CHAPTER 4
We have already alluded to several scandals, but perhaps the most outrageous is the corruption that pervades the energy sector in Mexico. The possibilities for corruptly appropriating public assets was the central motivation behind the privatization of the petroleum and electric power industries. One could argue that corruption has always existed in this sphere, but now corrupt officials risk killing the goose that lays the golden egg.
Jesús Silva Herzog, a Mexican economist (and later politician), noted angrily that when the petroleum company El Águila was expropriated, the British owners charged more than the company was worth because Mexican officials “were too generous.” In August of 1947, the state agreed to pay a sum of US$81,250,000 for the expropriation, including interest dating back to March 18, 1938. The circumstances around the agreement were shrouded in secrecy; negotiations between Vincent Charles Illing, the British representative, and Antonio J. Bermúdez, director of Pemex, took place at the latter’s home over the course of ten days.
Before long, someone, either within the petroleum sector, or from the Mexican government itself, couldn’t resist the temptation to make a buck and leaked information to the British press. The leak caused El Águila’s stocks to skyrocket, and it was later revealed that senior officials had been in on the leak, and had purchased shares at rock bottom prices.
Profiteering from insider information was nothing new then and remains just as prevalent today. Let us consider a few cases: in May of 1881, during the Porfiriato’s earliest days, one of the antecedents to contemporary cronyism took shape. Secretary of Finance Francisco de Landero y Coss sold 36,000 government-owned Mexican Railway shares to some close associates. The train line ran between Mexico and Veracruz, and was at the time the only railway in the country. Congress approved the sale after the fact, contrary to a law that required that all transactions of this nature be subject to a public bidding process. Yet, the most significant “irregularity” in the process was the government’s decision to sell these shares at twelve pounds sterling per share, when that same day they had been trading at sixteen pounds and rising. Among the buyers was Ramón Guzmán, who six months later acted as witness for Carmelita Romero Rubio in her marriage to Porfirio.
Francisco Bulnes24 notes that in 1908, when the government bought up shares of foreign companies to create Ferrocarriles Nacionales de Mexico,25 the treasury secretary’s brother, Julio Limantour, took advantage of insider information and, with a credit line at the national bank, bought advance shares through the New York market. These shares were then “sold at a higher price to the Mexican government, represented by the brother of this fervent speculator.” Business arrangements of this sort continued throughout the Porfiriato; they didn’t disappear in post-revolution administrations, and they have been the hallmark of the processes of privatization of banks and public enterprises under Neoporfirismo.
At Pemex, the state-owned petroleum company, corruption was relatively restrained from its expropriation in 1938 up until the 1970s. There were companies in the energy sector with ties to politicians, particularly in the area of oil exploration, but throughout production, refining, petrochemistry, and transport, little was contracted out—curbing much of the potential for bribery. This doesn’t mean that Pemex was free of corruption; in those times, its very logo was a charrito,26 who, people joke, was left bow-legged under the weight of corruption.
The poor management of Pemex worsened during President José López Portrillo’s administration, when his friend, the engineer Jorge Díaz Serrano, director of this public enterprise, relied on cronyism to appropriate large quantities of petroleum that had been originally destined for export, taking advantage of the fact that the cost per barrel was skyrocketing. This scandal was so brazenly outrageous that when the price of crude oil collapsed, the once-powerful functionary became the fall guy and was sent to prison on charges of corruption.
Even against this background, the scale of modern-day corruption in the energy sector is unparalleled. From Salinas onward, Pemex and the Federal Electricity Commission have been ransacked like no other companies on earth. Cronyism in the energy sector has resulted in multi-million-dollar losses. We could discuss corruption across all sectors of the Mexican economy, because it’s ubiquitous (in the purchase of new and refurbished equipment, services, construction of plants, etc.), but it’s more illustrative to provide a brief look at the most lucrative sectors: gas and electricity.
