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Analysis

Aligning the Organization Model with PEP's Objectives

Wed, 01/25/2012 - 10:23

In order to determine the convenience of an organizational model, an evaluation of its consistency with the objectives and strategies of the company is required. In Pemex’s case, this becomes particularly dicult since Pemex’s targets are not especially clear.

The Pemex Law itself, in Article 7, establishes a diverse list of objectives for the NOC, such as the need to create economic value to benefit Mexican society, meet the country’s energy needs, ensuring long-term reserves replacement, execution of activities where it is appropriate for the country, and to boost the power of Mexican engineering. These objectives add to those already established by article 4-bis of the Regulating Law of article 27 in the Constitution. This other law states that Pemex’s activities should focus on several goals, among which are the protection of Mexico’s national interests, ensuring the sustainability of Mexico’s hydrocarbon production, and developing the country’s economy.

The diversity and ambiguity of the objectives established by law is evident, and most correspond more to the state than to the running of a competitive oil company.

It should also be noted that the objective that should be Pemex’s primary focus is not on the list: to maximize the value of the company in line with the interests of its owners. This is the fundamental objective of other national oil companies such as Petrobras and Statoil, and not exclusive only to private players.

Despite the lack of clarity in the objectives established by law, in practice it is appreciated that Pemex Exploration and Production has historically worked with one primary objective: increasing the short-term production of oil. In the current context, this has resulted in preventing the continued decline of the country’s production levels, but this is not a viable long-term goal for the company. However, in the last few years, another objective has gained importance on Pemex’s agenda: increasing the volume of proven reserves.

The organizational model at Pemex Exploration and Production

The eectiveness of the new organizational model of Pemex Exploration and Production will depend on the relative weight assigned to each of the following two objectives: short-term production and increasing reserves. Both of these objectives represent the real transition that is at stake within Pemex; it is about making an eort to transition from a short-term production objective to a long-term value-creating objective.

If Pemex manages to transition towards the long-term value-creating objective, the goal of increasing reserves will gain importance and therefore, a functional model is more adequate.

If, however, the short-term vision prevails, the asset-based model would be more eective to establish short-term production goals, the way Pemex has operated historically. Nevertheless, we must point out that this alternative is not sustainable in the long-term since it is precisely this mindset of a short-term vision that caused the recent decline in production.

To pursue a medium or long-term vision, Pemex Exploration and Production has no alternative but to transform into a company that prioritizes the creation of long-term value and therefore, the accumulation and development of reserves must turn into the primary objective.

Necessary conditions for the successful implementation of the new organization model

Apart from a redefinition of objectives, the successful implementation of the new functional model depends on evaluation metrics and accountability, both of which are still lacking.

Unlike the asset-based model, the performance metrics of the functional model are neither evident nor easy to implement. How should the performance of the exploration and development units be evaluated? How should the performance of the production unit be evaluated? And which handover process should be used to transfer the projects between units, in order to ensure that both responsibility and accountability are clearly defined?

Fortunately, we can learn from international experience, but this does not mean to say that the implementation of a functional model at Pemex will be easy. One fundamental principle of the functional model is that the tasks of each of the links in the value chain should be tailored as independent business projects with clear goals and quantifiable results with regard to economic value. In order to do this, Pemex will have to separate exploration projects from development projects, and development projects will have to be separated from production projects. This will be a major challenge for Pemex to overcome.

The definition of performance metrics of each of the links in the value chain, as well as the hand-over process between each of the links, is still a pending obligation in the implementation of the new organizational model, and will need to be better addressed before the model can be considered eective.