Home' Trinidad and Tobago Guardian : August 15th 2013 Contents BG10 ENERGY
BUSINESS GUARDIAN www.guardian.co.tt AUGUST 2013 • WEEK THREE
Ajar 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 produc-
tion 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
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 invest-
ment, it finally struck deep-water oil last year.
But the amounts recovered so far are negligible.
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 two million 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 Boue 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
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 7, 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
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 US$7, and sells it for around US$100,
it lost an accumulated 360 billion pesos, or
US$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 a loss-maker.
Worse, the government sucks out cash to
compensate for the lack of tax revenues col-
lected in the rest of the economy. Last year,
55 per cent of Pemex s revenues went in roy-
alties and taxes. This perpetual drain on its
cash flow means its debt has soared to US$60
billion. The hole in its pension reserve is a
whopping US$100 billion.
Besides siphoning off its profits, the gov-
ernment refuses to let it make its own deci-
sions. Its boss is appointed by the president,
the energy minister chairs its board of direc-
tors, 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. Its union is bloated and
pampered. Reforma, a Mexican newspaper,
reported that the union s leadership received
US$65,000 a day last year for business trips
and general expenses.
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. Morales says he
needs five sets of approvals for any big con-
tract, 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 US$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 meager. Morales speaks
proudly of the rise in production at other sites
to offset Cantarell. But output and reserves
have only barely stabilized, at levels well below
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 the United States.
In a tacit acknowledgment of this, 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 gasoline
and diesel suitable for today s cleaner cars.
So Mexico will also suffer the national embar-
rassment of having to import more of these
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.
Mexico's government says
it will shortly unveil big
energy reforms. These
may include changing
the constitution to relax
on oil production.
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