The case of the petroleum industry is an embarrassment. No new refineries have been built since 1979. The last built was in Salina Cruz, Oaxaca; the other five are in Minatitlán, Veracruz; Ciudad Madero, Tamaulipas; Salamanca, Guanajuato; Tula, Hidalgo; and Cadereyta, Nuevo León. The decision to sell crude petroleum abroad instead of processing it here is distinctive of the neoliberal age. Even during López Portillo’s rule, despite designating much of our petroleum for export, our refineries still supplied the internal market and hardly imported gasoline. But since Miguel de la Madrid’s presidency in 1982, the lack of refinery capacity, alongside the growth in internal demand, has forced the country to import 635,000 barrels of gasoline per day, 60 percent of our national consumption.
In Mexico, we face the unfortunate paradox of being one of the world’s major petroleum producers, but also importing more gasoline and petroleum than most other countries worldwide. Gasoline in Mexico costs 30 percent more than in the United States, and often more than in Guatemala, despite that country’s petroleum shortage. The abhorrent politics of petroleum in the neoliberal age can be summed up with this statistic: from January to August of 2016 the export of crude oil from Mexico rose to US$9 billion; meanwhile, the imports of petroleum, natural gas, and petrochemicals reached $12 billion. That is to say, there was a deficit of $2.5 billion.
The irrationality of exporting crude oil and importing gas is akin to exporting oranges and importing orange juice. It is sometimes argued that it’s cheaper to import gasoline than to refine it in Mexico. This assertion is baseless and absurd. Producing one liter of gasoline requires two liters of crude oil, and while the crude sells at 8.96 pesos,27 gasoline goes for 13.98 pesos—which is to say, the added value after refining is 35 percent and entails other economic benefits such as the creation of jobs and non-reliance on outside suppliers.
The spokespeople for these so-called businessmen parrot the line that refining gasoline is not profitable; they maintain that, in any case, instead of building new refineries they can just buy facilities that have been shut down or are underutilized in the United States. Yet while Mexico has 6 refineries, the United States has 141.28 Our neighbors process 19 million barrels of crude petroleum each day, at a productivity level of 97 percent.29 Mexico’s plants can process 1.2 million daily barrels and operate at only 40 percent of capacity. This is rooted in the inability of these refineries to process heavy crude oil, the inefficiency of exporting light crude oil, and in widespread corruption.
In 2008, bowing to pressure from our movement, Felipe Calderón announced his decision to build a new refinery. Boasting about the jobs it would create, Calderón invited state governments to compete to see which would provide the best site. Ultimately Tula, Hidalgo was chosen. However, as we predicted, Calderón’s term ended without even the perimeter being demarcated, and when Peña Nieto took over the project was dropped outright.
Our existing facilities, too, have been allowed to deteriorate. This is not a new pattern; it happened to our petrochemical plants, which were practically abandoned and reduced to scrap. This was not for want of money, as a great deal was earmarked toward maintenance of the facilities. It again comes down to corruption. In 1997, when it was time to reconfigure the Cadereyta refinery, the South Korean firm Sunkyong Limited (SK), the German firm Siemens, and the Mexican firm ICA were selected for the job. The work was supposed to be finished by July 2000, but it took more than double the estimated time. The work was shoddy, and the payout was far more than agreed upon. In November 2001 the auditors found losses of over US$1 billion. Pemex, which had waived national jurisdiction, was sued by the consortium in international courts. Lacking a strong defense, it was obliged to pay an additional $630 million. To this day, no official has been held responsible for the loss of $1.63 billion.
For repairs at the Minatitlán refinery, a contract was granted in 2003 to the Spanish firm La Dragados. However, by 2012, four out of five construction schemes were not yet completed, and Pemex requested additional funds from the treasury for the administrative closure of the project. A job that should have taken four years ran for ten, running over US$2 billion over budget. And no one was held accountable.
