The MacNeil/Lehrer Report; Mexican Oil

ROBERT MacNEIL: In recent months oil geologists have confirmed the existence of huge deposits of new oil in Mexico. Beyond those proven resources may lie reserves rivaling the richest fields in the Middle East - - changing the energy picture for the world and perhaps for the United States.

Good evening. On-.Saturday Mexico will celebrate its 168th anniversary as an independent nation -- and this year it will really have something to celebrate.

After years of social upheavals, slow development, poverty and a high birth rate, Mexico has suddenly had a glimpse of new prosperity, from oil. Estimates of her oil reserves, long held conservatively low, have suddenly grown to the point where our southern neighbor is even being talked about as a possible rival to the biggest oil producers, like Saudi Arabia. And of course all this falls in the middle of our agonizing debate about impending oil shortages, conservation, and dependence on the Middle East. Tonight, starting with an exclusive interview with the head of Mexico`s state-owned oil corporation, we examine what Mexico`s oil could mean, to the world market and us. Jim Lehrer is off; Charlayne Hunter-Gault`s in Washington. Charlayne?

CHARLAYNE HUNTER-GAULT: Robin, the CIA made a study of where the oil reserves are around the world. In the Middle East, Saudi Arabia took the lead, with Kuwait and ran not far behind. In the Western world the United States was ahead with Mexico trailing. However, Mexico may no longer be the long shot; two weeks ago Mexican President Jose Lopez Portillo said Mexico has proven oil and gas reserves of twenty billion barrels; probable reserves estimated at thirty-seven billion barrels; and possible reserves could reach as high as 200 billion. It was in the late 1960s that the bleak Mexico oil picture began to change. By 1972 explorers had made one of the greatest oil strikes of all times, deep in the grassy swamplands of southeastern Mexico. Until that time Mexico had produced modest amounts of oil from shallow wells; in 1938 Mexico nationalized and expropriated foreign oil companies, and things went downhill from there. The international oil companies boycotted Mexican exports; and its national company, Pemex, was plagued by problems with bureaucracy and corruption. Domestic production decreased dramatically, prompting John Paul Getty to remark that Pemex was the only oil company in the world that was losing money. Today, however, rich fields in areas like Tabasco State in the southeastern part of Mexico and the deserts of Baja California, along with some offshore fields in the Yucatan peninsula, are turning Mexico into a major oil exporter.

But oil isn`t the only success story in Mexico. There are also enormous amounts of natural gas -- so much, in fact, that they`ve had to burn off much of it. Now Mexico is building a natural gas pipeline that will run some 800 miles from southern Mexico to the Texas border. A proposed sale of natural gas to the United States fell through when the two countries couldn`t agree on the price. The Mexican government has said that if the United States doesn`t buy the gas Mexico will use it at home. But there`s certainly enough of it, and if the United States wants it it`s theirs -- for a price. Robin?

MacNEIL: When Lopez Portillo became president of Mexico two years, ago, he brought in an old friend, Jorge Diaz Serrano, to run Pemex. Diaz Serrano is an engineer and an expert in oil drilling and production who has worked at times for several American companies. Healso found time to go back to college and take graduate degrees Mexican history and the history of art. He is visiting New York, and I spoke to him earlier today , I asked him how firm were the latest estimates of Mexico`s reserves running as high as 200 billion barrels, exiting Saudi Arab`s.

JORGE DIAZ SERRANO: Well, the comparison is not quite right. The reserves in the Middle East that you`re referring to are proven reserves; our proven reserves are twenty billion barrels of oil; our probable reserves are thirty-seven billion barrels; and the potential, including the first two, are 200 billion barrels.

MacNEIL: And if they were proven, that would make Mexico a larger source of oil than Saudi Arabia.

DIAZ SERRANO: Well, it all depends what Saudi Arabia is going to do in the same period of time. They have tremendous potentialities, and there`s no question that the Middle East is the largest reserve known of oil.

MaCNEIL: As I understand it, Mexico now produces 1.4 million barrels of oil a day.

DIAZ SERRANO: Yes.

MacNEIL: Looking forward over the next decade or so, how do you plan to increase that production?

DIAZ SERRANO: We plan to increase it to 2.25 million barrels per day by 1980, perhaps at the end of 1980; and of this we will dedicate one part for export after supplying all the country`s needs.

