Mexico's Energy Reform and Pemex: Both Face Challenges as U.S. Energy Sector Watches

Feb 7, 2017

From Fronteras Desk and Texas Standard:

President Donald Trump says he’ll renegotiate the North American Free Trade Agreement (NAFTA) with Mexico and Canada. That has a lot of businesses that participate in cross-border trade concerned. That includes some U.S. energy executives, even though energy was excluded from NAFTA.

 

Right now, American energy companies such as Exxon Mobil – led until recently by new Secretary of State Rex Tillerson – are now pitching once unthinkable exploration and production partnerships with Pemex, Mexico’s state-owned energy agency. It’s all part of Mexico’s attempt to modernize, inject cash and reform its energy sector.  

 

But reforms need to take place at Pemex itself before more U.S. companies invest.

The nerve center of Mexican energy is Torre Ejecutiva PemexIt is unmistakable on Mexico City's skyline, a monument to oil and gas when both produced massive, steady income. That is no longer the case.

When Mexico ushered in energy reform three years ago, inviting foreign players into the market for the first time since 1938, crude oil sold for a hundred dollars a barrel. Today it's news when it cracks $50 a barrel. These days Pemex is slashing its workforce, dumping pension obligations and selling off non-energy-related assets.

"It's not easy to see a simple, competitive future for Pemex," says Mexican energy analyst David Shields. "It is overstaffed, it is over-debted, and it has all kinds of burdens that it has inherited over the years when oil prices were high. And high prices bring inefficiency, overspending."

Pemex's finances are messy. Credit rating agency Moody's has issued a downgrade and Fitch says Pemex faces insolvency. Pemex owns hospitals and hotels for offshore workers, items typically outsourced by oil and gas companies.

"You have to swallow very unsavory medicine in order to take care of the patient's illness," Jorge Piñon says. He is the former head of Amoco in Latin America. He now leads the Latin America Energy Program at the University of Texas at Austin.

Piñon says Pemex is taking its medicine by cutting the fat. But he said changing Pemex's corporate culture won't be quick or easy. "When you have [an] institution like Pemex that for 75 years has been a state monopoly, it is inherently corrupt in the way that it does business."

Just one example; a few weeks ago, a senior Mexican federal police official said some Pemex workers are almost certainly working with organized crime to steal oil. Pemex says the current gasoline shortage in Mexico, one that’s sparking continuing outrage, is in part caused by oil theft.

Pemex admits corruption is a cancer.

"It's a fact. And we need to face it," says José Manuel Carrera, Pemex's Director of Business Development.

Across town, I met with Cleantho Leithe who heads the Mexico office of Brazil-based Braskem, Latin America's largest petrochemical company. Braskem is one of the early foreign players in the deregulated Mexican energy market. Leithe says there’s another problem at Pemex: brazen nepotism.

"When somebody retired," he says, "he could indicate that he wanted his son or his nephew or somebody from his family to take his post. That is absurd."

Leithe says that's changing, albeit slowly. He agrees with former U.S. Ambassador to Mexico Antonio Garza who says U.S. energy companies will miss out if they don't move in.

But Garza, who now lives in Mexico City, also says some of those companies may not move until Pemex gets its books in order.

"Does Pemex need to reform,” he says. "I'd say, 'You bet.' And most Mexicans would say it should've been done yesterday."

Pemex hasn’t exactly been helped by the Mexican government. Instead of using profits to help the company upgrade equipment or train workers, it has used Pemex as a piggy bank, taking away its profits to build schools, hospitals, and, in one case, a world-class baseball stadium.

Pemex’s José Manuel Carrera says despite those blights and low prices, there is an upside for U.S. energy companies even if the Trump administration decides to make it more expensive for those companies to set up shop in Mexico.

"The opportunity is so large that oil companies are discerning enough and understand that the first barrels that will come out of these fields will be not now, but in five to seven years,” he says. “So they should actually be looking at what is their price expectation on that horizon of time rather than actually just looking at the current price.”

Mexico sees its energy reserves as a focal point of national pride. It’s why foreign companies were kicked out in the first place almost 80 years ago. Reform wasn’t an issue when oil prices were high. But now there is a real urgency to modernize Pemex and bring in foreign investment and expertise to rescue it.

 Marfa Public Radio's Fronteras Desk reporter Lorne Matalon is the 2016-2017 Energy Journalism Fellow at the University of Texas at Austin's Energy Institute and KBH Center for Energy, Law and Business.