The reconfiguration and modernization of the Francisco I. Madero refinery in Tamaulipas was put up for auction in 1999 and the auction process was completed in 2002. At a cost of nearly $2.6 billion, the job was awarded to Pempro, a conglomerate of the Mexican firm Tribasa and Siemens—despite their poor performance with the reconfiguration of Cadereyta. Pempro was awarded these contracts under questionable circumstances and brought in nearly 4,000 laborers and technicians from South Korea, the Philippines, and Thailand, the vast majority without the approval of the National Institute of Migration (INM), leaving local laborers without work. The reconfiguration of three refineries cost over US$7 billion, just to have them running at 40 percent capacity. This is fraud on a staggering scale.
On March 8, 2016, Pemex director José Antonio González Anaya stated that he’d “take advantage of the tools of the Energy Reform” to allow for private sector participation in the reconfiguration of the three remaining refineries (state property in the hands of Pemex): the Antonio Dovalí Jaime Refinery, in Salina Cruz; the Antonio M. Amor Refinery, in Salamanca, and the Miguel Hidalgo Refinery, in Tula. These so-called “strategic alliances” are really just a mechanism for enabling privatization, as was used in the handover of the petrochemicals plant Pajaritos to the Salinista banker Antonio del Valle. Valle invested over $200 million, became a majority shareholder, and then fired 1,500 of the 2,200 employees who worked in the plants. This left maintenance and security in shambles, and led to an explosion at the plant that claimed the lives of thirty-two people.
Though Mexico’s corrupt politicians will say otherwise, oil refining remains a viable business. In 2006 there were 680 refineries worldwide, and over the last decade 14 more have been built. In 2008, India began operations at the largest refinery on the planet, with the capacity to process 1,240,000 barrels per day. The complex stretches across 415 acres in a city built expressly for the purpose of housing 2,500 employees and their families on the northwestern coast of Guyarat. The owners, previously in the textile industry, invested $6 billion in the refinery. Construction began in December 2005, and three years later operations began. This demonstrates that it’s possible to operate refineries efficiently and without corruption.
Those who maintain that the refinery business is not profitable are either wrong or simply lying. We have access to crude oil, a growing internal market, and the technical expertise to undertake the refining process. It’s true that the profit margin is small (and will never compare with the profit margins from extracting petroleum since, among other reasons, nature doesn’t charge rent); but investment in refinery capacity means creating jobs, saving on transport, and achieving greater economic self-sufficiency. Investment in the refining business is not only profitable, but also strategically smart. One thinks back to Rockefeller, who once said, “The best business in the world is a well-run oil company. The second best business in the world is a badly run oil company.”
In truth, the decision not to build refineries was rooted in the desire of Pemex International to maintain its profits from import. Pemex’s $25 billion-per-year deals were always shrouded in secrecy. The National Institute for Transparency, Access to Information, and Personal Data Protection (INAI), an organization with a massive budget and well-paid officials, was ostensibly created to combat corruption, but in truth it’s been more committed to covering it up. The INAI has never said a critical word about the management of Pemex International, and no one outside their inner circle knows at what price they purchase gasoline in the United States, how much of a cut they take, or even who produces and transports the stuff.
This of course is all in the past: following the implementation of the so-called Energy Reforms, the procedure for buying gasoline and diesel was changed, although corruption is rife. In April 2016, Peña Nieto’s government began granting concessions to smaller foreign companies to import and sell gasoline in Mexico. It handed over to the private sector what was once administered by Pemex. In 2015, the Mexican enterprise made 44 percent of its income on the sale of those energy sources, including crude oil exports. This was the sort of cut that powerful officials were taking.
Up to June 17, 2016, sixty-nine permits for gas import totaling around 1,335,000 daily barrels were granted, and ninety-nine permits for diesel import, totaling 1,015,000 daily barrels. This quantity greatly exceeds internal demand; in 2015, Pemex sold 793,000 barrels of gasoline and 385,000 barrels of diesel per day, taking in 355.3 billion pesos (US$19 billion) and 162.2 billion pesos (US$8.7 billion) for each, respectively. This means, on the one hand, that imports could displace national production of these energy sources, and, on the other hand, that this select group of businessmen and shareholders is left with a business worth 518 billion pesos (US$27.9 billion)—3.7 percent of the GDP—and with a net utility of almost 70 billion pesos (US$3.7 billion).