MacNEIL: And beyond 1980 can you project how you intend to increase production?

DIAZ SERRANO: Well, we`re going to be in office six years, and that`s all we`re allowed to think about. (Smiling.)

MacNEIL: I see. Some people in the United States have doubted whether Mexico -- and particularly Pemex -- has the technology or the capital to develop production as rapidly as you might like. Is that the case?

DIAZ SERRANO: Well, we have the technology and the capital for the program that we set up in December of 1976. At the beginning of the administration we made a program that would require $15 billion, which was increased one billion more during the course of 1977, and we had no problems obtaining that financing; and insofar as the technical part of it, we produce in Mexico drilling rigs, we have a pretty good human infrastructure. Because you must remember that producing oil is not a new industry in Mexico; we`ve been at it since 1901. And it was nationalized in 1938, so from 1938 to the present day -- that is, forty years -- we have been handling the industry ourselves. The first twenty years we did not receive very much help from the outside, so we had to develop our own resources, our own geologists, our own chemists, petroleum engineers, mechanical, electrical and what have you. And we have now a third generation of capable people doing the job. Now, we don`t pretend to know everything; don`t misunderstand me. But there is technology available for sale in the world that you can buy.

MacNEIL: So your answer would be that Mexico has enough technology and enough capital, or can buy the technology, to increase production as rapidly as you want to.

DIAZ SERRANO: Right.

MacNEIL: Are you interested in making any cooperative arrangements with any big American oil companies to help you produce at a faster rate?

DIAZ SERRANO: No, we are not. We discussed that at length and we told them that we appreciated their offers but that we did not need -- we didn`t have to accept risk capital, because there`s no risk involved; the oil already has been found.

MacNEIL: Is that because psychologically and politically, given the forty years of independence in oil production since you nationalized -- a date that you yourself have described as a transcendent moment in Mexican history -- is that because it would be very unpopular politically in Mexico to make any such arrangements?

DIAZ SERRANO: Well, it wouldn`t be popular, but why should we do it if -- why do we have to share? We are willing to establish international trade; we want to sell, we want to buy; but we want to do it ourselves, that`s a very natural thought. And commercially what the world cares is that the oil and the products are available. We make them available.

MacNEIL: Would you be interested in selling oil to the United States?

DIAZ SERRANO: Yes, we are.

MacNEIL: Are you actively seeking sales arrangements now?

DIAZ SERRANO: Well, we are producing 420,000 barrels a day for export. Of this about ninety percent goes to the United States. Some goes to ...

MacNEIL: Already.

DIAZ SERRANO: Already. Some goes to Spain, to Israel. Israel is a very good customer of ours.

MacNEIL: Does Mexico intend to become part of OPEC?

DIAZ SERRANO: No.

MacNEIL: For what reason?

DIAZ SERRANO: We want to be independent; I have stressed that during all my visit in New York and in other places. We want to have self-determination, we want to do what we consider best. And if we tie ourselves with other groups, no matter how important or respectful they are, we lose this self- determination. That is against the law in Mexico. However, we are aware that the world price structure should be kept, and that`s the reason why we`re selling in the high levels of the world price for crude oil.

HUNTER-GAULT: Now to a man intimately familiar with what`s going on in Mexico. He is Arthur Meyerhoff, a petroleum geologist and consultant to third world nations, the Soviet Union and China. As a former advisor to Pemex, Dr. Meyerhoff was only recently allowed by the Mexican government to speak publicly about these vast oil finds. Dr. Meyerhoff, first a technical thing: can you just explain the difference between those categories of oil -- proven, probable and potential, or possible?

ARTHUR MEYERHOFF:Yes; the proved oil is oil which has been discovered and revealed by drilling on structures; probable oil is oil on structures which already have been drilled, in which oil has been found, but they are parts of the structure which have not yet been drilled; potential oil is in structures that have not been drilled which lie adjacent to or between proved and probable. Probable is almost the same as proved.

HUNTER-GAULT: And potential, you know it`s there, it just hasn`t been...

MEYERHOFF: No, we don`t know until the drill has reached it; we have no idea.

HUNTER-GAULT: I see. Do you agree with Mr. Diaz Serrano`s estimates about how much oil-and gas there is in Mexico?

