Analysis of Petroleos Mexicanos there is file which i upload. it requires to read the file and make few slides of ppt. write a page of conclusion for those

Analysis of Petroleos Mexicanos there is file which i upload. it requires to read the file and make few slides of ppt. write a page of conclusion for those slides. A03-13-0011
Michael H. Moffett
Petróleos Mexicanos (Pemex)
President Felipe Calderón of Mexico announced Wednesday that the national oil company, Pemex,
had struck oil in deep water, its first success after years of exploration in the deeper reaches along the
bottom of the Gulf of Mexico. The find, deep below the Gulf’s floor and more than 8,200 feet below
the surface of the water, could add as much as 400 million barrels in potential reserves to Mexico’s
overall reserves, Mr. Calderón said at a ceremony at Los Pinos, his official residence. But perhaps
even more important than the amount is the fact that Pemex, a monopoly, found the oil on its own.
Mexican law prevents Pemex, which is officially called Petróleos Mexicanos, from forming partnerships with outside companies. Critics have argued that the company lacked the experience to
successfully explore in deep waters.
For Mr. Calderón, the announcement was vindication in the final months of his presidency that
the deepwater strategy was worth the gamble. Holding up a vial of light crude from the well, he said:
“What a good thing that this effort is crowned today, with a great discovery, with the realization of
a goal that we had set for ourselves.”
“Pemex Finally Strikes Oil in Deep Waters,” by Elisabeth Malkin,
The New York Times, August 29, 2012.
… the Chairman of the Mexican Stock Exchange (BMV), Luis Téllez, says oil is the country’s most
inefficient industry. Mr. Téllez believes it is therefore essential to leverage the power of the stock
market to increase the company’s competitiveness, which would allow it to capitalize on a buoyant
economy and strong investor appetite. “We were taught at school that Pemex belonged to the Mexican
people, yet there is not a single Mexican citizen who holds shares in the company.”
“PEMEX Can Be More Competitive; The Stock Market Would Boost the Oil
Company’s Value,” POR Diana Fernández, Funds Americas, March 30, 2012.
Petróleos Mexicanos—Pemex—was struggling. The national oil company of Mexico, Pemex held total reign over
the Mexican oil and gas industry. The largest company in Latin America, it employed 140,000 people, made up
3% of Mexico=s GDP, and provided nearly 40% of the funds for the Mexican government=s budget. Although
jubilant over its recent deepwater discovery (described above), production of oil and gas had been dropping for
years, and its single largest field, Cantarell, was in rapid decline.
Pemex had been a cash cow for the Mexican state, but was notoriously inefficient and corrupt. The newly
elected President, Enrique Peña Nieto, had long argued that private investors should be allowed back into the
Mexican oil and gas industry—in some way. He was feeling pressure from inside Mexico, from Mexican industry
particularly, and from outside Mexico, for example the United States, and calls for a Transboundary Agreement
for joint ownership of deepwater oil in the Gulf of Mexico. Everyone believed Pemex needed to change, but
the question was how? Juan José Suárez Coppel, General Director of Pemex, acknowledged that the company
had underperformed in the past, but that many significant changes had been made and it was now turning the
corner. Was change really needed?
Mexico and Oil
Oil and Mexico did not mix, at least well, historically.
Those following Mexican President Felipe Calderón Hinojosa’s energy reform efforts would probably
respond that to talk about oil in Mexico is not to refer to a resource below ground or the country’s
Copyright © 2013 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professor Michael
H. Moffett for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.
geographical wealth. Instead, oil represents something largely symbolic. It is an important part of the
mythological construction of an independent nation, and it is also associated with the underworld of
corruption in Mexico. The mere mention of oil stirs up both a strong nationalistic pride and feelings
of profound distrust.1
The Mexican oil industry was one of the oldest by industry standards, with oil exploration and production
beginning in the 1870s. Led largely by American and British companies, Mexico had become the world’s second
largest producing country by the early 1920s, with a quarter of all global production. But production began to
decline rapidly, and as industry returns declined, relations between the private industry developers and Mexican
labor and government worsened. On March 18, 1938, in the midst of a major oil worker strike, President Lázaro
Cárdenas surprised the foreign oil companies operating in Mexico by expropriating the entire oil industry.2
Mexican oil was the property of the state according to the Mexican Constitution of 1917. Article 27 of the
Constitution granted all permanent and complete subsoil rights to the government.3
Article 27. Ownership of the lands and waters within the boundaries of the national territory is vested
originally in the Nation, which has had, and has, the right to transmit title thereof to private persons,
thereby constituting private property.
