The (Surprising) Situation at PEMEX
Getting out of Athens on Tuesday was an adventure, to say the least, for Marina and me.
Air traffic controllers joined the general strike, closing Greek air space, delaying flights for more than 10 hours, and rendering our connecting flights unusable.
For a while, however, our immediate concern was just making it to the airport.
Matters worsened quickly as the unrest spread. Street availability became problematic, with major routes cut off early by either police or protesters. Traffic congestion was heavy. Sporadic violence was already erupting. The strike cancelled all buses, trains, and the metro; everybody who needed to get somewhere had to use a car.
Finally made it back to Pittsburgh at 1 in the morning on Wednesday. Left again for the airport three hours later and arrived here in Mexico City the same day.
Occasionally, what awaits me on my travels is a happy surprise. Like what I found here.
I Didn't Expect This
Not the city itself, you understand. I've been to Mexico City before. It is a sprawling urban area built on a plateau more than 7,000 feet up in the mountains. You're aware of the altitude even when walking. The air is thinner. You get exhausted quicker.
And the pollution hardly helps you to catch your breath.
Smog sits in an almost permanent dome over the city, coloring everything. From my 30th-floor room in one of the impressive new hotels, I can see little of what is going on below. The windows are covered in a thick layer of residue that turns everything brown.
The continually growing population and expanding fleet of automobiles is making the situation worse.
Still, there is construction all over the place… and signs that economic recovery is beginning. The unemployment rate is barely above 5% – about half the U.S. level.
I am here in Mexico to give several workshops for executives at PEMEX – the national oil company – along with a series of advisory meetings with the company leadership.
PEMEX has experienced a rising crisis in organizational response to changing conditions. It has suffered significant declines in oil production, as well as a loss of associated gas (because of an inability to maintain field pressure). It has been falling behind international equivalents in the development and application of technology.
In short, there are fears of a major contraction in operations.
That wasn't the surprise, either…
In fact, declining PEMEX production is of great concern to the U.S., because Mexico is a primary source of our imported crude oil, often ranked second in monthly volume after Canada.
When we speak of Mexico providing oil, we mean PEMEX. It is the national oil company, controlled by the state, and has an absolute domestic market monopoly. It also has ongoing inefficiency problems, owing in large part to the fact that it has no competition.
To put that inefficiency in perspective: PEMEX produces roughly as much crude oil as Chevron Corp. (NYSE:CVX), yet it employs over three times as many employees.
That comes out to more than 144,000 workers – making it both the largest company in the country and the largest provider of tax revenue to the government.
Both prized as a national asset and subject to considerable political manipulation, the beginning of another Mexican presidential election cycle guarantees PEMEX will draw considerable attention.
Especially this time around, since the party in power will not retain the presidency, and the race is already becoming a free-for-all. A number of sitting cabinet ministers are candidates, more interested in raising campaign funds than making policy decisions. PEMEX, of course, becomes a primary target for each of the campaigns – both as a source of money and as an issue in campaign platforms.
Mexico threw out foreign (primarily American and French) oil c
ompanies in 1938 and nationalized the sector. By 1941, legislation was preventing outside companies from owning Mexican oil assets or controlling any part of the hydrocarbons.
As a result, there is no foreign investment in Mexican oil or gas production. Outsiders are limited to service contracts. They are unable to form partnerships or joint ventures establishing any property rights whatsoever.
That is becoming a major problem.
While Mexico has considerable offshore oil deposits in the Gulf of Mexico, PEMEX lacks both the technical and capital base to exploit them.
Quiet negotiations are underway between Washington and Mexico City on the joint development of deposits extending across the bilateral water border. But Mexican authorities privately express worries over being able to secure national interests in such projects if PEMEX cannot compete on the technical side.
Its jewel remains the giant offshore Cantarell Field, discovered by a fisherman in 1976 and, for decades, one of the largest oilfields in the world.
Unfortunately, production levels there have only recently shown indications of leveling off – after a disastrous decline of more than 60% in a few short years. Every conceivable problem cropped up, including a periphery well blowout years ago that flowed for more than a year and remains the worst spill on record (surpassing even the recent BP spill in the Gulf).
Some forward-looking PEMEX executives, along with a tough-minded minister, have now begun to change the environment. Over the past three years, they have revised laws, introduced accountability procedures, and compelled a huge company – where directors and unit heads did not even know each other – to look inward.
The object was to evaluate procedures and practices with a goal of developing sustainable production. They realize a need for outside investment, but the political impediments remain strong.
Recent revisions in contract law will allow some movement, especially in the area of tying provisions of international expertise and technology to production levels. For the first time in 70 years, outside companies have an incentive based on how much crude actually comes out of the ground.
However, PEMEX needs to address its own organizational problems first. Before they bring in foreign companies, therefore, they have decided to retain foreign advisors.
And here is what I did not expect.
Mexico Could Become A Global Role Model
The last two days have been eye-opening.
I had anticipated hearing the same well-worn PEMEX line: “We are the state's company; they cannot allow us to fail.”
What I found is something else altogether.
Thousands of middle level and division managers have been given the green light. Their task is clear enough – to develop strategic plans to transform the company. That transformation will come from changing the way people's skills are used, combined with realistic approaches to projects and markets.
This time, most of the highest executives are on board and providing support. Government ministers in favor of change are working to marginalize those who are not.
This is a difficult and massive objective. But if PEMEX can begin to pull it off over the next several years, we may actually have a model for other national oil companies (NOCs) wrestling with the same situation.
Traditional ways of doing things are not working in a rapidly changing oil market. The PEMEX example could stand for the way NOCs should operate worldwide, lending a whole new meaning to the label “Made in Mexico.”
Next up, I'm off to Morocco for meetings of a different kind – policy creation for shale gas and shale oil, in a place where there's enough of it to change the energy picture in Europe. (See “Shale Gas Initiative Brings Morocco to My Doorstep,” December 13, 2010.)
The next Oil & Energy Investor will be coming to you from the edge of the Sahara…