Mexico Unveils Restructuring Plan, $3-Billion Cut for Pemex

Officials on Thursday unveiled the broad outline of a long-awaited restructuring of Mexico’s national oil company, the first major test of new President Vicente Fox’s ambitious plans to modernize Mexican society by making state-owned enterprises and government agencies more efficient and businesslike.

The plan, which calls for $3 billion in cost cuts and possibly massive job reductions at Petroleos Mexicanos, or Pemex, faces huge political obstacles and potential union resistance. Its success will say much about whether Fox can sell Mexican legislators, union members and bureaucrats on his vision for bringing business standards to such government functions as energy tax collection and education.

Fox has sent a clear message to the massive government bureaucracy by cracking down on phantom bureaucrats who rarely, if ever, report to work. He also plans next week to unveil a far-reaching tax reform package that is already drawing intense opposition from business interests and political opponents.

A streamlined, more competitive Pemex could boost not just Mexico’s economy but the global energy market overall, by increasing supplies and lowering costs. Mexico on average exports more than 1.3 million barrels a day--one-third of its production--to the United States. That’s about 7% of U.S. consumption.

But Pemex is as close to a sacred cow as Mexico has, one that politicians are loath to tamper with. Ever since its founding in 1938 after Mexico nationalized all petroleum, Pemex has embodied the country’s independence economically and psychologically from foreign interests, especially the United States.

“Pemex watches over the most important natural resource we have, the national patrimony,” said Claudio Rivas, editor at Primer Enfoque energy consultants. “It’s also important for the benefits it gives us, contributing 40% of the federal budget.”

None of that changes the fact that Pemex is overstaffed and grossly inefficient, by most industry standards. Moreover, Pemex has failed to expand its petroleum reserves and production at a time consumption, especially of natural gas, is rising rapidly.

Promising to impose new “entrepreneurial vision” on Pemex, new general director Raul Munoz Leos promised Thursday a dramatic restructuring to include $3 billion in cost cuts, opening the doors to more foreign investment and boosting efficiency. The plan aims over the long term to transform Pemex “into the best oil company in the world,” he said.

Saying Pemex has lacked the “dynamic growth” it has needed over the last 18 years, Munoz Leos blamed a leaden bureaucracy that has trouble making decisions and acting on them. He said the company would cut 20% of its costs by streamlining bureaucracy, purchasing and refining over the next two to three years.

The Pemex payroll of 120,000 workers is double what it should be, according to some observers, even after 100,000 job cuts made since the mid-1990s. Munoz Leos, a former DuPont Co. executive who was appointed by Fox in December, did not specify how job cuts would be made.

“Pemex is a jobs program. National oil companies tend to be. So there is no question in my mind that Pemex can streamline. If Exxon Mobil, BP Amoco and Royal Dutch Shell can do it, my guess is they can do it,” said David Pursell, vice president at Simmons & Co. investment bankers in Houston.

Although Munoz Leos said Pemex and its new board of directors could act unilaterally to impose the cuts and changes, no one expects the lumbering giant to have an easy time instituting them.

“It’s necessary but unrealistic to think they are going to make the $3 billion in cuts. The numbers of job cuts required to reach that level are just huge. The political obstacles are too great and they can’t go around the unions, which are very powerful,” said Roger Diwan, global economist of Petroleum Finance Co. in Washington.

Pemex’s contract with the 80,000-member Oil Workers Union expires in October and a union spokesman said layoffs so far are not on the table.

“It’s [nonunion] administrative workers who are vulnerable. There are 33,000 of them, and they average four times the wages of union members,” spokesman Victor Manuel Garcia Solis said.