To put this level of corruption in context, consider this: in its request for the extradition of Joaquín Guzmán Loera,30 the United States claimed that he smuggled seventy tons of cocaine in a single month, with a “street value” of US$700 million. If we extrapolate to a year, then, we’re talking about an $8.4 billion business, nearly three times less than the business of importing and selling gasoline in Mexico.
The greatest beneficiaries of these permits are the three companies who manage over 60 percent of authorized imports: the multinationals Gulf Oil and Trafigura-Puma Energy, and the Mexican Grupo Comborsa. They all have histories of influence peddling, ecological catastrophes, and the paying of bribes to win contracts and gain control over the country’s natural resources.
Following the advent of NAFTA, the Mexican government set aside quality control standards for gasoline in order to remain competitive and to keep prices low. Consequently, quality declined drastically. This is especially concerning with regards to the health effects associated with high sulphur content in gasoline; we are gambling with the health of the Mexican people in the pursuit of easy money.
Ultimately, the sale of gasoline and diesel fuel is a very profitable business. The government’s energy reforms pose an existential threat to Mexico’s energy sovereignty. Without public pressure, there will be no incentive to build new plants or to maintain our national refineries. This must be addressed in the 2018 election through a referendum to determine whether to remain on this path or to change it.
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The natural gas situation is very similar to that of gasoline. Until recently Mexico was self-sufficient in natural gas, but since 1993, we have stopped investing in exploration and extraction and instead opted to increase our imports. Meanwhile, the construction of private power plants has multiplied, adding significantly to the demand for natural gas. The business of buying and selling natural gas has had corrupt politicians and influence peddlers chomping at the bit. The contracts in the field are notorious. It should surprise no one that Mexico is the oil-producing state most responsible for burning off gas into the atmosphere.
This excessive burning off of gas originated under Zedillo’s government, when the then director of Pemex, Adrián Lajous, made the controversial decision to build a nitrogen plant in Atasta, Campeche, to augment the extraction of crude oil. Production increased for four years, but the nitrogen contaminated the oil and gas wells. Consequently, they were forced to close down over eighty wells, losing around 400,000 daily barrels of petroleum, and burnt off 750 million cubic feet of gas into the atmosphere every day. Though there was an easy solution—gas separation plants require neither a large investment nor overly sophisticated technology—it was not pursued, because those in the upper management of the energy sector are interested solely in personal gain.
Mario Gabriel Budebo, deputy secretary of hydrocarbon energy, commented that “considering the price of natural gas in 2009 of US$3.61 per thousand cubic feet, the economic value of hydrocarbon gas burned this year is estimated to be around $921 million. This volume represents approximately 18.5 million tons of CO2, with grave implications for the environment.”31 Similarly, a Pemex report delivered to the Mexican Stock Exchange stated: “During the third quarter of 2015, emissions increased by 509 million cubic feet daily, largely due to the incident that took place at the Abkatún A-Permanent platform, as well as delays in attempted landfill gas captures.” This represents, at an average cost this year of $2.70 per thousand cubic feet, $1.37 million daily, or over $500 million annually. Worse still than this massive waste of money is the environmental damage incurred as a result of burning off natural gas.
Neoliberals didn’t resolve the financial and environmental problems of gas burn off in the Cantarell (one of the largest oil fields in the world); instead, they kept buying more gas from foreign companies. Calderón himself celebrated a contract with the Spanish energy company Repsol for the provision of 500 million cubic feet imported from Peru. Much like Peña Nieto’s predilection for the foreign firm OHL, Calderón favored Repsol. Recall that the first contract for multiple services granted to a foreign firm—in direct violation of the Constitution—was during Felipe Calderón’s time as secretary of energy and president of the board of Pemex. On November 14, 2003, without other companies being allowed to bid for the job, Repsol was granted a contract for $2.4 billion to develop the oil fields of Cuenca de Burgos, Tamaulipas.