… In the case of petroleum, and solid, liquid, or gaseous hydrocarbons, no concessions or contracts will be granted, nor may those that have been granted continue, and the Nation shall carry
out the exploitation of these products, in accordance with the provisions indicated in the respective
regulatory law.
The nationalization of 1938 gave the Mexican government exclusive rights over the exploration, development, production, and refining of hydrocarbons. Two months following expropriation, President Cárdenas created
Petróleos Mexicanos (Pemex), making it the organization responsible for all of these upstream oil and gas activities.
Even after expropriation, Pemex continued to use private contractors to fill the void in needed technology, capital, and operational execution. Much of this work was performed under risk-service contracts, where
contractors were paid, in part, with percentages of production.4
This era ended with the administration of President Ruiz Cortinas in 1958. The Petroleum Law of 1958
expressly prohibited contractor compensation in anything but cash. Contractors could not be paid on the basis
of percentage of production, participation in production or sale, or the result of exploration activities. This eliminated the use of risk-service agreements. The law of 1958 extended Pemex=s exclusive rights over hydrocarbons
to the downstream, the manufacture and sale of petroleum products.
Over the next 25 years, Pemex grew as a domestic bureaucracy, expanding its production and refining
activities with varying levels of success. Pemex was increasingly seen as an organization representing Mexico=s
sovereignty and future prosperity, in many ways an embodiment of “the people=s struggle” against repression.
The organization and its bureaucracy continued to grow, expanding employment, compensation, often more
under the control and influence of labor than the federal government.
With the surge in global oil prices in 1973-1974, Pemex came under new pressure to expand production,
which it could not do without finding and developing new fields. Despite a renewed emphasis on exploration,
the single largest discovery was made by accident. In 1976, a fisherman by the name of Rudesindo Cantarell
noticed an open water oil seepage in the Bay of Campeche. Only after repeated complaints about the oil seepage
damaging his fishing was he able to gain Pemex=s attention, leading to the discovery of one of the world largest
producing oil fields, Cantarell. Oil production boomed; Mexico moved from 1% of global production in 1973
Oil in Mexico: Pozo de Pasiones, The Energy Reform Debate in Mexico, Rossana Fuentes Berain with Daniel Rico, Woodrow
Wilson International Center for Scholars, Mexico Institute, 2009.
AThe Void of Governance: An Assessment of Pemex=s Performance and Strategy,@ Ognen Stojanovski, Program on Energy
and Sustainable Development, Stanford University, Working Paper #74, April 2008, p. 10.
The Mexican Constitution and its Safeguards against Foreign Investments, Álvaro Ramírez Martínez, American University,
Cornell Law School Inter-University Graduate Student Conference Papers, 4-14-2009.
AEnergy Reform and the Future of Mexico=s Oil Industry: The Pemex Bidding Rounds and Integrated Service Contracts,@
Tim R. Samples and José Luis Vittor, Texas Journal of Oil, Gas, and Energy Law, Vol. 7, July 21, 2012, p. 223.
to more than 5% in 1982, nearly 3 million barrels per day as illustrated in Exhibit 1. And like much of Mexico=s
history, oil production had been characterized by the Presidential regime of the day.
Exhibit 1. Mexican Oil Production
(000 barrels of oil per day, bopd)
Source: Statistical Review of World Energy, 2011, BP.
But Cantarell proved a mixed-blessing. Cantarell=s booming revenues initiated an era of oil revenue dependency by the Mexican government, often termed a petrocracy, a state whose leadership becomes increasingly
disenfranchised from its own people.5 Many analysts believe this era of readily available oil revenue allowed
Pemex to become complacent and, eventually, ineffective. The Mexican government increasingly relied on the
company for its income, as did a large part of the Mexican population.
