What next for Pemex?

The news that Emilio Lozoya, CEO of Mexican National Oil Company Petroleos Mexicanos (Pemex) would be stepping down came as no great surprise to many observers of Mexican oil politics. The company has been in deep trouble for over a decade now and, although Lozoya only took over 3 years ago, he has been able to do little to stem the tide of bad news during his tenure at the top of the organization. From a high point in crude oil production in 2004 of 3.4 million barrels per day (bpd), Pemex now only produces around 2.2 million bpd, and that total is predicted to fall further in the coming months. Combined with the low oil price internationally, that means a lot less revenue for Pemex, but more importantly, less fiscal revenue for Lozoya’s political bosses in the government of President Enrique Peña Nieto. Mexico’s government has depended on oil for up to 35% of its revenue over the past decade, but with lower prices and lower production, that total has fallen closer to 20%, leaving a growing gap in the federal budget, that has been covered by cutting spending in infrastructure projects and government salaries and services.

The money problem afflicting Pemex has largely been caused by successive Mexican governments treating the NOC as a cash cow, and the truth is that the company has been milked to death. This year’s cuts in the Pemex budget and the calls for layoffs are only the latest manifestation of a long-running abuse of the company by the Mexican federal government. But the decline in Pemex and government revenues is only one part of the unholy trinity of problems that has been afflicting the NOC in recent years.

A second major handicap has come from poor management, a dysfunctional organization and has been denied operational autonomy, with all major investment decisions being taken by its government-dominated board.  There can be little doubt that there has been a significant restructuring of the firm over the past few years as well as a number of other changes that will benefit the firm in the long term, but they have been insufficient to turn matters around in the short term. Despite a recent agreement with the powerful Pemex union, the STPRM, to modify the collective agreement, there is a major overhang with the pensions and other labor liabilities of the company. A massive restructuring of Pemex into three main companies has resulted in turmoil and disillusionment among Pemex staff, and has failed to have any meaningful impact on corporate performance. A major dispute is pending with the union over the question of layoffs, which some analysts estimate must total 40,000 if the firm is to become competitive. What’s more, despite a recent reduction in the amount of oil and refined products stolen by organized crime groups, local communities and Pemex staff, January 2016 saw 414 thousand barrels of product siphoned off for illicit purposes.

The third major challenge facing Pemex today lies in the persistent and nagging rumors of corruption that surround the firm. There is little doubt that Pemex staff have been involved in kick-backs, side deals and outright theft over the years, but in recent months the accusations against senior management have become more public. In the aftermath of the Petrobras scandals in Brazil, the government and industry analysts have been anxiously waiting to see if something similar would develop in Mexico’s NOC. The resignation of the company’s head of procurement, Arturo Hernandez Autrey, in September last year after public accusations of corrupt behavior led many to believe that Pemex was on the verge of a series of revelations about corrupt behavior, which have yet to come to light.

So what happens next for Pemex? Its new leader,  José Antonio Gonzalez, the former head of the Mexican social security institute (IMSS), is an effective technocrat who has a solid track record. He is seen as being close to Luis Videgaray, the Finance Minister, which should smooth communication and coordination. In terms of the tasks ahead, the restructuring of the firm will continue. But it is imperative that the company not only moves ahead on that front and on corruption issues, but also tackles three additional major tasks. The first is the migration of service contracts to exploration and production deals is a priority item that has been pending since late 2014. Also, since 2014 the company has been promising to “farm out” some of its fields (a deal by which another company would offer services in exchange for a share in the production of those fields), and only minimal progress has been made. Second, the company must prepare itself for possible joint venture projects with the private sector in the deep waters of the Gulf of Mexico. The government recently announced the bidding terms and process for deep water fields, which will likely be made available next year, and Pemex needs to work with foreign firms if it is to have any success either in the bidding process, or in the exploration and production process. Lastly, the government must give Pemex the autonomy it so desperately needs. If Pemex is to be a successful and competitive NOC, it must be allowed to operate like a business, and a major part of that is being allowed to control its own finances and to make its own investment decisions.

Lozoya’s departure from Pemex is only one more disappointment for Mexico’s once-proud national oil company. Let’s hope that the company and the Mexican government seize this opportunity to begin to put things right, for the good of the firm and of the country’s oil and gas sector.

This article was originally published on Forbes.com