MEYERHOFF: On his proved and probable, which amount to fifty-seven billion barrels by his estimate, the answer is affirmative, yes. On the potential this remains for the drill to find out. There is certainly the potential to become the second largest power after Saudi Arabia, and there is definitely the potential to go beyond that and become larger than Saudi Arabia.

HUNTER-GAULT: But you couldn`t give a numerical estimate.

MEYERHOFF: No. Mr. Lopez, the President of Mexico, gave a high figure last January in a news conference of 327 billion barrels, but that`s wildly optimistic.

HUNTER-GAULT: From inside Pemex, the national company, there have been conflicting reports about how much oil there is; some have said that the estimate is overrated, some have said that it`s underrated. Why is that conflict?

MEYERHOFF: I think it`s because there has been no real official spokesman for Pemex until the new regime took over in 1976. Mr. Dfaz Serrano has expressed very, very well the official Mexican position; I don`t think you`re going to see many contradictions in the future.

HUNTER-GAULT: So in other words, the conflict no longer exists?

MEYERHOFF: It should die right now.

HUNTER-GAULT: You mean right at this very moment.

MEYERHOFF: And as he said, for the next six years -- or four years, now.

HUNTER-GAULT: All right. In terms of what he said about Mexico being able to exploit this, resource itself, he said that they know quite a lot but they don`t know everything. How much technical expertise do they have and do they need?

MEYERHOFF: I`ve worked with their geologists; to a lesser extent with their engineers. They have one of the finest exploration departments in the world. It`s equivalent to anything in the United States or any other Western or Japanese-related country.

HUNTER-GAULT: Is it going to need to buy technical expertise from, say, the United States or other places?

MEYERHOFF: No I don`t think so. They may have to buy equipment, as Mr. Diaz said, but I doubt seriously that they will need a great deal of advice.

HUNTER-GAULT: How about money?

MEYERHOFF: Money, yes; they have to keep a cash flow. Of course they`re going to build that up as they go along.

HUNTER-GAULT: All right; we`ll come back. Robin?

MacNEIL: Someone who`s not quite as optimistic about Mexico`s chances of becoming another Saudi Arabia is George Grayson. He`s a professor of government at the College of William & Mary. Dr. Grayson has lectured around the country on Mexican economics and oil, and is currently writing a book on the politics of Mexican petroleum. Dr. Grayson, you`ve written recently that there are good reasons why Mexico will not be able to exploit her oil in the simplest and most convenient way -- that is, simply selling it to the United States. What are those reasons?

GEORGE GRAYSON: I think Diaz Serrano probably went over them quite well, and that is that the Mexicans simply will not tolerate massive foreign intervention in their oil industry; specifically, the seven sisters -- the major integrated foreign oil firms -- will not be permitted to get into the production process. There are some things which they of course could do and offer joint operations with these major integrated oil firms. Furthermore, they might consider parallel to the gas pipeline, which is being built toward the northern part of Mexico, also having an oil pipeline there for the rapid flow and transportation of that oil to the United States. I think Mexico will definitely sell the overwhelming amount of its oil to the United States, but I don`t think that they`re willing to have it massively and immediately exploited, and I don`t think the United States is in any position to influence very much internal domestic petroleum policy in Mexico.

MacNEIL: That internal domestic petroleum policy has a legacy very much colored by attitudes to the United States, particularly within the union, I gather from your writings. Could you spell that out a little bit?

GRAYSON: Well, the union is of course extremely nationalistic; furthermore, March 18 is celebrated each year as a kind of a day of national dignity -- that`s the day when President Lazaro Cardenas in 1938 expropriated the Mexican industry, the seventeen foreign firms, and took them under national control to give rise to Pemex, the current state oil monopoly in Mexico. I think that we can look forward to close petroleum and gas relations with Mexico in the future, because there is a natural and a symbiotic relationship. There is at present some difficulty over the price at which the gas, for example, will be sold in this country, but Mexico doesn`t have alternative economically -- alternative markets -so I think we`re going to see a flow here. What we find is on the one hand President Lopez Portillo saying, Our position is deliberately conservative. Countries which have less proven reserves are extracting twice the amount that we are extracting. So I think the Mexicans want to take it slow and easy, but I`m convinced that most of the gas and oil will be dispatched to the U.S. market.