As illustrated by Exhibit 1, production largely stagnated between 1980 and the mid-1990s, and became
increasingly intertwined with presidents and politics. Little reinvestment was made by Pemex (and the Mexican
government), with the focus shifting to maintaining production. Cantarell was already showing signs of decline,
so in 1996 a major nitrogen injection project was initiated to boost production. Although successful in the
short-term, it was thought to have accelerated the eventual depletion of the field. Cantarell=s production began
to decline quickly, and Mexican oil production peaked in 2004. (In 2004, Cantarell had accounted for 63% of
Mexican production; by 2008, it had fallen to 43%.) In the years that followed, the government=s revenues were
partially sustained by rising oil prices, but falling production now posed a looming threat.
Mexico=s crude oil production today is predominantly Mayan crude (60% of total production), a heavy
crude of high sulfur content. This requires more specialized and higher-cost refining technologies, which explains
why most of the heavy crude is exported to refineries on the U.S. Gulf Coast. Oil production does include two
lighter oils, Isthmus and Olmeca, which are refined domestically and used predominantly for domestic consumption. Crude oil production is approximately 25% onshore and 75% offshore today.6
A Venezuelan saying paraphrases the potential dark side of the oil curse: Columbus discovered us, Bolívar liberated us, and
oil ruined us.
Mexico: Country Analysis Briefs, Energy Information Administration, U.S. Department of Energy, July 2011.
Natural Gas
Historically of lesser development and value, natural gas has been a poorer sibling to oil until recently. Private
participation is allowed in the downstream, unassociated natural gas, and has been since 1995. Pemex is the
exclusive natural gas pipeline and gas distribution operator in Mexico, including 10 different import pipeline
connections with the United States. Recent shale gas discoveries and developments (largely the Eagle Ford formation of northern Mexico and southern Texas) have revived interest in gas development, along with growing
demand. The EIA estimates that Mexico may have 680 trillion cubic feet of shale gas reserves which would rank
Mexico fourth largest globally.
Mexico was one of the few countries that continued to use fuel oil and diesel for electrical power production. Natural gas costs and environmental concerns have, however, now driven natural gas to a greater share of
electrical power, as well as increased the use of coal. Much of the latest electrical generation facilities are using
liquefied natural gas (LNG) which is imported to Mexico on both coasts. The Altamira LNG receiving and regasification facility on the Gulf Coast (a joint venture with Shell and Mitsui) began operation in 2006, supplying
the CFE (Comisión Federal de Electricidad), the Mexican state monopoly electrical power producer, under a
15-year contract. The Costa Azul receiving and regasification facility on the Pacific Coast near Ensenada started
up in 2008, and supplied natural gas to commercial developments in northern Mexico. Nigeria provided 75%
of all LNG, followed by Egypt and Qatar.
Pemex=s declining production was a direct result of its inability to find and book replacement reserves. The
company had invested little in exploration for decades, and the two most promising areas for future development, the onshore Chincontepec Basin and deepwater Gulf of Mexico, had seen little exploratory drilling. The
problems in future oil were thought to lie within Pemex today.
A few companies preserve the great tradition of state-sponsored incompetence and overmanning.
Venezuela’s Petróleos de Venezuela, which is central to the patronage machine of the country’s
president, Hugo Chávez, is an obvious example. More surprisingly, so is Mexico’s Pemex, which has
successfully resisted numerous attempts to reform it.
“State Capitalism’s Global Reach: New Masters of the Universe, How
State Enterprise Is Spreading,” The Economist, January 21, 2012.
Pemex had been founded and run for 40 years for the express purpose of supplying the country=s domestic oil and
gas needs. This was distinctly different from most NOCs which were created to produce domestic hydrocarbons
for export and national earnings. Starting in the 1970s, however, Pemex, too, moved in this more traditional
direction; it became an export-earning vehicle for the Mexican federal government.
Governance and Management
Pemex operated as a governmental bureaucracy, charged with administrative and operational duties, but lacking
in financial and legal independence. The Mexican federal government maintained control over the company=s
budget, budget modifications, and any investments it wished to make. Organizational governance came from a
collection of parties, complicating the identification and pursuit of a singular corporate strategy.
