“Patria, el niño Dios te escrituró un establo/
y los veneros del petróleo, el Diablo.”

“Oh country, the child Jesus left you a stable/
and the Devil left you springs of petroleum.”
López Velarde (1888-1921)

Guadalupe Alvarado Soto wants her chickens back. In 1938, after Mexico banished foreign oil companies and nationalized its petroleum reserves, the young orphan did her part.

Standing outside the tomb of Lázaro Cárdenas — the president who led the bold move to nationalize Mexico’s oil — during the 65th anniversary commemoration, Soto’s small frame hunched inward, and her eyes grew big with tears.

“I come to his tomb, and I say to him, “Look, Lazaro, look at what they’re doing to our country,” she said.

Behind her the giant Monument of the Revolution, which houses Cárdenas and other Mexican heroes, stood in the midst of Mexico City’s incessant traffic. Handfuls of retired oil workers scuttled about, unnoticed by herds of taxis and blaring horns.

“Like we say here, Mexico is an oil power without any money,” said Soto.

Once upon a time, oil was the biggest pot of gold a country could strike. With oil, countries could rest assured of their enviable position within an emerging global energy market.

For Mexico, which has borne the weight of U.S. influence throughout its turbulent history, the discovery of oil and natural gas and the decision to nationalize their exploitation in 1938 fostered hope that the country could finally assert itself as an economically independent nation. Its oil and gas would provide not only a ticket to easy wealth but also energy security for its growing industry.

Today, however, the world’s fifth largest oil producer is at risk of becoming a net energy importer. Its proven reserves are running out, and the country brings in more than $12 billion in refined products, like gasoline and natural gas, from the United States. Additionally, a long history of collusion between the state oil company, Petroleos Mexicanos (PEMEX) and the government has led to corruption and mismanagement in the industry.

For Soto and many of her compatriots, who have witnessed the promise of Mexican oil wealth become nothing more than a tangled state monopoly, the Mexican government and PEMEX have failed to deliver.

Everyone, from taxi drivers to state senators to the CEO of PEMEX agrees that Mexico’s energy regime needs change. The dilemma facing politicians, PEMEX officials and citizens alike is how to reform and modernize the company without violating Article 27 of the Mexican constitution, which strictly forbids foreign companies from investing needed capital and reaping any wealth from Mexican oil.

When the Cantarell oil field was discovered in 1974 off the coast of Campeche in the Gulf of Mexico, things never looked better for Mexico. In a time of booming oil prices and dwindling reserves, PEMEX found one of the largest deposits in the world — one that produces more than half of Mexico’s oil at more than 2 million barrels a day.

Today Cantarell is reaching its peak and is expected to start a slow decline next year — and with that the decline of the country’s known oil reserves.

“We have 18 years left of proven oil reserves, at most 25 or 30,” said political analyst Georgina Sanchez. “But 25 or 30 years is not much to launch alternative technologies or financial mechanisms to replace oil.”

A long muddled history of corruption and mismanagement, many Mexicans believe, is also slowing down reform.

“Ask anyone in Mexico and they will tell you that PEMEX to them means corruption,” said renowned Mexican author and poet Homero Aridjis, who also served as Ambassador to Mexico in Holland. “PEMEX has no face. I was extremely morally conflicted in Holland as a diplomat, having to watch the way PEMEX behaved. It was like having a very powerful mafia right next to the government. And one that was always working with the government.”

But PEMEX officials see the story differently.

Within the thick iron gates of the 50-story PEMEX skyscraper in Mexico City, where more than 20,000 people come to work everyday under the vigilant watch of a massive bronze statue of Lázaro Cárdenas, it’s hard to imagine that Latin America’s biggest corporation might lack the resources to protect its lifeline.

Indeed, since Vicente Fox appointed Raúl Muñoz Leos, a businessman with an impressive corporate track record, as CEO in 2000, PEMEX has embarked on an ambitious exploration plan. Many within the Fox administration hope it will shift PEMEX out of its old corrupt system and into corporate gear.

“We’ve historically lagged behind in exploration, but we’re working to fill that gap,” said Miguel Angel Maciel, Chief Engineer within PEMEX’s Exploration and Production Division.

“Our exploration budget has increased five-fold since last year; the replacement rate of our reserves reached 46 percent last year, and we expect to reach a 102 percent replacement rate by 2006,” he said referring to the level at which the quantity of newly discovered oil is added to continually dwindling reserves.

But exploring is expensive, and under the current tax regime, PEMEX has to hand over 80 percent of its revenue to the government, leaving little money aside for the financing of new discoveries.

“They need to increase exploration, but there is no money,” said oil analyst David Shields, who has been following PEMEX for thirty years.

In a different country, privatizing parts of the state oil industry or the sale of concessions to private oil companies would be an alternative for raising capital, but the heavy bust of Lázaro Cárdenas in the corridor is a reminder that in Mexico, this is not an option. The constitution maintains that hydrocarbon production and exploration are the exclusive responsibility of the state.

“We don’t envision the dismantling of the state monopoly or the allowance of any oil concessions,” said Maciel.

However, the presence of foreign oil companies waiting for the doors to privatization to open up is unmistakable. For their help, the Mexican government has come up with a short-term solution, called deferred impact projects, where private companies finance major oil projects which the government purchases after they’re finished. This formula keeps PEMEX debt off the books for a few years and keeps with the constitution by refusing concessions to any company.

