Juan Carlos Zepeda
President
CNH
/
Insight

Complexity of Navigating PEMEX

Wed, 01/25/2012 - 09:51

“Legally speaking, Pemex is not a company,” says Juan Carlos Zepeda Molina, President of the Comisión Nacional de Hidrocarburos (CNH), Mexico’s upstream regulator. “Pemex doesn’t have shares, shareholders or capital. It is a government entity, which has been driven by a short-term strategy. Even after the legal reform of 2008, it is still not clear what the legal mandate of Pemex is. Even though Congress introduced in Article 7 of the Pemex Law the mandate to create value, this mandate is among several objectives in the article. So, despite the intention, it is still not clear whether Pemex’s objective in practice is to create value. Based on Pemex’s results and current strategy, it would seem that short-term production goals are currently driving Pemex, rather than the long-term goal of creating value.”

The President of the CNH believes that Pemex is currently focusing too much on the implications of its strategy for Mexico as a whole, rather than simply focusing on the company. “Pemex should behave in an ecient and competitive way like other NOCs do, and concentrate on maximizing value, because these objectives would go a long way to reducing costs and increasing eciency. And to counterbalance the objectives of the company there is the government, in this case the CNH and the Energy Ministry, who will focus on maximizing value for the government and the country.”

Zepeda Molina insists that in order for Pemex to become more like a competitive private company, further legal changes are needed to clarify the position and mandate of the NOC. “Pemex should be as ecient as the best oil companies in the world,” he says. “It should have objectives similar to those oil companies.”

When asked about the most influential decision-makers in Pemex, Zepeda Molina is quick to highlight Pemex Exploration & Production (PEP), one of the NOC’s four subsidiaries. “Around 85% of Pemex’s budget is spent on exploration and production, and almost all the company’s profits come from PEP. All the taxes and duties paid by Pemex to the government are from E&P activity. PEP takes its own decisions, does its own planning and develops its own strategies without enough counterbalance from the corporate entity as a whole, or from the government.”

“The influence of PEP on Pemex’s decision-making process represented one of the factors that drove CNH’s creation in 2008, as well as the attempt to accelerate the introduction of best corporate practices in Pemex,” says Zepeda Molina. “CNH aims to act as a counterbalance to the powerful force in the Mexican oil industry by applying checks and balances to projects and making sure that Pemex starts focusing more on eciency and value creation, rather than selecting projects based on their ability to contribute to production targets and potential impact on the country.”

Pemex is now starting to incorporate new international best practices into its decision-making and approval processes, but there is still inertia from the old ways, when a central board or investment committee never approved E&P projects; and instead, received approval within PEP and later from the Finance Ministry. This was changed by the Energy Reform of 2008, which specified that Pemex’s corporate board had to approve all projects proposed by the E&P division.

However, these changes to corporate practices have not yet attained their full impact, because projects already in progress before implementation of the 2008 reform did not require retroactive board approval. Pemex’s board must now sign o on any major changes to ongoing projects. While there is still inertia to the changes, Zepeda Molina believes that there is also movement in the right direction.

In terms of the PEP board, Zepeda Molina says that the 2008 reform went a long way to creating a structure comparable to the boards of many other E&P companies around the world. PEP’s board is composed of Pemex’s CEO, four independent members, and representatives from the government. Still, Zepeda Molina highlights changes needed to achieve the aims of the CNH that include a faster approval process for both planned and ongoing E&P projects.

MAJOR FORCES IMPACTING PEMEX STRUCTURE DURING 2008-2011

2008: Energy Reform is passed by Congress; CNH is created as regulator to the oil and gas industry, and for the first time Pemex moves away from self-regulation; independent non-executive directors are placed onto the board of the company, and the board is given the authority to approve all exploration and production projects the NOC embarks on.

2009: Pemex Law defines the mandate of Pemex as creating maximum company value, moving away from its original mandate of producing oil for Mexico at the lowest possible price

2011: Pemex announces that its E&P subsidiary, Pemex E&P, will be restructured, to move away from a project-based organizational structure to a process-based one. This means creating separate exploration, development and production divisions within the company, and the handover mechanisms to ensure best exploitation of reserves.