Although a part of a complex web of intergovernmental structures and relations, Pemex was officially regulated by the Ministry of Energy, but held largely accountable to the Federal Income Tax Authority of Mexico—the
Hacienda. Pemex paid all its net revenues, all income beyond current direct costs and general administrative
expenses, to the Hacienda. Without the ability to control its own financial resources, the company was unable to
undertake investments it believed necessary strategically for the future. This meant that for many years investment
was largely confined to production, not exploration, refining, or petrochemicals. In the words of one analyst:7
AThe Void of Governance: An Assessment of Pemex=s Performance and Strategy,@ Ognen Stojanovski, Program on Energy
and Sustainable Development, Stanford University, Working Paper #74, April 2008.
Pemex=s manager[s] are effectively stripped of much of the responsibility and accountability that comes with
running such a large company—they are unable to pursue an optimal investment strategy because they have neither
the capital resources nor the autonomy to make intrinsically risky investment decisions on commercial merits.
Although not a regulator, the Ministry of Public Functions (SFP), the government organization which
had oversight over the external auditing of all public entities, had immense influence over the daily operations
of Pemex. The internal controllers required by SFP had authority over much of the internal spending of the
company, in addition to influencing organizational structures and reporting lines of authority. Although only
created in the mid-1980s, it had grown highly bureaucratic.
Pemex=s internal stakeholders were exceedingly powerful and politically insulated. Power was held officially
by a director appointed by the Mexican President every six years—like Mexico=s presidency itself.8 The organization was governed by a board of directors consisting of members of the President’s cabinet and industry union
leaders.9 The six-year terms meant that leadership focused on strategies, tactics, and projects possessing relatively
short-term outlooks—and results.
The union, the Oil Workers= Union of the Mexican Republic (STPRM), was powerful and largely immovable. The union had resisted significant organizational change over time, protecting the roughly 140,000
employees of Pemex. (The union had lost one major employment fight under President Carlos Salinas in the late
1980s, when Pemex employment had dropped from 220,000 to 120,000, but 20,000 of that had been regained
in the following years.) The union was also the subject of increasing debate over the corruption thought to be
rampant throughout the organization. Three of the union=s general directors had ended their administrations
in recent years under indictment. The union maintained its stranglehold on much of the Pemex organization
through hiring—the union controlled most new hiring (termed “filling spaces”), not management.
The union had not fought the increasing use of outside contractors for many oil field and natural gas production services. In many cases, union members or Pemex management had business interests related to many
of the contracting companies.
The oil industry nationalization of 1938 (expropiación petrolera) had created two separate entities, Pemex
Production and Pemex Distribution. Several years later, they were merged to form a single all-encompassing
national monopoly, an organizational form preserved for 50 years. In 1992, the company had been reorganized into four main operating units (exploration and production, refining, gas and basic petrochemicals, and
petrochemicals), along the same organizational lines seen in other major international oil companies. A fifth
organization, PMI Comercio Internacional, conducted all international trading activities, including the sale of
exported crude oil and the purchases of imported natural gas and petrochemical products. In 1995, in a major
restructuring, most of the natural gas exploration, development, production, and processing was outsourced to
a series of major contractors.
Oil Production
The single issue which dominated the debate over the need for change in Pemex was declining production. As
illustrated by Exhibit 2, Mexican oil production was defined by five distinct basins:
1. Tampico-Misantla Basin. The oldest producing area, onshore, and, although some enhanced recovery had
been successful in recent years, largely depleted.
2. Mesozoic Chiapa-Tabasco Basin. Located onshore in the southeast coastal zone, the MCT basin collective
combined a number of large and producing fields. The second oldest production area in Mexico, production
had continued to decline despite continuing investment in enhanced recovery.
Mexico was infamous for experiencing two things every six years (seis años in Spanish): a presidential election and a currency
devaluation. This was the case in 1976, 1982, 1988, and in 1994. Devaluation was an official act of either the departing
president or the first act of an incoming president. Luckily, 1994 had been the last devaluation.
The Mexican Oil Dilemma: Refining Pemex, Knowledge@Wharton, April 20, 2009.
3. Ku-Maloop-Zaap Basin. An offshore basin located northwest of Cantarell in the Bay of Campeche, it was
made up of three producing fields. Now the largest production area in Mexico, it was the focus of intense
production investment.
4. Cantarell Field…
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