News Article

Diagnosis of PEMEX’s Business Areas of Opportunity

Mon, 09/01/2014 - 14:40

In order to enable PEMEX to effectively compete in an open market, several of its core concepts are currently being redrafted. Efforts are being made to transform PEMEX’s internal culture, starting at the top and radiating their way down the corporate ladder. According to César García Brena, Partner at Bremass Energy Advisors, looking at other oil companies around the world could help diagnose PEMEX’s current shortcomings to become a productive company of the state. “PEMEX has great people, including some of the best engineers I have seen,” he details. “The problem lies in that the company is not constantly exposed to international challenges and the rigor of best practices. PEMEX is a renowned expert in conventional shallow water operations, while also having enough expertise and skill in onshore operations.” However, the outstanding issue that García Brena points out is that PEMEX cannot be expected to be an expert in unconventional and deepwater E&P given that its engineers have not yet faced such challenges.

The circumstances of the oil and gas industry in Mexico are also not helpful as its regulatory and institutional frameworks present constraints to PEMEX’s operations. “It is not possible to develop an oil and gas company under the Mexican public law framework. PEMEX has done wonders considering the institutional straightjacket it has been subject to,” states García Brena. He adds that over the recent history of the Mexican oil and gas industry, PEMEX has had to obey too many regulatory bodies – SHCP, SENER, SEMARNAT, and CNH, amongst others. “All the regulations and authorities that PEMEX’s operations were contingent on contravened the constraint that PEMEX had to acquire the necessary equipment and services in a timely manner,” he continues. “Simply put, all the contracting processes and authorizations needed within a bureaucratic, decentralized system acted to the detriment of PEMEX’s urgent need to acquire the necessary rigs, many times leaving the company without the needed equipment and services to continue its progress. All of this led PEMEX to become an inefficient company, while remaining a powerful state-owned arm for amassing production and oil revenue in the country. PEMEX was earmarked as a decentralized organism, but in terms of legislation and budget, the company was really treated as a Ministry of Oil and not a real company,” says García Brena.

The Energy Reform is to give PEMEX more flexibility, operational autonomy, and more control over its decisions. The decree also sets a two-year period after the implementation of the Energy Reform for PEMEX to become a de facto company. “This is an important step for PEMEX and it will allow the NOC to become more functional and efficient,” García Brena comments, while suggesting that it could have been done through the public issuance of some percentage of the PEMEX’s ownership on the Mexican Stock Exchange. “Look at the case of Ecopetrol in Colombia, only 10% of the company’s stock was issued publicly in the stock market, yet it has created more attractive incentives to produce better results inside the company. It has driven Ecopetrol to respond to market forces from within the company, allowing an actual corporate governance scheme that fires people that do not fulfill their objectives.”

Up until a year ago, PEMEX’s corporate governance structure consisted of four Professional Board Members, six Government Board Members, and five Labor Union Board Members. This gave the larger pull within PEMEX’s internal decisions to the government, creating a conflicts of interest within the ‘corporate ideas’ that the NOC was set to have. Following the Energy Reform, the Labor Union Board Members are being removed from the Board of Directors. However, key players in governmental positions have kept their seats on PEMEX’s Board, creating a basis for conflicts of interest that contradicts the ‘corporate PEMEX’ idea. “PEMEX has to create its own governing body,” believes García Brena. “It will have to do a lot of soul searching in the next two years: it will have to find a way to correctly manage itself, and then find a way to choose and fight its battles on its own. After that, the 

company will also have to prove to the general public and the government that it can function in a transparent way that leaves no room for corruption, or abuse of power and resources.” García Brena, however, is looking forward to seeing PEMEX succeed in this new operating environment, being confident enough that conflicts of interests can be mitigated through a straightforward energy policy. The Energy Reform already foresees the pairing up of influences on PEMEX’s Board, stating that it will consist of five representatives of the Mexican government and five independent members.Meanwhile, PEMEX continues to face other challenges regarding its corporate governance model in terms of transparency and checks and balances. “The new rules have to make PEMEX more efficient, transparent, and flexible,” says García Brena. “In terms of transparency, the more the corresponding legislation distances itself from traditional Mexican law, and the more PEMEX becomes a company that responds to market forces, the greater the chance it will have to succeed. Therefore, the secondary laws will have to create new bridges between all authorities.” This might create certain gaps in transparency, according to García Brena, who would like to see a strong regulatory body with a healthy budget of its own. Regulators such as the National Hydrocarbon Agency in Colombia wield considerably more institutional strength than CNH and have a wider array of responsibilities. “A regulator in charge of overseeing the hydrocarbon sector, possessed of a clear role and mandate, will minimize the possibilities of making the same mistakes seen in other countries,” García Brena continues. “In Mexico, the change has to be oriented towards making laws more transparent and flexible, while maximizing profit. This should be the main objective, above job creation or industrial development. Perhaps national content rules should be avoided, such as when Brazil set some domestic content rules which only resulted in higher costs and more bottlenecks.” Another issue PEMEX must face is its current organizational structure. PEMEX has been operating under a four subsidiary model – not including PMI and PEMEX Corporate – which came into effect in 1992. Public belief is that this model is outdated and García Brena agrees. “The subsidiary model worked fine for a while as it gave a great deal of autonomy to each of PEMEX’s divisions, albeit at the cost of developing several micro-cultural environments and ways of operating,” he says. “Today we see PEMEX bringing power and decisions back to its headquarters and away from the fields.” While he still believes that some decisions should still be taken by each unit, García Brena mostly agrees with the latest PEMEX efforts to centralize certain functions. He notes, however, that implementation will be paramount in achieving success in such transformation from a decentralized to a centralized entity. “When PEMEX has attempted to implement similar schemes, it has created parallel worlds within the company’s operation: one reality in the corporate headquarters and another one in the fields,” he claims, using the implementation of SAP as an example. “SAP was brought into PEMEX as a great information and decision-making tool that would enable PEMEX to handle several terabytes of data in order to make better-educated decisions. However, people on the platforms often just fill out this requisite as part of a red-tape procedure, not seizing its benefits.” This problem, according to García Brena, could be addressed by implementing such measures through a bottom-up design, helping the people in the fields realize the real benefits of using the SAP platform to be more efficient and leave their jobs earlier.

“Now that PEMEX will have to compete against other companies, flexibility will become a major lever for it to thrive,” says García Brena. “By becoming a more competitive force, PEMEX will have the opportunity to become a role model for cultural transformation processes; however, until this process finishes its implementation stage, the company will feel the growing pains of organizational evolution.”