Pemex: Unfixable?

Via The Economist, a look at Pemex, Mexico’s troubled oil firm:

A JAR of crude oil, not much bigger than one of baby food, has pride of place in the office of Carlos Morales, the veteran oilman in charge of exploration and production at Pemex, Mexico’s state oil monolith. He handles it reverentially because it comes from Maximino, a deep-water field in the Gulf of Mexico, close to his country’s maritime border with the United States. Deep water is a territory that Pemex has only just started to explore.

Although privately owned oil majors such as Chevron have been drilling successfully in non-Mexican waters near Maximino for several years, Pemex has been left behind. After 23 failed attempts and billions of dollars of investment, it finally struck deep-water oil last year. But the amounts recovered so far are negligible. Mr Morales laughs weakly when asked if the jar on his desk is all there is.

The discoveries—none of which yet count as proven reserves—are emblematic of both Pemex’s problems and its potential if it were freed from one of the most restrictive oil regimes in the world, and able to partner with private firms with expertise it lacks. Its forte has been drilling oil in shallower waters of the Gulf of Mexico. But in the past decade production in its most bounteous shallow-water field, Cantarell, has plummeted from over 2m barrels a day to less than 400,000, and it has struggled to find new reserves to compensate.

Oil and gas production in America has soared thanks to shale deposits, some of which extend into Mexico but which Pemex has failed to develop. Pemex also looks south with envy at the deep-water prowess of Brazil’s Petrobras, another state-controlled but more entrepreneurial firm. Juan Carlos Boué of the Oxford Institute for Energy Studies estimates that Brazil has discovered as much deep-water oil in just the past five years as Mexico’s entire proven reserves.

Mexico’s government says it will shortly unveil big energy reforms. These may include changing the constitution to relax Pemex’s monopoly on oil production. As an indication of how politically sensitive this will be, the presidency let speculation grow that the reform would be announced on August 7th, only to admit the day before that it was not ready. Not only is it unclear how far the reforms will go, such is the state of Pemex that some doubt it is reformable at all. Bernardo Minkow, a former consultant at McKinsey, says it is so complex and poorly governed that it is “very hard if not impossible to fix”.

Its first problem is structural: it has never been treated as a profit-making company. Astonishingly for a monopoly that drills every barrel of oil in Mexico at an average cost of less than $7, and sells it for around $100, it lost an accumulated 360 billion pesos, or $29 billion, in the five years to 2012 (despite a small profit last year). This is partly because although its oil-and-gas-production side makes a fat profit, its refining business loses a fortune, and its petrochemicals division is also loss-making. Worse, the government sucks out cash to compensate for the lack of tax revenues it collects in the rest of the economy. Last year 55% of Pemex’s revenues went in royalties and taxes. This perpetual drain on its cashflow means its debt has soared to $60 billion. The hole in its pension reserve is a whopping $100 billion.

Besides siphoning off its profits, the government refuses to let it make its own decisions. Its boss is appointed by the president, the energy minister chairs its board of directors, and the finance ministry vets its budget, line by line. The board has no independent directors and lacks business expertise, says a former chief executive. He notes, for example, that more than 20 years ago the board began “benchmarking” Pemex’s refineries against international peers, but they have remained at the bottom of the league even as parts of Mexico’s manufacturing industry have become models of efficiency.

With 151,000 employees, Pemex’s output of oil per worker is well short of that of its foreign counterparts (see chart). Its union is bloated and pampered. Reforma, a Mexican newspaper, reported that the union’s leadership received $65,000 a day last year for business trips and general expenses. Mr Morales admits that the upstream business is overstaffed with workers who cannot be laid off, even though the wells they work on have dried up. Meanwhile, managers suffer a stifling internal bureaucracy. Mr Morales says he needs five sets of approvals for any big contract, including one from the full board.

The management has made a string of poor investment decisions. Faced with the collapse of production at its crown jewel, Cantarell, it has poured unprecedented amounts into exploration and production—a combined $70 billion between 2008 and 2012. But since much of this has gone into areas for which Pemex is technically ill-prepared, such as deep-water drilling and onshore shale oil, the returns have been meagre. Mr Morales speaks proudly of the rise in production at other sites to offset Cantarell. But output and reserves have only barely stabilised, at levels well below their highs.

Adrian Lajous, a former Pemex boss, says that, in contrast, the firm has underinvested in natural gas, resulting in Mexico having to import record volumes from America. In a tacit acknowledgment of this, Mr Morales says Pemex now plans to invest heavily in new gas production. The firm has also failed to find the $30 billion it is thought to need to reconfigure its refineries to produce petrol and diesel suitable for today’s cleaner cars. So Mexico will also suffer the national embarrassment of having to import more of these fuels.

Whatever reforms the government announces, they will stop a long way short of privatising Pemex. It is so wrapped up in a myth of national sovereignty that even the energy minister, a champion of reform, insists that not a “single screw” will be sold. Reformists hope the government will at least let private firms work with Pemex to develop shale, deep-water and other challenging fields. But even this would require constitutional changes, and would face much resistance. Since Mexico has no significant private-sector oil industry, much of the investment would have to come from foreign firms, and for nationalists this would be hard to stomach.

This entry was posted on Sunday, August 11th, 2013 at 12:43 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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