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Analysis

Improving Corporate Governance at PEMEX

Tue, 01/22/2013 - 14:37

Twenty-one years ago, a new Pemex Law was approved, which included the first step towards the modernization of the NOC: the law determined the creation of a corporate governance structure and divided Pemex into four subsidiaries: Pemex Exploration and Production, Pemex Refining, Pemex Gas and Basic Petrochemicals, and Pemex Petrochemicals. On January 16, 2013, during an unscheduled Pemex Board Meeting, a proposal from the Professional Board Members triggered discussions on overturning this model, when Fluvio César Ruiz Alarcón, Professional Board Member of Pemex, recommended an internal restructuring that would see the four subsidiaries merged into one to increase e·ciency. “We believe that the current subsidiary model has already yielded the expected results and that a change is needed for the company to continue growing,” explains Ruiz Alarcón.

He believes that the strategic decision to divide Pemex into divisions has lost its validity since it no longer offers an optimal platform to streamline execution across the value chain. “The system is ine·cient because it generates division in the decision-making process and creates power structures that cause conflicts of interest,” Ruiz Alarcón claims. “It has also reduced the possibility of improving the information sharing process and the transfer of human, technological, and material resources between the company’s di†erent areas. In retrospect, it might seem that the creation of the four subsidiaries hindered the formation of a collective identity, both in terms of operations and in building a single corporate philosophy and identity.”

When this issue of organizational restructuring was last brought before the Board of Directors, in August 2010, it was rejected since only Rogelio Gasca Neri and Ruiz Alarcón voted in favor. “The motives for change were already there, because success for one subsidiary does not necessarily mean success for the whole company,” Ruiz Alarcón explains. “However, the political timing was not perfect: we were two years away from the end of the presidential term and the company needed to yield results, so the Board voted against change.”

The proposed restructuring, to which Pemex CEO Emilio Lozoya will have to respond this year, is expected to benefit the company in some specific ways. “First of all, we expect the decision-making process to become more agile by eliminating bureaucracy and the concentration of power, thus facilitating the flow of information.” Ruiz Alarcón adds: “Processes relating to issues such as safety, security, and the environment should be homogenous across all operations, and the restructuring will eliminate any duplication of functions; not by firing people, but by converting their capabilities to perform di†erent activities.”

The reintegration of the four subsidiaries into one strong, unified Pemex also brings a symbolic solidity back to the company. “Reafirming a collective identity will be vital for Pemex’s future, harmonizing the company’s goals and working towards them with a unified strategy that does not di†er from region to region or from subsidiary to subsidiary,” Ruiz Alarcón remarks.The creation of a more solid identity might be the first building block towards letting Pemex work as a business-oriented company. The restructuring would also allow for the elimination of socalled ‘internal sales’, and the possible conflicts of interest within the company. In the current organizational structure the transfer of one subsidiary’s final product to another has to be accounted for as an individual transaction, even if the product remains within the company. Having unilateral objectives for each subsidiary also causes ine·ciencies. “For example, it is not always in Pemex E&P’s best interests to exploit natural gas, since it primarily uses it for reinjection; but Pemex Petrochemicals needs that gas to operate. As a result, the conflict of interest between the objectives of each division directly a†ects the overall performance of Pemex,” explains Ruiz Alarcón. The current concern for Ruiz Alarcón is again the timing at which this first step is taken. “The restructuring is overdue,” he states, “but there are several groups inside the government that would prefer to delay it until the energy reform is o·cially proposed.”

According to Héctor Moreira, Professional Board Member of Pemex, the first e†orts to modernize the NOC should focused on the most conflicting issues. “Which model best fits Mexico? Should we create a new business model to better fit the unique requirements of the national industry?” he asks. “These questions need to be properly addressed in the first three quarters of this year. Debate should not be prolonged past September, since the di†erent stance of each political party would then combine with the urgency of reaching an agreement to present the federal budget.”