MacNEIL: So the point is, we will probably be able to buy it in the long run, but that it won`t come -- for the reasons you`ve said -- it won`t be able to come to us fast enough to make a real dent in the present dependence, for instance, on Saudi Arabian oil or the energy shortage. Would that be a fair representation of your point?

GRAYSON: I think that`s fair. We`ll cut in in the `80s, but right now the Saudis are producing 7.5 million barrels a day; as you`ve said earlier in this program, the Mexicans are producing 1.4 and using the great bulk of that domestically. I think a figure in the State Department summed it up in a very provocative editorial in The New Republic when he said: "It`s like a fruit tree. If you don`t shake it too hard or too fast, pretty soon you`ll get nice fruit." And I think that`s probably the course that fuel relations between Mexico and the United States will run.

MacNEIL: Given the history of the attitudes on both sides, is there a way in which clever, sophisticated American diplomacy could create a sort of a situation whereby the interests of both countries would be served?

GRAYSON: I think so; and with regard to crude, as Senor Diaz Serrano said, ninety percent of Mexico`s crude is now flowing into this market, and Mexico`s bringing it on line as fast as they want to, perhaps not as fast as we`d like to see it or certain groups in this country would like to see it, but as fast as they want to bring it on line. With regard to gas, there`s been a breakdown; an impasse was reached over the price of gas whereby the Mexicans wanted $2.60 per thousand cubic feet, which is about eight times more than they`re selling it for to their own people in northern Mexico. At the same time, the Carter gas compromise calls for only $1.75; and so I think we have to wait until the domestic fuel legislation is disposed of before negotiations can recommence again. I don`t believe there`s any conspiracy on the part of the United States government, it`s just something that`s going to take time and take patience on both sides.

MacNEIL: Well thank you. Charlayne?

HUNTER-GAULT: Let`s get some insight into how the United States government looks at this. Someone who`s been talking with insiders at the Treasury, Energy and State departments is Morton Kondracke. He is Executive Editor of The New Republic. Mr. Kondracke has been closely watching the Mexican situation. Mr. Kondracke, what is the United States` position toward Mexico? Let`s start with the Department of Energy.

MORTON KONDRACKE: Well, their position is very much as Mr. Grayson explained it. What`s curious, however, is that the CIA has been reporting to the highest levels of the government since 1976 that Mexican potential reserves were the size of Saudi Arabia`s, yet that information never reached the public or Congress. When we asked one Department of Energy person why that was so, he said, "Well, CIA sources might be killed." I mean, that doesn`t add up. I don`t know exactly why that information was concealed but what we were led to suspect by some other people in the Department of Energy -- which is, by the way, a split agency on the subject -- is that the administration doesn`t think that Mexico is capable of producing, or willing to produce, oil in quantities that the reserves would justify and therefore has discounted Mexican oil as a factor in world production.

HUNTER-GAULT: Is that true also in the Treasury Department, do you think?

KONDRACKE: Well, the Treasury Department more or less followed along the same lines, yes.

HUNTER-GAULT: And the Department of State?

KONDRACKE: Well, Mr. Grayson quoted the Department of State attitude, that eventually Mexican oil will come to the United States and that we shouldn`t rock the boat. They`re interested in not getting the Mexican Left riled up by appearing too eager to get Mexican oil supplies.

HUNTER-GAULT: You mean so they don`t begin to talk about the so called gringo imperialism...

KONDRACKE: That`s right. The Mexican Left wants to keep it away from the gringos and also wants it left in the ground, and they`re very nationalistic. And also they claim that the Mexican elites are not terribly interested in having the social dislocation occur which might, if the poor people find out that they could be a rich country.

HUNTER-GAULT: How much was Mexican oil a factor, do you think, in drafting our energy legislation?

KONDRACKE: Well, this is again an issue on which we got a split opinion. My colleague Eliot Marshall and I interviewed a number of people, and some of them told us at the high level in the State Department and in the Department of Energy that it was taken fully into account; but another person said that the people who run the computer analyses of what oil is likely to cost in the world in the future and how much oil is going to be available only got these sized, these 200-billion-barrel-sized projections, a month before we wrote our article in The New Republic, which was in August. I mean, it just doesn`t add up. What seems to have happened is that they knew from the CIA that yes, there were 200 billion barrels there, but they said it`s not going to be produced; and so therefore they discounted it.

