Mexico's Energy Reform And Pemex: Both Face Challenges As US Energy Sector Watches
A Pemex gas station in front of Pemex headquarters, Mexico City. The state-owned agency is dealing with several challenges as it participates in Mexico's deregulated energy markets.
Lorne Matalon
March 01, 2017

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

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 into and reform its energy sector. But there’s reform that has to take place at Pemex itself before more U.S. companies invest.

The nerve center of Mexican energy is Torre Ejecutiva Pemex. It is unmistakable on Mexico City's skyline, a monument to oil and gas when both produced massive, steady income.

That is no 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 $100 a barrel. Today, it's news when it cracks $50.

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," Mexican energy analyst David Shields said. "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 Ratings said Pemex faces insolvency. Pemex owns hospitals and hotels for offshore workers, items typically outsourced by major oil companies such as Pemex.

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

"Mexico's economy today, and the energy reform, is a transitional process," said Piñon. "There's going to be treatment that's going to be difficult, that is going to be painful in order for you to get better down the road."

Piñon said Pemex is taking its medicine by cutting the fat. But, he added that changing Pemex's corporate culture won't be quick or easy.

"When you have institution like Pemex that for 75 years has been a state monopoly, it is inherently corrupt in the way that it does business," he said.

The most recent example unfolded in mid-January when a senior Mexican federal police official said some Pemex workers are almost certainly working with organized crime to steal oil. Pemex said the current gasoline shortage in Mexico, one that’s sparking continuing outrage and known as the gasolinazo, is in part caused by oil theft. Pemex admits corruption is a cancer.

"It's a fact. And we need to face it," conceded José Manuel Carrera, Pemex director of business development.

He contended that combating corruption is the responsibility of several stakeholders, including the federal and state governments and various levels of police, though mistrust of police is widespread.

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

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

Leithe said that is changing, albeit slowly. And he agreed with former U.S. Ambassador to Mexico Antonio Garza who said U.S. energy companies will miss out if they don't move in.

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

"Does Pemex need to reform?" he asked rhetorically. "I'd say, 'You bet.' And most Mexicans would say it should have 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’s 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 said despite those blights, and the low price environment, there is an upside for U.S. energy companies, even if a 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,"  Carrera said. "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."

American, and other foreign energy companies, appear to be heeding that counsel.

In December 2016, Mexico auctioned eight blocks of offshore real estate in the Gulf of Mexico worth billions of dollars in investment to companies such as Exxon Mobil and Chevron. The major players are now making a substantial bet that Mexico's oil and gas industry will recover from the current mix of low production, low prices, layoffs and cuts in spending on equipment and system upgrades.

Mexico sees its energy reserves as a focal point of national pride. Fierce nationalistic fervor was the driver that resulted in foreign companies being 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. For American energy companies and their foreign competitors, billions of dollars in projected revenue are at stake.

EDITOR'S NOTE: Fronteras Desk reporter Lorne Matalon is the 2016-17 Energy Journalism Fellow at the University of Texas at Austin's Energy Institute and KBH Center for Energy, Law and Business.