Mexico’s Giant Takes Big Steps Into a New Era : Energy: The nation’s leadership vows to keep oil behemoth Pemex government-owned. But it is being forced to change along with the rest of the economy.

Within two years of the dramatic nationalization of Mexico’s oil industry in 1938, rumors began that the new government-owned oil monopoly would be dismantled and returned to private ownership.

But never in the past 50 years have those rumors been stronger than today.

As the government sells off hundreds of state-owned enterprises--from sugar mills to the telephone company to banks--Mexico watchers wonder how long Petroleos Mexicanos can remain untouched.

“Petroleos will remain the property and under the control of the Mexican government,” President Carlos Salinas de Gortari pledged to oil workers this March at a ceremony marking the 52nd anniversary of the nationalization. “This decision of our people is irrevocable.”

Still, Salinas has also made it clear that his decisions to bring Mexico into the world economy and to clean up the environment are just as irrevocable. Those changes cannot occur without significant changes at Pemex, as the government oil company is called.

Part corporation, part national myth, Pemex dwarfs Mexico’s private industrial giants, just as its gleaming 43-story headquarters dwarfs other buildings in its Mexico City neighborhood. The company provides about one-third of Mexico’s exports, and its $19 billion in 1989 revenue was equal to more than 10% of the country’s gross domestic product.

Since Salinas took office in 1988, he has begun to open this country to imports and foreign investment and is insisting that Mexican companies compete internationally. And Pemex’s exclusive franchise to find, extract and refine Mexico’s oil wealth makes it crucial to the economic modernization effort.

“Pemex does not have to disappear, but it must change,” said Oscar Vera Ferrer, assistant director of economic studies at Desc, an industrial conglomerate.

In fact, the revamping of Pemex has already begun:

* One of Salinas’ first acts as president was to arrest legendary oil workers union leader Joaquin (La Quina) Hernandez Galicia after a dramatic gun battle between federal police and union bodyguards. The arrest, on charges of illegal possession of arms, cleared the way for a new labor contract last August that reduced featherbedding and sharply restricted the union’s role in Pemex’s contracts with private firms.

* A year ago, the Pemex monopoly on petrochemical production was reduced from 35 chemicals to 20. And the number of chemicals that could be produced only by companies with majority Mexican ownership and special government permission was set at 66, compared to 400 previously.

* In February, Pemex’s marketing and petrochemical operations were spun off into autonomous departments. The new petrochemical department--in a switch from previous policy--has been downright friendly to private and foreign companies, encouraging their participation in innovative financing schemes for plants stalled by lack of money. And the marketing department is looking for private partners.

* Pemex now makes regular reports on pollution levels of rivers in the petrochemical-producing region along the southern Gulf of Mexico and on the progress of plants to make lead substitutes for gasoline.

These actions--unthinkable only five years ago--are believed to be just the beginning as Pemex confronts a new era of international competition and continued budget restrictions.

However, changes are not coming quickly enough for many Pemex customers--Mexican businesses feeling pressure from imports because of lower tariffs, which have forced them to share their once-protected markets.

Among other things, these customers want to do their own refining. But the same market opening that is causing their problems also provides the customers with an alternative: the ability to look elsewhere.

Four Mexican chemical companies were on the verge of buying a $600-million El Paso refinery last year. Disappointed in Pemex as a supplier, they planned to manufacture and import their own petrochemical raw materials to assure themselves of punctual delivery and consistent quality.

The deal fell through because of financing problems, but the companies are still shopping. Two are negotiating to buy a refinery in the Netherlands Antilles island of Curacao. Not long ago, such a purchase would have been considered an act of disloyalty to a company that is the very embodiment of Mexican nationalism.

Pemex was formed 52 years ago after U.S. and British oil companies refused to obey a Mexican court order regarding a labor dispute. In response, President Lazaro Cardenas expropriated their assets, relying on Mexican workers to run the new government-owned company.

