Woes mount for Mexico’s state oil titan

Times Staff Writer

With crude oil topping $95 a barrel, these should be heady days for Petroleos Mexicanos. Mexico’s state-owned oil monopoly, known as Pemex, generated record revenue of about $100 billion in 2007.

But at a ceremony marking the 69th anniversary of the nationalization of Mexico’s oil industry last year, Pemex General Director Jesus Reyes Heroles wasn’t in a celebratory mood.

“The situation of Petroleos Mexicanos is critical and merits immediate attention,” the company’s top executive said.


Indeed, 2007 tapped a gusher of concerns for the world’s sixth-largest oil producer.

Pemex managed to lose $1.2 billion in the third quarter. Output is declining, as are exports and proven reserves. Mexican Energy Secretary Georgina Kessel said last month that Mexico’s crude production, which averaged about 3.1 million barrels a day in 2007, could fall as much as one-third in less than a decade if the nation didn’t move fast to reverse the slide.

The consequences could be painful, not only for Mexico, which relies on oil revenue to fund about 40% of its federal spending, but also for world markets, which are feeling the pinch of tight supplies. Mexico is the No. 2 provider of petroleum to the United States, behind Canada.

The bad news isn’t confined to the financial pages. An emblem of national pride and the nation’s most important company, Pemex lurched from one humiliating episode to another in 2007. Among them:

* Leftist guerrillas pulled off a series of pipeline bombings that sent the government scrambling to deploy troops to protect company installations.

* An accident at an offshore oil platform killed 22 workers in October and crippled a major well. Public outcry forced Pemex to take the unprecedented step of appointing an independent commission to investigate the incident, reflecting lack of trust in the institution.

* A federal watchdog fined a former head of Pemex for using company funds to pay for his wife’s liposuction and illegally funneling more than $150 million to the oil workers’ union as part of a murky contract settlement. Separately, government audits turned up lucrative supplier contracts awarded to former company insiders.


* The national daily newspaper Excelsior reported in November that 11,500 oil workers, about 10% of Pemex’s unionized workforce, get paid for sitting idle.

* Mexico imported nearly 40% of its gasoline in 2007 -- a record amount -- because Pemex lacks sufficient refining capacity to meet domestic demand. This is an embarrassment akin to Idaho importing potatoes.

“Definitely, Pemex is in a vulnerable situation, a delicate situation,” said Ruben Camarillo, a senator with President Felipe Calderon’s conservative National Action Party, or PAN, which is working to introduce legislation early this year to loosen state control of Mexico’s energy sector. “A profound change is required.”

Much of the trouble stems from Cantarell, Mexico’s largest oil field. Located in shallow waters off Campeche state in the Gulf of Mexico, Cantarell supplied about 60% of Mexico’s output until recently. The field’s production peaked in 2004, when it averaged more than 2 million barrels a day. Output has tumbled since then, down about 30% to an average of 1.46 million barrels a day through the first 10 months of 2007.

Analysts for years have predicted the decline of this aging workhorse, which has been pumping for nearly three decades. The real shocker, they say, is that Mexico’s government did so little to prepare for its inevitable demise. Geologists believe there is plenty more oil to be found in the deep waters of the gulf. Pemex simply doesn’t have the tools to go after it.

That’s because deep-water drilling requires specialized knowledge, advanced technology and piles of money -- none of which Pemex has. Cantarell’s oil was so plentiful and so easy to extract for so long that spending big bucks on tough drilling elsewhere wasn’t a priority.


The lawmakers who approve Pemex’s budget instead channeled oil wealth into roads, schools and social programs. Pemex is far and away the nation’s biggest taxpayer, turning over more than half its revenue to the government.

How big a burden is that compared with industry peers? Consider this. In 2006, Pemex and state-owned Venezuelan oil company Petroleos de Venezuela, known as PDVSA, posted nearly identical sales of just under $100 billion. Pemex paid nearly $54 billion in taxes. That’s one-third more than the $36 billion that Venezuelan President Hugo Chavez extracted from PDVSA to pay for his “socialist revolution,” which critics complain is crippling the oil company.

Mexicans remain fiercely proud that their country wrested its petroleum assets from foreign companies such as Standard Oil decades ago and committed them to social development.

“Mexico stood up to the United States and won,” Enrique Bravo, Latin America analyst for consulting firm Eurasia Group in Washington, wrote in a recent report. “Pemex is thus much more than an oil company; it is a powerful symbol of Mexican national sovereignty.”

But by operating Pemex more like an ATM than a business, politicians have left Pemex with few options.

Some deep-water experts, including Brazil’s Petrobras, have expressed interest in helping Mexico tap its hard-to-reach crude in exchange for a share of production. That’s currently impossible under Mexican law, which grants Pemex a monopoly on all aspects of oil production, refining, transport and sales and forbids outside investment in its energy sector.


That leaves borrowing. But Pemex has hocked itself to the hilt. The company ended 2006 with $52.3 billion in debt on its books, making it the most-indebted oil company on the planet. Time is running out. Pemex’s proven reserves fell by nearly 30% to 15.5 billion barrels from 2001 to 2006. The company last year replaced only 4 barrels out of every 10 produced. Yet public officials continue to spend. The recent run-up in oil prices produced windfall revenue that paid for baseball stadiums, fancy government offices and other gimcracks.

“It’s a scandal,” said David Shields, a Mexico City energy analyst who has written two books on Pemex. “Pemex’s money is being divided up among politicians with no control on how it’s spent.”

Company leadership is another issue, many say. The board is stocked with government bureaucrats and union officials. The top executive at Pemex is appointed by Mexico’s president.

“Appointments are made with regard to political and electoral issues,” said George Baker, a Mexico expert with, a Houston-based energy consulting firm. “Those kinds of appointments do not find oil. Period.”

With nothing on the horizon to replace Cantarell, talk of energy reform is gaining urgency. Most experts agree that privatization of Pemex is politically impossible, given Mexico’s divided legislature.

But the three main parties have been meeting to see whether they can find wiggle room in Mexico’s Constitution. PAN’s Camarillo said a plan was emerging to permit private-sector investment in pipelines and refineries and to allow Pemex to form “strategic alliances” with firms that could help it extract crude from deep waters.


“There is no intention . . . to sell off Petroleos Mexicanos,” he said. “Pemex will continue being national.”

But such a proposal will face considerable opposition. Some fear that allowing any kind of foreign participation in the energy sector is a first step toward privatization. Defeated leftist presidential candidate Andres Manuel Lopez Obrador rallied thousands of supporters to Mexico’s historic center in November, urging them to defend Mexico’s patrimony.

Political discussions have also focused on more operational autonomy for Pemex, as well as ways to improve efficiency, oversight and transparency.

How even those modest goals are to be achieved remains to be seen.

Some have cited the examples of Norway’s Statoil-Hydro and Brazil’s Petrobras. Those firms are state-controlled, yet they are profitable and regarded as well-managed. Both are publicly traded and thus must answer to shareholders and analysts. They have partnered with foreign oil companies on projects around the globe. And their governments have opened their nations’ oil fields to outsiders, which has fueled competition to find more crude.

But veteran observers say Pemex remains so sacred to many Mexicans and Congress is so divided that they see little chance for anything but tinkering this year. The hard truth, oil analyst Shields said, is that conditions will have to get a lot worse at Pemex to spur major changes.

“Things are going to be tough on every front,” he said. “That’s our new normality.”


Times staff writer Cecilia Sanchez contributed to this report.