The Pemex Debacle

Mexico’s government main source of income is in peril

Mexico’s finances are threatened by the dooming country oil monopoly Petroleos Mexicanos. Falling oil reserves, obstacles to foreign investment, a domestic growing demand, unstable oil prices and a global trend to shift energy sources are just some of the woes Mexico’s oil company is facing.

Petroleos Mexicanos is the biggest enterprise in Mexico and Latin America and the highest fiscal contributor to the country. It is one of the few oil companies in the world that develops the entire productive chain for the industry–upstream, downstream and final product commercialization.


Petroleos Mexicanos (PEMEX) is also Mexico’s largest enterprise in terms of total sales, total assets and personnel employed. By the early 1990’s it was the fourth-largest crudeoil producer behind the Saudi Arabian Oil Co., National Iranian Oil Co., and the Chinese National Petroleum Co. In 1995 it averaged 2.7 million barrels of crude oil production a day.

This increased to 2.9 million barrels a day in March of 1997. In addition to crude oil, PEMEX produces natural gas, petrochemicals, gasoline and diesel fuels.

At this time PEMEX operates by means of a corporative office and four subsidiary entities:

  • PEMEX Exploracion y Produccion (Exploration and Production)
  • PEMEX Refinación (Refining)
  • PEMEX Gas y Petroquímica Básica (Gas and Basic Petrochemicals)
  • PEMEX Petroquímica (Petrochemical)

At this time, PEMEX requires modernization of structure, organization and the main indicators of the Petroleos Mexicanos operation.

BACKGROUND

As a result of the long-existing conflict between the oil workers’ union and the companies, President Lazaro Cárdenas nationalized the oil industry on March 18, 1938. A number of reasons were given for this drastic measure.

In 1977 PEMEX approved an ambitious $15.5 billion development program with the aim of increasing the company’s production. The exploration and development effort led to a spectacular increase in reserves and production in the 1980’s. With increased production, PEMEX also boosted its exports, which in 1989 were just less than 1.3 million barrels per day.

In June 1990 the international marketing division of PEMEX was split off from the main organization. This division, Petroleos Mexicanos Internacional Comercio Internacional, was responsible for the marketing of crude oil, refined products and petrochemicals.

In 1992 PEMEX was divided into four operating divisions: Exploration; Refining; Gas; and Chemicals.

As a compromise, the Mexican government agreed in March, 1996, to limit foreign participation in the sale of its petrochemical complexes to 49%. This was intended to guarantee participation of local companies in the privatization.

STATISTICS

According to the information provided at the PEMEX web site exploration and production has dropped recently.Exhibit 1 shows the production of petroleum products 2004 through 2008.

Reserves statistics are shown in Exhibit 2 during the same time span. Exhibit 3highlights the Sales records.

There are no official figures for 2009 nor 2010, but according to industry analysts the general trend for reserves and production is negative for the recent two years.

REASONS FOR THE PEMEX DEBACLE

The Mexican economy has also faced the hard hits of the world economic crisis, mainly because of its closeness with the U.S. Mexico also has to face the problem of giving up being an oil producing country, to become an importer by the year 2017.

According to CNN this is because 23 of Mexico’s 32 largest oil wells are clearly in need of renovation.

Mexico prohibits private investment in hydrocarbons and PEMEX has become the largest monopoly controlled at any time by politics and union leaders. Unfortunately the investments made at PEMEX have been applied to creating the largest payroll ever and that has absorbed any possibilities of growth for the company.

The Economist made an important analysis for this situation. This journal reports on the opportunity that may exist in the deep sea in the Gulf of Mexico, where it has been said that 50 billion barrels of oil may exist. Mexico has only drilled 10 wells in deep water, but hasn’t found anything spectacular.

Without a doubt this is because of a lack of experience, technology and capital. If Mexico accepts private investment for oil exploration, according to The Economist, the amount required annually would be around US$10 billion.

These actions only bloated the bureaucracy instead of applying the resources in exploration and modernization, which were previously stated as the major needs of PEMEX.

CONCLUSION

Historically, oil has supplied 30% to 40% of the Mexican government’s revenue. Confronting a potential calamity, President Calderon has pushed through the strongest reforms he can defend politically, in hopes of attracting foreign investment. But he dare not do anything that would appear to reverse the 1938 nationalization.

Even the modest reforms he has managed to pass are being challenged in court.

The U.S. Energy Department projects that Mexican production will decline by an additional 600,000 barrels a day by 2020; combined with growing domestic demand, that would probably make the country an oil importer.

In the last two years, Mexico provided about 12% of all crude oil imports to the U.S., thus, supplying about 8% of the total oil, according to the Energy Department, used by American refineries.

President Calderon has been trying to find a solution to the PEMEX debacle. Under his Presidency he has been able to approve an oil law supposedly much more flexible. He has also called for a second reform which seems very complicated because of the fact that the first one still hasn’t been implemented.

President Calderon deems it important to have interaction with foreign investment and oil production.

He recently stated: “The contracts are incentive-laden contracts, which are flexible agreements allowing specialized global companies to help PEMEX transfer technology and explore and produce oil and natural gas in a lot of places that PEMEX has never been able to reach before.”