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Analysis

Principal Details of PEMEX's Transformation

Wed, 01/21/2015 - 17:28

Perhaps the most well-known fallout from the Energy Reform was the transformation of PEMEX, the Mexican NOC, into a productive enterprise of the state. The true meaning for this cryptic description remains somewhat of a mystery. However, with the Energy Reform now behind us, certain facts have emerged that reveal what the new incarnation of PEMEX will look like. Firstly, it is not just the corporate structure of PEMEX that has changed, or its fiscal management. The entire corporate purpose of the NOC has shifted, allowing it to move beyond a web of complex and competing interests that left it bloated and old-fashioned. Being a state monopoly gave PEMEX the exclusive rights to Mexico’s oil and gas reserves but it also became a piggy bank for the government. In 2013, taxes amounted to 119% and 125% of operating income and pre-tax profits, respectively. Against this, PEMEX was essentially ordered to extract as much oil as possible, with little regard being paid to production costs or profitability. The now liberated productive enterprise of the state will be able to largely do away with most of these obligations and focus on streamlining its operations, maximizing efficiency, and creating value.

This transformation will truly be reflected in PEMEX’s activities in several ways: 

• The new legal framework will allow PEMEX to operate with increased flexibility and dynamism.

• Wholly owned by the Mexican State, PEMEX will have the capacity to operate like a for-profit company dedicated to value creation

• Corporate governance will be strengthened through a new composition of the Board of Directors with enhanced responsibilities and accountability, a renovated corporate structure with a new regime comparable to that of private corporations, and performance assessment based on economic objectives

• PEMEX will be granted greater autonomy in its approach to accessing financing and allocating spending between CAPEX and OPEX

• PEMEX will be allowed to create its own subsidiaries and affiliates, broker alliances, enter as a member into associations, and become a minority owner in outside entities

PEMEX will be freed from the administrative clutter of being a full-fledged government entity and should thus be able to compete or collaborate on an even keel with incoming players. In this, the Energy Reform has delivered on what it promised. However, putting this ambitious plan into action will be fraught with peril. For starters, the transformation of PEMEX will have to precisely define what the company does and, perhaps most importantly, what it does not do. Without this very clear definition of responsibilities, its reincarnation could appear to encroach on the activities of other state-owned enterprises, particularly CFE. As the national electricity company is undergoing a similar change to PEMEX, and has also been given two years to turn a profit, any turf war between the two could hurt their operations, but would be even more damaging to investor confidence. After all, PEMEX has the opportunity to enter the electricity sector, which would see the two productive enterprises potentially face off as rivals. This clash could also take place in natural gas activities, where PEMEX and CFE both have interests in transportation and production, as well as cogeneration.

The changes within PEMEX are not merely taking place at the corporate level but are affecting its entire structure, including the make-up of its subsidiaries. In order for PEMEX to become the efficient operational behemoth that the Energy Reform envisions, its subsidiaries will be completely reshuffled and restructured. As such, they will be reduced from four to just two. In the 1990s, four subsidiaries were created, namely PEMEX Exploration and Production (PEMEX E&P), PEMEX Refining, PEMEX Gas and Basic Petrochemicals, and PEMEX Petrochemical. While the first of the four, PEMEX E&P, will continue to exist with a revised portfolio, the other three will be disbanded and merged into a new subsidiary, PEMEX Industrial Transformation. This restructuring aims to allow PEMEX to more easily identify and act on opportunities in a variety of sectors, without such actions being slowed down by excessive bureaucracy. This fits into its new role as a productive enterprise and into its new target to consistently turn a profit for itself and the State. The creation of PEMEX Industrial Transformation involves a major rethinking of the NOC’s operating structure. While it will take on the operational responsibilities of the three dissolved subsidiaries, these will not remain as separate divisions. PEMEX Gas and Basic Petrochemical sees its former duties reassigned within a number of working areas, while PEMEX Refining and PEMEX Petrochemical should remain more or less intact within one division. Finally, new affiliates, which are smaller than full subsidiaries, will be created throughout 2015 to take charge of specific areas: drilling, cogeneration, logistics, ethylene, and fertilizers.