The expropriation, Pemex General Manager Francisco Rojas told legislators last month, “affirmed Mexicans’ confidence in themselves, in their ability to confront and to overcome the pressure and oppression of the powerful, and in their talent to learn, master and create technologies that others assumed were beyond their abilities.”

He went on to say that wresting ownership of Mexico’s oil wealth from foreigners also “strengthened the Mexican state both inwardly and outwardly and consolidated its independence and sovereignty.”

Another major effect of the expropriation was that it strengthened the oil workers, creating a new aristocracy within Mexico’s unionized labor.

The oil workers union now runs everything from movie theaters to restaurants to funeral homes--all at cut-rate prices--for its members working in oil towns. The union has also developed its own health-care system for members, with hospitals that oil workers boast are far superior to those provided for other government employees.

Until last year, the union received a commission on outside contracts, and portions of contracts awarded by Pemex were set aside for companies owned by the union or union leaders.

The power of Pemex and the union grew as oil prices rose and as Mexico geared up to export crude oil in the 1970s.

But, like other oil companies throughout the world, Pemex rode the roller coaster of international oil prices in the 1970s and 1980s and by 1989 found itself with an $18-billion debt while it was earning the money to repay it by selling its oil for only $16 a barrel.

Unlike private-sector oil companies, it was the main source of revenue for a cumbersome government bureaucracy that included hundreds of subsidized industries. More than half of Pemex’s revenue goes to the federal treasury as taxes or oil-production fees, leaving just $7 million in profit in 1989.

When production fees were raised and an excess-profits tax on exported oil added last year, Pemex had to tap into its exploration and oil-depletion reserve to make the payments.

Pemex’s budget has “been very restricted in recent years, notably less than the investment needs in many areas,” Raul Robles Segura, the oil monopoly’s assistant director in charge of the new petrochemical department, told reporters recently.

Spending limits have forced Pemex to curtail exploration, causing proven reserves to drop to 66.5 billion barrels at the beginning of this year, compared to a peak of 72.5 billion barrels seven years ago.

Construction of multimillion-dollar petrochemical projects was halted, leaving plants inoperative and some only 60% to 80% complete.

“It is not that Pemex does not have the money,” said Alejandro Forte Aragon, director of corporate relations at Celanese Mexicana, a chemical company that is an important Pemex customer. “The company has plenty of borrowing capacity. However, as part of the government, it is subject to spending and borrowing ceilings.”

Despite the limitations placed upon it, Pemex was given additional responsibilities after Salinas took office.

Environmental concerns became a priority for Pemex--both in terms of cleaning up the pollution at its own refineries and of producing more unleaded gasoline and improving the quality of other fuels to help solve the severe air pollution problems in Mexico City. The budget for the combined efforts is $1 billion, most of it borrowed from the Japanese government, thus further limiting borrowing for other purposes.

The company has also had to start thinking globally. Focusing principally on production of refined products for the domestic market and exporting crude oil is no longer a sound strategy, officials decided.

“The new situation in the world, in our own country and in the company itself have made it necessary for us to modify our definition of self-sufficiency,” General Manager Rojas said.

“Our new objectives transcend the fundamental commitment of covering domestic demand to enter into foreign operations, whether by selling crude oil, manufacturing and marketing of products, technology transfer, completing projects or providing services,” he said.

The company’s new worldwide marketing arm--Petroleos Mexicanos Internacional--is already actively negotiating strategic alliances with foreign governments and companies. That is similar to strategies adopted by Venezuela and Kuwait, which have purchased refineries and distribution channels in the United States and Europe, economist Vera said.

Radical changes are also occurring in the new petrochemical department. Federal law stipulates that Pemex is the only entity allowed to refine crude oil and natural gas into the primary petrochemicals from which more sophisticated products are made.

