During an April 21 presentation at the Baker Institute for Public Policy, Emilio Lozoya, CEO of PEMEX since December 2012, delivered an optimistic and ambitious view for the future of the company. At the Baker Institute’s inaugural McLarty Lecture Series event, Lozoya envisioned a three-pronged plan designed to revitalize the company’s business strategy, corporate structure and organizational culture. These three main internal reforms are part of PEMEX’s new strategic approach to evolving energy markets, with the hope of better positioning the company as a viable international competitor in the wake of reforms that rapidly liberalized Mexico’s energy sector. Lozoya’s remarks showed that the former investment banker’s main task is to radically transform PEMEX, one of Latin America’s largest companies. And there has been some progress. Under Lozoya’s leadership, for example, the company’s recent integration of its procurement systems has presumably saved PEMEX an estimated $600 million in 2014.
Lozoya’s remarks pointed to the fact that the Mexican government’s goals are to keep PEMEX as a state-led oil company while positioning the country to take advantage of wider energy markets. More specifically, in the coming years, PEMEX will continue to focus on proven oil reserves while building strong joint ventures with foreign companies. And even as foreign companies are invited to bring their operations to Mexico, PEMEX’s desire is to tap into new energy opportunities, like shale and deep-water prospects, which will likely require corporate partnerships since it currently lacks the expertise and technology to carry out these capital-intensive projects independently.
Lozoya also highlighted PEMEX’s wish to develop its infrastructure, e.g., pipeline and refining capabilities, through limited initiatives with private companies. Multi-billion dollar projects, from the new Los Ramones natural gas pipeline to fertilizer plants, are all designed to transform PEMEX into “the largest logistics company on the continent.” It is these extensive, longer-term efforts that are expected to “bring [production by] PEMEX and the new operators to 3 million barrels per day [by 2018]” according to Lozoya. Lozoya also mentioned the company’s renewed commitment to meeting production goals and improving efficiency in both exploratory and downstream services.
Several key obstacles are in the way of Lozya’s plans, however. First, dropping crude oil prices and budget cuts lurk behind PEMEX’s long-term success amid international competition in the newly reformed energy sector. PEMEX already has had to sacrifice key investments and is falling behind in fulfilling important contracts in the face of shrinking funds. Second, the transformation of PEMEX’s corporate culture will be a very difficult challenge. The CEO has advocated a more meritocratic compensation policy, structured career plans and the development of a corporate university for employee training—all of which will likely run afoul of the powerful oil workers union and the company’s corporate culture. In fact, tens of thousands of workers have already been laid off since the April event at the Baker Institute, with even more staff cuts expected in the coming months. Eventually, this may create resistance to the change in Mexico, both within the company and outside it.
In addition, gang violence has brought financial woes to the company as thousands of fuel theft incidents have already occurred. The recent escape of Sinaloa Cartel leader Joaquin “El Chapo” Guzman from a maximum security prison has brought focus onto the enormous issues associated with doing business in Mexico, where organized crime poses challenges to law enforcement. Further, the April 1 explosion at a Pemex-owned oil rig killed four workers and raised the industry’s concerns about PEMEX’s safety record. Considering the drop in oil production as a result of that deadly accident on one of Pemex’s offshore platforms, Lozoya’s production estimate seems increasingly unlikely. Finally, the first round of bidding which would have allowed Mexico to enter into profit-sharing agreements with foreign firms, and potentially could have moved 14 exploration blocks to the hands of foreign and domestic operators, was a flop and brought greater uncertainty to Mexico’s ability to implement energy reform effectively. But the liberalization process will continue, and soon it will include bidding for heavy and light crude reserves and eventually move on to unconventional deep-water and shale reserves.
With this longer-term vision in mind, Lozoya emphasized the plethora of opportunities available for PEMEX in the future. His ambitious and optimistic view of the energy liberalization process signals Mexico’s willingness to become a key player in the global energy industry—even if it takes a while. He stressed that PEMEX’s highly competitive production costs per barrel of oil allows for a cushion against the prevailing low oil prices in the current market. He also acknowledged that, although current levels of oil production for PEMEX were at 2.4 million barrels per day, foreign investment and joint production agreements could still allow the company to hit the 3 million barrels per day of production by 2018 he projects.
In all, Mexico is caught between an optimistic view of the future and key challenges on the ground. But clearly, even as obstacles remain in the way of this groundbreaking opportunity for the Mexican economy, Mexico’s leadership remains confident about the future of the country’s energy sector. Nonetheless, there is a long road ahead in the conversion of PEMEX from a government-controlled giant to an internationally competitive energy company.
Alex Haer is an undergraduate at Rice University and an intern for the Baker Institute Mexico Center.