The appendix of the contract, entitled “Catalog of Maximum Prices,” spells out its outrageous terms: the infrastructure was acquired at 120 percent of cost; and as for maintenance, 320 percent of direct cost was paid. What’s more, the price per unit was unchanged regardless of whether the firm used new or used materials. Moreover, the contractor was allowed to conduct its own inspection processes and approval and certification of all materials. Even more outrageously, the hidden costs of tariffs and taxes were not factored in until after the contract was awarded.
While foreign firms made windfall profits, our country picked up the tab. For these onerous contracts doled out to Repsol, Tecpetrol, Petrobas, Teikoku, Schlumberger, and Halliburton, among others, Pemex has paid out over $5 billion, with the pretext that gas production would increase by 50 percent in the Burgos Basin—yielding 500 million cubic feet daily. However, five years later production has only increased by 63 million cubic feet, just 4 percent of the promised increase. During this same period, Pemex increased production at its non-contracted fields from 1 billion to 1.3 billion cubic feet, or 35 percent. In short, these contracts did little for the company and, given the grossly inflated price, the contracts represented a huge attack on the public interest.
Mexico’s leading auditing institution, the Auditoría Superior de la Federación, denounced Pemex (during Calderón’s tenure as president of the board of Pemex when he was secretary of energy) for selling Repsol bonds at artificially low prices. This practice was justified in two ways: first, it was claimed that the price of shares was going to decrease, and that funds were needed to finance Pemex. Recall that in October of that same year, Repsol had been granted a contract worth $2.4 billion to produce gas in the Burgos Basin—which, of course, raised its stock value. As to the need for finance, Pemex never offered the auditors any proof whatsoever that selling the shares was the best course of action. Regardless, in order to sell those shares, Pemex issued a bond expiring in 2011, convertible to stocks, and situated it in the tax haven of Luxembourg. Months after the sale, the shares grew in value, leading Pemex to register losses of $655 million.
In 2005, the Federal Electricity Commission (CFE) was exploring a project for the provision of natural gas and the construction of a regasification plant in Manzanillo, Colima. With zero regard for transparency, Repsol was made aware of these projects and, with this privileged information, obtained the right to extract gas from the region of Camisea in Peru in December 2005, knowing that they could sell it in Mexico and the eastern United States. Yet at the time, Repsol had no legal right to supply natural gas in our country. This raises an obvious question: How did Repsol know, in 2005, that it could sell gas to the Commission, a year and a half before the project was even announced?
The Federal Electricity Commission did not release a call for bids until June 6, 2006. When they did so they stated that the contract would be for a period of twenty-five years. It was also stipulated that a bid clarification meeting would take place in September 2006. When the new administration took the reins, Repsol negotiated directly with Felipe Calderón, and, disdainful of established legal procedures, hammered out a deal from the offices of Juan Camilo Mouriño, then secretary of the Office of the President. On September 18, 2007, the CFE awarded a contract to Repsol for the provision of 500 million cubic feet of natural gas per day, without allowing counter-offers from alternative bidders. The contract was estimated at being worth some $15 billion.
Corruption grew even more entrenched under Salinas. On September 22, 1992, Congress approved a reform that allowed foreign firms to receive contracts to install energy generation plants. This was a violation of Article 27 of the Constitution, which states: “It is the Nation’s exclusive right to generate, conduct, transform, distribute, and supply electrical energy whose purpose is the provision of a public service. In this sense, no concessions will be granted to private individuals and the Nation will make use of all goods and natural resources required for these ends.”
Nevertheless, from Salinas onward, offshore companies—largely based in Spain—began their creeping expansion into Mexico’s energy market. Public sector plants were shut down or run below capacity, effectively opening the market for transnational corporations. This was backed up by a vicious propaganda campaign that asserted the energy sector needed to modernize, or Mexico would face calamity. These maneuvers opened the door to characters such as José Córdoba Montoya and Claudio X. González, two of Salinas’s advisors, who held stocks and other interests in the companies.