HUNTER-GAULT: It wasn`t going to be produced because they didn`t think that they could produce it, that they had the ability...

KONDRACKE: The people in the Department of Energy that we talked to were almost contemptuous of Pemex` ability to pump oil. And that conflicts with everything that Dr. Meyerhoff says and the Mexicans say about themselves. And then they also doubt Mexico`s will to produce it.

HUNTER-GAULT: Okay; thank you. Robin?

MacNEIL: Yes; coming back to you, Mr. Meyerhoff, do the new Mexican discoveries make the scenario of shortage, on which the Carter administration has based its energy policy, unrealistic? To put it more simply, is there going to be more oil longer as a result of these finds in Mexico than we`ve been told?

MEYERHOFF: Here we have to distinguish between two things. There will be more oil longer in the world; but there will not be more oil longer, necessarily, in the United States. What I`m saying is that if we want to enjoy the fruits of Mexican oil, our administration should bend every effort to make love, shall we say, to Mexico and perhaps not woo so many other foreign powers.

MacNEIL: Does making love to Mexico, Dr. Grayson, involve areas other than strictly buying petroleum?

GRAYSON: Well, I certainly don`t want to come out against making love to Mexico, but it strikes me that we are the most ready market for their petroleum products. For example, now, while the Saudi Arabians and other OPEC members are getting about $12.70 per barrel of marker crude, the Mexicans are getting well over thirteen dollars because of the natural affinity with us. The Mexicans are talking about using gas domestically, when they only sell it to their own people for forty cent, per thousand cubic feet and we know they can sell it in our market r at least $1.7, the Carter price in the energy plan, and probably well over two dollars. So I think we`re such a natural market for the Mexicans that if we don`t rush into it too much with our wings flapping but let nature take its course, in a couple of years we`re going to see continued good relations in the sale of both oil and gas; and those good relations have already started.

MacNEIL: Mr. Meyerhoff, how much would Mexican production have to rise, to how many barrels a day -- assuming we were getting a proportion of it -- to begin to be a factor in the world oil production equation?

MEYERHOFF: This is a very difficult question to answer, and...

MacNEIL: Saudi Arabia is at seven and a half million a day at the moment, could rise to eleven or twelve, one understands; how much would Mexico have to produce to really begin to influence it?

MEYERHOFF: Well, you`ve got to remember in the equation that Mexico is trying to build a gigantic industrial complex in the Monterrey and also other areas; and they hope to use, of course, naturally, as much as possible at home, and they also hope to conserve, as Diaz Serrano said, as much as possible for home use. It`s also been said by other members of the panel. I would say that by 1985 Mexico should be producing between between four and five million barrels a day; and if they do this I would guess that we will be getting very close to half of it, or we`ll see half of it exported, at the very least. Now, this depends upon the friendliness of the Mexican regime

MacNEIL: And do you happen to know, which I don`t remember, the figure on how many million barrels we should be importing by that year -- we will need?

MEYERHOFF: Right now we`re importing just under eight million, so I would guess that by that time it`ll be in the -- remember, Alaska`s on stream at last -- and I would guess we`ll be importing roughly, let`s say, nine to ten million. I`m just guessing now.

MacNEIL: So Mexican figures like two million a day could amount to a fifth of our imports and be significant by that time, if it amounted to that.

MEYERHOFF: A fifth or a sixth, something; and it would definitely be significant.

MacNEIL: Mr. Kondracke, do you see, from all your sort of looking into this, Mexican oil finally having a considerable impact on our energy picture and economy as the problems are worked out?

KONDRACKE: Well, it certainly can. One interesting development that I learned about was that the administration, which up to very recently had never really considered what the future of U.S.-Mexican relations would look like on a systematic basis, is finally conducting a study called a presidential review memorandum to see if there`s not some basis for coordinating our relations with Mexico. For example, we have a lot of problems: we have...

MacNEIL: I think we have to just leave it "a lot of problems," colon, Mr. Kondracke; that`s all we have time for this evening. Thank you, gentlemen, all very much. Good night, Charlayne.

HUNTER-GAULT: Good night, Robin.

MacNEIL: That`s all for tonight; we`ll be back tomorrow night. I`m Robert MacNeil. Good night.