Fluvio Ruiz Alarcón
Professional Board Member
PEMEX Petrochemicals
View from the Top

Organizational Hurdles in PEMEX’s Transformation

Wed, 01/21/2015 - 12:57

PEMEX’s transition into a productive enterprise of the state could be a rocky road due to the NOCs political nature. Fluvio Ruiz Alarcón, Professional Board Member of PEMEX Petrochemicals, stresses that the working culture within the institution will have to change and that will be a difficult task. In the process, PEMEX workers are being subjected to a lot of uncertainty, even though the government has made a great effort to reassure them. For instance, there has been a significant increase in the amount of people that have decided to retire. Ruiz Alarcón voices his concern saying that, “Many officials who have worked for the company for decades have decided to retire, even if this means they will be entitled to only 80% of their pension. This situation is very dangerous because PEMEX can lose a great proportion of its most capable human resources.”

Given the changes PEMEX is going through, Ruiz Alarcón says it is very important for its employees to learn how to work in a competitive environment. The state-owned company is finally confronted with the challenge of competing with other players, which implies a serious degree of adjustment. “I have a strong feeling that most of the Energy Reform makes it perfectly clear that the conditions of free competition are more important than the objective of strengthening PEMEX. For instance, SENER has the ability to instruct PEMEX to avoid certain activities if these could affect free competition in the market,” says Ruiz Alarcón. “I would definitely send the message to PEMEX employees that there is a need to adjust, which will in turn implicate serious transformations for everyone within the institution.

In addition to elements established in the law, PEMEX is also subject to a series of social limitations. “PEMEX cannot decide unilaterally to lay off 30% of its workers so that it can have a payroll closer in size to that of other major international oil companies,” says Ruiz Alarcón. “Decisions cannot be made from a completely business-oriented perspective yet. Take the budget cuts, for example. In a context different from the one we are living in, I would have expected that the decision to cut PEMEX’s budget would have been made unanimously in a board meeting. However, we are not at this point yet.” In his view, PEMEX must also contend with social expectations which play a role in the development of the country. In this sense, PEMEX cannot make decisions that other companies make by only considering the relevance and profitability of a project as it must also account for social and political costs. “This is one of the great contradictions in the Energy Reform. PEMEX’s formal mandate is to create value. However, it is very difficult for PEMEX to do that because of the social costs implied.”

PEMEX’s empowerment and ability to make the right decisions in this difficult time lies in its Board of Directors. The key point for giving PEMEX a solid and stalwart board, according to Ruiz Alarcón, is fiscal dependency. “For as long as Mexico depends on oil revenues, it will not matter who is on the board as that concern will remain in place.” Ruiz Alarcón strongly believes it was a mistake to exclude the union from the board of PEMEX, mainly because workers should have been given the chance to choose their representative and have them included. This would have given the board a completely different perspective on key issues. “As long as PEMEX remains the government’s primary source of income, it will be very difficult to achieve this objective. However, if PEMEX is seen as the responsible entity for assuring the energy supply for the country, then the Boardof Directors’ perspective will change completely. Another considerable threat to PEMEX’s transformation into a real productive enterprise of the state is the lack of oil and gas expertise in its board,” says Ruiz Alarcón. “This can be addressed or mitigated by listening to experts, of which there are many in PEMEX. This company is self-made. It is not surprising that it has serious expertise and capable people. Now it is just a matter of using them wisely.”

Ruiz Alarcón is confident that Emilio Lozoya Austin, Director General of PEMEX, is the right person for the occasion due to his political strength and close ties to the president. “This is a major difference vis-a-vis other CEOs of PEMEX, as Lozoya Austin has full presidential support,” he says. However, Ruiz Alarcón believes that having the president’s support could be a handicap in the short term, given the country’s political context. “The president might not want to make difficult decisions with the elections nearing, even if Lozoya Austin presses him to do so,” asserts Ruiz Alarcón.