In a Change, Mexico Reins In Its Oil Monopoly

Via The New York Times, a look at the Mexican government’s increasing role in Pemex’s daily operations:

Pemex, the state-owned oil company, invested billions at the Chicontepec field, but has extracted little petroleum.

For seven decades, Pemex, Mexico’s state-owned oil monopoly and a mainstay of the government’s revenue, regulated itself — which is a polite way of saying it could do pretty much as it pleased.

No authority challenged the wisdom of investments like the billions it has spent here in the Chicontepec oil field to extract just a trickle of petroleum even as private companies have pulled torrents from similar shale rock in Texas and North Dakota.

The company’s safety procedures went largely unscrutinized as it joined the oil majors drilling in deepwater areas of the Gulf of Mexico. And the company faced no serious consequences for not keeping its promises to raise output or operate more efficiently.

But in the last few years, that has begun to change. The tiny National Hydrocarbons Commission, created by the Mexican Congress in 2008 to increase regulatory oversight of the company, is proving to be a surprisingly sharp thorn in Pemex’s side.

The five-member panel of energy specialists, which has a staff of 61 and an annual budget of about $7 million, has begun to confront the company’s executives over where and how they drill for oil. With a raft of new regulations and its own blunt assessments of the practicality of Pemex’s projects, the commission is pushing the company to explain its plans.

Pemex does not have to follow the regulators’ recommendations, but the commission’s young president, Juan Carlos Zepeda, is speaking out when it does not.

“The strength of the commission is in public opinion,” said Mr. Zepeda, 42, an economist who contends that Pemex, officially Petróleos Mexicanos, should be more transparent as it spends $20 billion this year to find and pump oil. “The force of change will come from Congress, from opinion leaders, from national universities, from society.”

As a symbol of Mexican nationalism, created in 1938 when the government expropriated foreign-owned oil companies, Pemex occupies a peculiar place in the country’s energy policy. The jobs it generates give it powerful political allies, and its union is so strong that no president risks defying it.

The government relies on the company’s oil revenue for as much as 40 percent of the national budget, taxing it so heavily that last year the company lost $6.5 billion on sales of $111.5 billion.

As long as oil gushed from Pemex’s giant offshore fields, there seemed little reason for anyone to challenge the status quo. But production has declined since 2004, and the company’s ability to find and exploit new sources of oil has been cast into doubt.

The commission has closely tracked the Chicontepec project, on which Pemex has already spent nearly $9 billion. The regulators told the company that in its haste to meet ambitious production goals, it was drilling hundreds of new wells without studying the region’s geology or the best recovery techniques.

The criticism was quickly picked up by members of Congress.

Mr. Zepeda is also scrutinizing Pemex’s plans to push deeper into the Gulf of Mexico. The memory of the BP disaster there in 2010 is still fresh, and Mr. Zepeda is concerned that Pemex does not have enough experience to drill three new exploratory wells at depths of almost 10,000 feet — more than twice the average depths it has been drilling in the region.

David Shields, an independent oil analyst based in Mexico City, said the change in approach was significant. “It was heresy in the past to question whether Pemex was doing things properly,” Mr. Shields said. The commission’s five members all had previously worked for Pemex or for government entities involved in energy. But their decisions have shown independence, said Miriam Grunstein, an oil specialist at the CIDE, a public research university in Mexico City.

“They have integrity,” Ms. Grunstein said. “They’re really admirable. It’s completely unexpected.”

In the last few weeks, Pemex and the chief of its production and exploration subsidiary, Carlos Morales Gil, have begun responding to the pressure. The company officially reduced its estimate for probable reserves in Chicontepec by about 30 percent, to 6.49 billion barrels of oil equivalent, ending two years of wrangling with Mr. Zepeda’s team.

Then, at the end of March, Pemex announced that it had signed a contract with Wild Well Control, a Houston company that handles oil well disasters, including the 2010 BP spill, to provide deepwater containment systems, and it is in talks with a consortium of gulf oil companies to provide additional services. Pemex is also analyzing whether it should buy additional insurance for the deepwater wells, Mr. Morales said.

Jeremy Martin, the director of the energy program at the Institute of the Americas in the La Jolla neighborhood of San Diego, said that Mr. Zepeda was right to take his concerns about Pemex public. “He is holding their feet to the fire, especially Carlos Morales. At a minimum, he is forcing Morales to respond.”

Mr. Zepeda said he sensed the beginning of a shift at the company but added, “for Pemex to fully recognize an authority, it will take a cultural change that is going to take some time.”

Mr. Morales of Pemex expressed exasperation with the commission’s oversight.

“It is like being the coach of the national soccer team,” he said in an interview. “Everybody wants to tell the coach what to do.”

Mr. Morales suggested that some of the guarantees that the commission wants from Pemex before the company begins drilling in deeper waters reflect the commission’s inexperience.

“We have been doing these things for 70 years,” he said.

But Ms. Grunstein said that Pemex’s efforts in deep water had little to do with sound business management. “They want to prove to Mexicans and to the world that they can do it,” she said. “It’s a heavily reputational thing.”

Although Pemex does not have the experience to easily develop unconventional fields like Chicontepec, where the oil is tightly locked in the rock, it has no choice. The Mexican Constitution prevents Pemex from doing what would be standard practice anywhere else in the world — striking partnerships with private companies to share costs and revenue.

Some positive news has occurred. Pemex’s oil production has stabilized at about 2.5 million barrels a day, down from the 2004 peak of 3.4 million. This year, Pemex will finally replace each barrel it produces with a new barrel of proven reserves, a goal that had long eluded it.

And a new boss, Antonio Narváez Ramírez, is in charge at Chicontepec, where 2,100 oil wells are spread over low hills covered with orange groves and cattle pastures. Mr. Narváez has spent 18 months overhauling operations and adopting many of the commission’s suggestions.

“Pemex is used to doing things in a conventional way because the oil fields were conventional,” he said. “But that’s finished, and we have to go against the conventions.”

When Mr. Narváez arrived, he monitored the wells with different colored Post-it notes on a wall. Now he has a computerized system to transmit production information in real time to his tablet computer.

Some of his changes are low-tech but effective, including keeping a fleet of maintenance trucks that can be deployed immediately to fix most of the mechanical problems in an oil pump. Others are more complex, including new types of well design to permit horizontal drilling and multistage hydraulic fracturing.

The subsequent impact on the local community is just beginning. “There is more movement, more jobs,” said Marisol Tapia Rodelo, 29, who runs a roadside restaurant in the village of Palma Sola, where giant trucks operated by Pemex and its contractors rumble by and workers turn up every lunchtime.

Chicontepec’s production, now about 65,000 barrels of crude oil a day, is rising, although the goal Pemex now cites — 300,000 barrels — is far off.

“In the end, we will learn how to produce in the field,” Mr. Zepeda said. “The shame is that it cost a lot of money. The learning curve is too expensive.”

This entry was posted on Tuesday, April 24th, 2012 at 10:03 pm and is filed under Mexico, Petróleos Mexicanos (Pemex).  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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