t an efficient constructor.”

'We threw rocks'

Fighting over oil in Tabasco helped launch Lopez Obrador’s political career. Discoveries there propelled a boom in the late 1970s, but there was already concern that locals weren’t getting a share of the wealth.

After losing a controversial 1994 election for the state governorship, Lopez Obrador joined activists who were blockading Pemex’s wells. He gained national exposure by appearing on television covered in blood after a clash with police.

Plenty of people in Tabasco remember those days. “We threw rocks, they beat us and sprayed us with tear gas,’’ said Raul Drouaillet, now president of the National Movement for the Defense of Oil Workers. And they remember Lopez Obrador’s role too. “His political work has always been in the field, against the establishment,’’ said Carlos Lopez, who went to elementary school with the candidate.

Election talk in oil towns like Villahermosa is dominated by jobs. Tabasco has Mexico’s highest unemployment rate.

When oil slumped in 2014, Pemex’s budget got squeezed and that led to job cuts at service companies like Weatherford International Plc. Pemex accounts for as much as 85% of its local business, because private production has been slow to develop, said Franco Pulido, regional account manager at Weatherford’s office in Villahermosa.

'We are ready'

Several workers at Pemex’s exploration and production arm in Tabasco also said they’re worried about their jobs, and expressed support for Lopez Obrador -- even though their labor union has ties with the ruling political party, the PRI. The workers, requesting anonymity for fear of reprisals, said training programs have been cut. Pemex said there’s been no such reduction, though it said arrangements are constantly changing.

Yesugai Frias says he hasn’t decided who to vote for –- but he has no doubt about the decisive issue.

He’s chief executive of Herramientas Varco, which sells drilling equipment. The company has lost about 40% of its workforce and 60% of sales in the past two years. Inside its plant, bright red drill pipes gather dust and cobwebs. Frias points to a row of trucks that he says would have been on the road in better times.

“I’ll vote for the candidate that will generate jobs, not just going by their word but by the projects they announce,’’ he said. “We are ready to work.’’

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