Alfredo Elías Ayub, who served as director of the Federal Electricity Commission, was another person who benefitted significantly. Previously the deputy minister of mining under Salinas, he oversaw the privatization of mining companies like Cananea and presided over the division of 9,456,722 acres of mineral reserves among three syndicates: Alberto Baillères’s Peñoles, Jorge and Germán Larrea’s Grupo Mexico, and Carlos Slim’s Grupo Carso.
Under the direction of Elías Ayub, the Federal Electricity Commission became a “world class” business specializing in overcharging energy to Mexican consumers and subsidizing foreign firms. Today, the CFE buys nearly 50 percent of the energy consumed in this country at extremely elevated prices: in 2016 it earmarked nearly 60 billion pesos (US$3.2 billion) for this purpose. Concurrently, public sector energy plants were either left to rust or were underutilized. But the decline of Mexico’s industrial infrastructure does not concern the well-paid business executives and defenders of neoliberal dogma. Two years ago it was discovered that a group of Mexican politicians were keeping huge amounts of money in Switzerland.
This laundry list of corruption demonstrates that the recent waves of privatization are rooted in the perverse ambition of the same group of people that has cannibalized our national assets. The decision to privatize was not taken because of technical, financial, or administrative considerations; this decision was taken purely in order to facilitate corruption and fraud.
Emblematic of this practice was the granting of the first block of territory opened for petroleum exploration in shallow waters, to Sierra Oil and Gas, a subsidiary of Black Rock Funds. Barely a year before, the company had been purchased by Jerónimo Marcos Gerard Rivero, Salinas’s brother-in-law. Subsequent rounds favored ex-government functionaries who sat at the helm of private petroleum corporations.
Even as petroleum prices fall, these so-called businessmen still profit. For example, in 2012 the cost of extracting one barrel of crude petroleum was around $10, with around $5 designated to go toward bribes, but it was sold at $94, and the public finance system took in a significant portion. Now it goes for $40; however, private enterprise gets $25 and the nation receives only $15. Another approach is to reduce profits on paper by artificially inflating production costs, as Repsol, Schlumberger, Halliburton, and others have done. Ultimately, it is a great deal for private firms—and a terrible one for our country.
These crooked politicians, blinded by their lust for money, have gambled with our nation’s future. Neoliberal politicians ended nearly one hundred years of energy sovereignty. They did not heed general Cárdenas’s warning: “The government or individual who hands over natural resources to foreign entities betrays the nation.” I will finish with the words of Adolfo López Mateos,32 who wrote a note on September 27, 1960, when he nationalized the electric industry, in which he wisely professed:
To the people of Mexico: I put electric energy back in your hands, as it belongs solely to the nation, but do not trust that in later years some with malicious intent will not attempt to return it to the hands of foreign investors.
“Not one step back” was the motto of Lázaro Cárdenas del Río upon nationalizing our petroleum. Today, electric energy has its day. People of Mexico, I absolve you from any loyalty to a future government that might hand over our resources to foreign interests. It is clear that Mexico must modernize our technology and invest resources effectively to achieve energy independence; it would be absurd to affirm otherwise. However, outside investment is not a requirement. Only a traitor hands over his country to foreign nationals; we Mexicans can manage our affairs better than any country can do on our behalf.
When a foreign State asks me if they can enter our energy industry, I respond that we’re just barely achieving the independence from foreign invasion from which we freed ourselves not so long ago.
We Mexicans are happy to invest in American petroleum or in the production of electric energy, if they want a foreign investor. However, Mexico’s Constitution makes it clear: our energy resources are the sole and exclusive property of the Mexican people. Arguments to the contrary are a betrayal to the nation.
Industrialization does not require giving up our resources to the highest bidder, nor the indiscriminate handover of our country’s legacy.
The corruption of the energy industry will be a contentious matter of debate in the campaign cycle of 2018. The Mexican people must choose not only the next president, but also the political economy we want moving forward. I hope that the people will decide to re-establish the autonomy of our natural resources, including petroleum and electricity, in service to the pueblo and to the nation.