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Building the new Pemex

13.08.2014 / Energyboardroom

No single actor has been more affected by the sudden removal of the Mexican state’s exclusive rights to hydrocarbon production than the national oil champion, Pemex. In accordance with the new energy framework, Pemex must transition from monopoly status to a productive enterprise. It has not been privatized, so will continue to be publically owned, but will nevertheless be exposed to market forces and obliged to create economic value in the same way as a classic private sector entity.

“Many people erroneously believe that we are simply renaming the same old Pemex and casting it adrift in the open market. This is actually far from the case,” explains Lourdes Melgar, undersecretary for hydrocarbons. “The fiscal terms have been modified to afford Pemex a tax break and greater budgetary autonomy, and the rules governing joint ventures significantly freed-up enabling the NOC to migrate its entitlements into contracts.”

Pemex has at last been unleashed, with the government take of its profits falling from 79 to 65 percent within 10 years,” argues Miguel Messmacher, undersecretary for revenues at SHCP. “SHCP will retain only two elements of control and oversight over its finances. Firstly, we demand that Pemex’s budgets are balanced and that the NOC does not incur indebtedness. Secondly we have the power to place limits on the company’s personnel costs.” On top of that, labor liabilities are also being taken out of Pemex’s balance sheet and being absorbed by the federal government as public debt, thus slimming down Pemex’s financial condition.

Within Pemex, however, the mood would not seem to be quite so rosy. According to Fluvio Ruiz, an independent director on Pemex’s board, the company risks finding itself “trapped in a no-man’s land where it doesn’t enjoy the privileges of being an autonomous actor, but still has all of the responsibilities of being a public organization attached to the state.” “I simply don’t believe that the fiscal reforms go far enough in liberating Pemex from its tax burden,” he continues. “Pemex is part of a fiscal regime that renders it the second most profitable oil company pre-tax and the 86th after taxes. That alone demonstrates how disproportionately burdened Pemex is.” Even more concerning, he points out the state can force Pemex to undertake projects of high social impact. “That is in effect a euphemism for projects that nobody else wants to do because they are not economically viable. There is no problem with Pemex taking on this sort of assignment if it is a public monopoly, but if you are competing at the same time as having to do this, then you are going to find it very damaging to your market position.”

In order to prepare itself for the challenges ahead, Pemex has been undergoing an internal restructuring every bit as radical as the reform itself. For Pemex Exploration and Production (PEP), the main task has been to define what reserves it needs to create a sustainable production environment for the medium- and long-term while simultaneously leaving enough space for the industry to develop and monetize reserves to the benefit of the nation. “Round zero represents, without doubt, one of the most important decisions in the entire lifespan of Pemex and marks the first step towards transforming our way of thinking,” remarks PEP’s director general, Gustavo Hernandez. “As we have never before needed to fight for acreage, this involves a paradigm shift in mind-set.”

PEP’s other core priority has been to anticipate a possible flight of human capital. “Pemex is aware that its recruitment efforts have to be firmly focused on sourcing and retaining PEP personnel because there is going to be a high-risk of losing geoscientists, reservoir engineers, geophysicists and geologists who will be in great demand by the incoming multinationals requiring local talent. We are already restructuring our pay-scales to bring them in line with international market going-rates to counter any flight tendency,” reveals Hernandez.

A further area in which Pemex has been making significant headway has been in the centralization of its procurement functions. This was a pressing issue because, as Chief Procurement Officer Arturo Henriquez candidly explains, “Having an unsynchronized and fragmented process where decision making was scattered across 120 purchasing offices spread over the five different companies that make up Pemex failed to leverage the purchasing power of a USD 25-30 billion annual spend. What’s more it was actually inherently wasteful with, in some cases, identical equipment being purchased at wildly different prices.” Henriquez has been dismantling what he calls the ‘big spider’s web’ of disconnected interactions and replacing it with the ‘big door’, a single outward face with which to engage suppliers. “In short, we will end up with a much simplified process that will be fair, efficient and will crucially not scare off potential suppliers and contractors,” he declares.

One figure who firmly agrees that Pemex has to be much more strategic in its sourcing of technologies is Vinicio Suro, director general of the Instituto Mexicano del Petróleo (IMP). “Pemex needs to be much smarter in its technology management. The issue is not about a lack of access to advanced technology, because Houston is a vast supermarket of technologies, but rather a lack of understanding as to which device or solution is best suited to fixing a specific problem. Developing the capacity to make smart choices must be a priority for the NOC,” he asserts.

 

To read more articles and interviews from Mexico, and to download the latest free report on the country, click here.

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