Those rules were imposed 35 years ago, when the Mexican petrochemical industry was in its infancy, to prevent chemical companies--many with links to U.S. corporations--from dictating terms to supplier Pemex, Vera said.

Today, the restrictions have become a problem because Pemex cannot produce enough of many petrochemicals to meet demand, said Guillermo Cochrane, who heads the petrochemical section of the National Chemical Industry Assn. Last year, Pemex produced 16.9 million tons of petrochemicals, a 9.2% increase from 1988, but still far short of demand.

As a result, Mexico, the world’s seventh-largest oil producer, ran a $204-million foreign trade deficit in petrochemicals in 1988, as companies imported $663 million in raw materials that Pemex could not provide.

“It is becoming increasingly clear that the simple fact of having petroleum does not justify the existence of a petrochemical industry,” Vera said. What is needed is exactly what Pemex does not have: money for investment.

So Pemex is asking private chemical companies for $1.3 billion in off-budget financing to help build plants. One idea is for Pemex’s customer companies to provide capital to build plants that they would lease to the oil monopoly, allowing Pemex to pay them back in product.

The goal is to generate $1.4 billion more in sales a year by 1994 while investing as little as possible directly. More than a third of those sales would come from exports.

Companies are responding.

Two key plants at the Morelos Petrochemical Complex here are being finished with funds provided by chemical companies that paid in advance for the products those plants will produce. Another consortium that includes Japan’s Mitsui and the Mexican industrial conglomerate Alfa Group are working on ways to help Pemex finance a $345-million aromatics plant.

The reason for the support is simple.

“The needs of Pemex have become our needs,” said a high-ranking Mitsui executive in Mexico, who spoke on condition that he not be identified.

Mitsui became involved because, for the past 10 years, it has bought petrochemicals from Alfa to make film for videocassettes. Alfa, in turn, buys its raw materials from Pemex.

Mitsui wants to increase production to meet the rising demand for videocassettes. To do that, Alfa must have more raw material from Pemex.

The most likely arrangement is an agreement under which Mitsui and Alfa will provide financing for a factory to Pemex, which will repay with products, said Hector Islas Juarez, manager of petrochemical operations at Pemex.

Other companies tell similar stories.

Last year, acetaldehyde--a chemical used to make paint and medicine--was in short supply on the international market. Because Celanese could not obtain enough, either domestically or by importing, it was unable to participate fully in one of the few chemical sectors where prices were rising.

Partly because the company could not buy that key petrochemical, Forte Aragon of Celanese said, its exports plunged more than a third to $55 million. That was particularly frustrating, he added, because Pemex two years earlier had mothballed a partly finished acetaldehyde plant for lack of money to finish it.

In February, the companies found a solution. Celanese made a $15-million advance payment for acetaldehyde, and Pemex is using the money to finish the plant by October.

But Vera said that although such private sector-Pemex cooperation is a novelty for Mexico, it is not a long-term solution. “These projects are just unclogging bottlenecks,” he said.

However, Pemex has plenty of bottlenecks to unclog, and success in innovative financing schemes in petrochemicals and marketing could open the door to imaginative approaches in other areas.

Pemex officials insist that they isolated those two areas to permit more private enterprise participation in them without involving the rest of the company. But it is not certain how strong that resolve will remain should international competition intensify.

Much will depend on the outcome of U.S.-Mexican talks on a free trade pact, scheduled to begin in earnest later this year, industry experts predict. Depending on its terms, such a pact with the United States could increase competitive pressures on Pemex.

Nonetheless, one international petroleum expert, who declined to be named, cautioned against expecting changes at Pemex too quickly. “In Mexico,” he said, “oil is emotion.”

Ironically, Mexicans themselves are less sure of the emotional endurance of oil.

“There are political risks” in changing oil policies, Vera said, “but each day they are less. Last year, when they liberalized the petrochemical law, no one said anything. If they liberalize the petrochemical law again, and as a result $3 billion is invested in the country, no one will object.”