Another Bush “transformational diplomacy” “success”? The simultaneity of the announcements is striking:

Mexican attitudes ease on private oil investment

Libya mulls oil exploration concessions

So how should this be interpreted?
Let’s have a look at the details:

Mexican attitudes ease on private oil investment

Politicians from Mexico’s three main parties are bracing themselves to allow more private sector investment and greater financial autonomy for the heavily indebted national oil company Petroleos Mexicanos (Pemex).

Pemex, which provides the Mexican government with 36 per cent of its revenues, needs to invest in fresh exploration and production to reverse a recent fall in reserves and rising imports. Recent oil spills have also drawn attention to the dangers posed by the company’s ageing infrastructure.


Mexico’s constitution asserts that energy resources are the exclusive patrimony of the nation, barring foreign companies. Pemex was such a sacred cow that Vicente Fox, elected president in 2000 on promises of a “government of change”, asserted that privatisation of the company was off the agenda.

Privatisation is still not being discussed, but many are appealing for options to allow some private investment, to sell some shares in the company to Mexican investors, or to reform its corporate governance.


With taxes based on revenues rather than profits, Pemex last year contributed about 75 per cent of its sales – 110 per cent of pre-tax profits – to the national Treasury.

So the story here is purely domestic: Pemex has been a cash cow for much too long, and although it is a competent company technically, it is not able to invest enough because its resources are captured by the central government (which depends unhealthily on them – 36% of income!), and because there are too many hands in the “pot of gold”…

This fits in my narrative in previous diaries about national oil companies being unable to invest, and the host countries being unwilling to let foreigners do it. Mexico, a democracy, is at least asking the right questions: how to invest, how to make the company more efficient, how to use the natural wealth of the country for the benefit of the population.

Pemex’s example shows that keeping investors out is not necessarily the best way for the country: the wealth is less than it could be because of lack of investment, and it only goes partly to the right uses as there is a lot of “seepage” in a monopoly with no competition and entrenched “stakeholders” of the wrong kind.

In any case, Bush has very little to do with it, so don’t let him claim that as a victory in any way.

Now Libya.

Libya dangles prospect of oil exploration concessions

(a slightly longer article than that linked to above, I am not sure it is accessible without a subscription)

Libya is considering offering lucrative long-term oil exploration concessions in a bid to attract international oil companies and boost crude output after years of economic sanctions.

Such a move, if agreed by the Tripoli government, would mark a rare return by an Opec producer to a concession system that collapsed in the mid-1970s.

Libya, which holds the largest oil reserves in Africa but trails Nigeria and Angola as a producer, is dangling the prospect of oil development and exploration rights at a time when oil companies around the world are battling to replenish dwindling oil reserves.

Analysts believe Libya hopes the concession arrangement will appeal to big foreign oil companies such as ExxonMobil and BP.


Libya, which has estimated reserves of 36bn barrels, has started to open up its potentially rich oil and gas sector to greater foreign investment following the lifting of 18 years of US trade sanctions in 2004.

In January it raised about $200m (€155m, £107m) through the award of 15 exploration licences, mainly issued to US companies led by Occidental Petroleum and Amerada Hess. But foreign companies only account for about 20 per cent of the country’s oil output.

Mr Shatwan said Libya planned to issue another 100 exploration licences over the next 18 months in an effort to double oil output to 3m barrels a day by the end of the decade. It currently produces about 1.6m b/d of crude, less than half the peak of 3.3m b/d in 1970.

Libyan officials estimate the country needs $30bn in investments to expand and modernise the oil industry.

Under the licence terms, Occidental and Amerada would have to share production with Libya’s state-owned National Oil Corporation (NOC).

Oil companies which already operate in Libya, such as Total of France, Italy’s ENI, Repsol of Spain and Austria’s OMV, operate under production-sharing agreements with the NOC.

Fellow Opec member Algeria may also introduce long-term oil concessions following last week’s approval of new energy liberalisation laws by the country’s national assembly.

This is fairly technical stuff, but what you need to note is the following:

  • Western oil companies (well, European) are already producing oil in Lybia, under the PSA (production sharing agreements) regime, which is not necessarily better than the concession regime (it all depends on the taxation mechanisms in each case).
  • like Mexico, Lybia needs new investment in its oil sector. Unlike Mexico, it has not been totally closed to foreign investment, but was not very welcoming until recently.
  • the elimination of the US sanctions allows US companies to join their European counterparts in the fun, and the improvement in bilateral relations makes it easier for all oil companies to come and invest.
  • as has been discussed elsewhere, Libya has been keen for relationship normalisation for a while and that process is only marginally linked to Bush’s diplomacy and the Iraq war.

In either case, do note that the investments wil ltake a few years to come to fruition, so this potential oil will not be in the market for a while and will not do much to ease the expected tensions on the market in the near future.

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