Guillermo Pineda
Energy Specialist
PwC Mexico

Time for PEMEX to Outperform Its Global Peers

Tue, 01/22/2013 - 16:47

“Less experienced companies have overtaken Pemex in the global ranking of national oil companies, due to thorough, relentless preparation, well-organized operations, and their countries’ positive economic situations,” says Guillermo Pineda, Energy Specialist at PricewaterhouseCoopers (PwC) Mexico. “Norway is a clear example: Statoil successfully took advantage of the country’s favorable economic circumstances and the company made a conscious e†ort to improve its operation in the early 1990s. Brazil did the same, evolving from a country that depended on ethanol to having a strong national oil company. Colombia has also exceeded Mexico’s e†orts, with drastic improvement in both its oil industry and its economy. Even oil companies in Europe and Japan that do not possess large hydrocarbon reserves have improved their e·ciency to enviable levels.” Oil companies that appeared to be behind Pemex have shown resilience in their e†orts to improve their national oil industries, and are now topping the performance of Pemex, according to PwC’s latest report.

The paper presented by PwC also includes the results of an analysis made by Rice University on how oil companies around the world transfer part of the benefits obtained from petroleum production to local communities, showing that countries that have neglected to follow this course have failed to remain successful. “Venezuela had a very e·cient oil company in PDVSA, with a large amount of booked reserves that promised a bright energy future for the country,” Pineda explains. “However, when Hugo Chávez became president, he replaced the qualified executives of PDVSA with new government o·cials, who destroyed all the value previously generated for the community and spent all the money generated on filling the country’s co†ers.”

IOCs have also adapted to the dynamic challenges of the industry over time, from seeing each other as competitors to forming alliances between themselves to share the risks and benefits of projects. This is a lesson that runs contrary to the Mexican Constitution mandate that allows only Pemex to perform oil-related activities. “Mexico has to understand that it is not detrimental to the interests of the industry’s development to partner with other companies to achieve better results; even companies that could undertake projects on their own prefer to share the implicit risks,” Pineda asserts. “Pemex should not work on its own, but rather shake hands with other experienced companies and share knowledge and technology to successfully realize the full potential of the Mexican Gulf of Mexico. When we see how countries in Africa have evolved in their hunt for oil through alliances, we realize the limitations in our regulatory framework.”

Both positive and negative outcomes from business cases around the world are analyzed in the PwC investigation, with the objective of creating discussion that improves the way Pemex operates and, eventually, stimulating the country’s economic development. “The moral of the story is that, no matter what the circumstances bestow, we can always work towards the industry’s betterment,” Pineda says. “After seeing the modernization processes these oil companies have undertaken and knowing the conditions of the oil industry in Mexico, it is easy to conclude that there is still a lot of work to be done to further improve Pemex.” Pineda is convinced that the lag that Pemex shows compared with other national oil companies is a direct consequence of not having planned adequately for the future. “We used to rely heavily on Cantarell, to the point that its decline caused a 30% decline in Mexico’s national production,” he explains. “The lack of preparation for the Cantarell situation exemplifies how Pemex o·cials reasoned in the past: the problems we have today are a direct consequence of inadequate spending on exploration and production. We did not make the proper investments at the correct moment, when we were still overproducing oil and costs were not as high. Now, we are paying the price.”

“We have failed to optimize the exploitation of natural gas in the country’s northern region, choosing to import instead of investing in the infrastructure needed to develop our own resources,” Pineda says. “Gas exploitation is another area where Pemex should look for alliances. The first step is to verify the prospective shale resources of the northeastern regions of the country, and then define the correct strategy to extract them,” Pineda states. “If the incentives are not aligned with Pemex’s short-term priorities and capabilities, then Mexico should open the sector to private initiative, with private companies taking the risk and obtaining part of the benefits, under the unmovable axiom that hydrocarbons are still property of the country.”

Pineda believes that these lessons should carry important weight in the way the new reform is presented. “A reform needs to take a look at the entire sector, not just oil, gas, or power generation,” Pineda concludes. “With a comprehensive reform, Pemex stands a better chance of closing the gap and becoming once again a top oil company in the world.”