/ Modified feb 7, 2017 9:24 a.m.

US Eyes Mexican Energy Industry as Pemex Readies for Reform

American companies are ready to invest, but not before Pemex gets its house in order.

Pemex Tower Mexico City hero The Pemex Tower stands out in an aerial view of Mexico City.
Mario Roberto Durán Ortiz via Wikimedia Commons

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MEXICO CITY - Pemex Tower is unmistakable on Mexico City's skyline. The nerve center of Mexican energy is a monument to oil and gas, when both produced massive, steady income for the country. 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 $100 a barrel. Today it's news when it cracks $50. As a result, Pemex is slashing its workforce and dumping pension obligations.

That is holding back U.S. energy companies and other freign entities that expressed interest when reform began.

"It's not easy to see a simple, competitive future for Pemex," Mexican energy analyst David Shields said, “because 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 has said Pemex faces insolvency. Pemex owns hospitals and hotels for offshore workers, things typically outsourced by oil and gas companies.

"You have to swallow very unsavory medicine in order to take care of the patient's illness,” said Jorge Piñon, the former head of Amoco in Latin America.

Piñon leads the Latin America Energy Program at the University of Texas at Austin. He said Pemex is taking its medicine – cutting the fat. But 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," Piñon said.

In 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 has said that the current gasoline shortage in Mexico, one that’s sparking daily outrage, is in part caused by oil theft.

Pemex has admitted corruption is a cancer.

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

And that’s not the only problem at Pemex, said Cleantho Leithe, who heads the Mexico office of Brazil-based Braskem, Latin America's largest petrochemical company and an early foreign player in the deregulated Mexican energy market. Pemex is also plagued by brazen nepotism, he said.

"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."

That’s changing, he said, albeit slowly. 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, has also said some of those companies may not move until Pemex gets its books in order.

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

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

Despite those blights – and low prices – there is an upside for U.S. energy companies, said Pemex’s Carrera, 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."

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.

Fronteras Desk
This story is from the Fronteras Desk, a collaboration of Southwestern public radio stations, including NPR 89.1. Read more from the Fronteras Desk.
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