Although some factions within Mexico (especially the National Action Party) would like to modernize the industry by breaking up the PEMEX monopoly and opening doors to foreign investment, officials within PEMEX insist that oil will remain as Mexican as tamales for years to come.

Yet while PEMEX insists that oil will remain steadfastly Mexican, Ciudad del Carmen, an oil boomtown on the edge of the Mexican Gulf has become strikingly international.

Neatly paved sidewalks are brimming with Burger Kings, Holiday Inns, and scores of foreign oil contractors. Canadian, Argentine and Venezuelan workers fill the seafood restaurants. They fly in from the rigs offshore, checking into three star hotels to ditch their orange Schlumberger jumpers.

Meanwhile, at the bustling airport just outside town, Jose Luis Zepeda, the manager of Pegaso Air Transport, is doing booming business transporting foreign engineers and technicians from Ciudad del Carmen to the platforms of Cantarell. “Most of our oil business is with PEMEX, but we move people from Schlumberger, Halliburton, all the companies,” he said.

Mexico never really shook off the presence of foreign companies. More than 40 private companies operate on 60 percent of oil fields. PEMEX depends on them for everything from off-shore drilling technology to environmental clean-up techniques.

PEMEX plans to attract direct foreign investment in natural gas exploration, with plans for controversial contracts known as Multiple Service Contracts (MSC) which would allow private companies to take over the management of whole exploration and drilling in natural gas operations for a single fixed fee. TotalFina ELF, Gaz de France, British Petroleum, Exxon Mobile — all have shiny offices in the capital, and according to Maciel, they are ready to put their foot in the MSC door — waiting, perhaps, for the day when they can extract oil as well as gas.

“Of course, opening the fields up further will bring more business,” said Zepeda, as one of his yellow helicopters stuffed with oil workers took off from the sun-baked tarmac heading out to the heavy platforms which stand like iron islands, pulling thick crude oil from deep below.

The Mexican government expects to attract more than $8 billion in direct investment from Multiple Service Contracts in the next five years. PEMEX hopes that the first contracts for natural gas exploration will be signed in August. Although PEMEX is very careful about saying that the contracts are limited to natural gas development, there is no legal reason why they cannot be extended to oil eventually. After all, both are hydrocarbons.

But this is also why the future of the MSC’s is still uncertain — anything that might open the door to foreign contact with oil generates political controversy.

“The contracts are perfectly constitutional,” says Rafael Aguilera, PEMEX’s legal representative in charge of MSC’s. “Private contractors are paid a fixed fee in cash, they don’t sell the oil. Those who oppose the MSC’s either do not really understand it or do so because they have an electoral agenda.”

Far from the oil-stained workers of Cantarell, the political fight over PEMEX’s dilemma rages within the offices of the Mexican parliament, a modern high rise in the aristocratic Paseo de la Reforma, the heart of Mexico City.

Perhaps the single greatest obstacle to the MSC alternative is the battle that has erupted between the Institutional Revolutionary Party (PRI), which considers itself a defender of the legacy of Cárdenas and the interests of the Mexican people and the National Action Party (PAN), which sees the MSC’s as one of the few viable ways for PEMEX to work its way out of its predicament.

The political fight over the wealth ensconced in Mexican soil is a long and sordid one. Although the two primary parties embroiled in the debate agree that Mexico should have exclusive rights to the reserves stored in Mexican soil, the question of which direction to push PEMEX becomes heated when talk of service contracts and tax reform hits the floor.

Those opposed to the MSC’s believe the answer to PEMEX’s money troubles and thus, a solution to Mexico’s dilemma in exploring for more oil offshore, lies in tax reform within the state and the company. “There is no other company in the world that is taxed as much as PEMEX. If that were to change, then the company would have the necessary resources to invest in itself,” said PRI leader Rafael Segovia.

Although most agree that PEMEX’s tax burden is excessive, without a comprehensive and controversial tax reform, the only alternative is to seek other alternatives. And since the Fox government stepped into power, the taboo buzzword that is ventured and then crushed in the parliamentary acrimony of political debate is: privatization.

Yet despite the vibrant nationalistic undercurrent that informs all political talk of Mexican oil since it was nationalized in 1938, PEMEX has had a long relationship with foreign companies. It is a relationship that will likely expand as the solution to PEMEX’s financial dilemma if current CEO, Raul Munoz Leos’ plans for reform are successful.

“What is happening today is not new,” said Mexican historian Lorenzo Meyer, referring to the need for foreign investment after oil was nationalized in 1938. Then, however, PEMEX sought investment from small companies who would not compete for political power with the state, he said.

“Today the fight is big and ideological,” he said. “PEMEX could be efficient, from the perspective of the market. We don’t need to have physical control of the oil; we can control it through taxes, regulations, not with this massive bureaucracy that has become a monopoly. All we have now is a perpetual stalemate.”

The story of Mexican oil is the story of Mexico, said Homero Aridjis. “Oil has historically been considered a source of wealth, but it has been the source of conflict for Mexico.”

Daffodil Altan and Angel Gonzalez are graduate students in the School of Journalism at UC Berkeley.