Mexico’s Pemex Struggles to Overcome Years of Mismanagement

Not only a source of national pride, Mexico’s national oil company was also supposed to lead the country to prosperity. The famous nationalization of the nation’s oil fields, which is celebrated with a national holiday every March, marked a definitive political separation from the US and signaled the emergence of a truly independent nation. And the discovery of the massive Cantarell oil field in 1976 promised an unprecedented era of economic growth and affluence. As former President José López Portillo said as production was ramping up, the only challenge was to “administer the abundance.”

But if you fast-forward 30 years, Cantarell is drying up and Pemex, as the company is universally known, is a listing behemoth. Mexico is indeed wealthier, but that is more in spite of Cantarell’s boon rather than because of it. If Mexico is not the most damning example of the resource curse in the world, the oil industry that once held so much promise certainly seems to have helped Mexico along the path not to prosperity, but rather to disappointment.

The biggest basic issue for Pemex is that the federal government, from López Portillo onward, didn’t use the tools necessary to create a healthy corporation able to thrive for generations into the future. Rather, the state acted as a leach: the federal government, which collects very little tax revenue for a country of Mexico’s level of development, relies on Pemex for close to 40 percent of its operating budget. This amounts to nearly 60 percent of the company’s revenues being siphoned off every year.

These issues were easy enough to cover up as long as Cantarell’s production was on the upswing, especially when oil prices were high. However, production at the gargantuan field hit its peak around 2004. It has since begun an inexorable decline, with the barrels produced dropping 15 percent in many recent years, and projected to plateau at roughly a fifth of peak production.

While Mexico has other oil fields, none of those that have been exploited are of comparable size or easy access as Cantarell, and the field’s demise has also meant the decline of the industry in general. And because the government relies so heavily on the Pemex revenues, serious political ramifications have also occurred. Here, the resource curse implies something more insidious than mere unfulfilled expectations: if legislators don’t figure out a way to replace the lost income, the state could conceivably cease to function to the degree that Mexicans have long become accustomed.

Pemex could theoretically invest in the technologies to reach the deep-water oil deposits in the Gulf of Mexico, but the government’s dependence on petro-profits has made this virtually impossible. Because it turns over so much of its revenue to the government, Pemex is unable to build the stockpiles of cash needed to fund complicated new investments. In fact, the company must borrow heavily simply to meet its current obligations: with debt in excess of $50 billion, Pemex is the most indebted oil company on the planet.

Given that unfortunate burden, Pemex could instead partner up with other companies that can access the harder-to-reach oil, although federal law has severely circumscribed the freedom that Pemex has in working with outside companies. A 2008 oil reform aimed to loosen up the Pemex stranglehold on the nation’s oil by allowing the sale of service contracts to private businesses, which gives the outside firms a wide role in production and promises high payment for the best performing-groups, but without giving the firms ownership of the oil extracted.

It remains to be seen if the potential profits from these service contracts –which were just placed for bidding earlier this spring– will be sufficient to lure the firms with world-class extraction technology into the Mexican oil morass. If not, the overriding goal of the reform –to put Pemex on the path to sustainability– will have almost certainly fallen flat. Even if the service contracts generate significant interest, it’s not clear that they will be enough to fix the company.

That’s not to suggest that Mexico’s oil needs to be turned over to foreigners and Pemex needs to be broken up and sold off to Exxon and BP. Pemex may be shot through with inefficiency and corruption, but there are plenty of other successful state oil companies that offer a model — the most significant being Brazil’s Petrobras, a company that has become, in many respects, a world leader.

Indeed, it was just that sort of alliance between the two companies that was broached earlier this year by Mexico City Mayor Marcelo Ebrard, during a visit from former Brazilian leader Luiz Inácio Lula da Silva. Whether or not such an alliance comes to pass (and it seems a long shot), Petrobras offers a template for how Mexico can turn its resources into a blessing.