MEXICO

Petroleos Mexicanos, the mainstay of Mexico's economy, was created in 1938 when then-President Lazaro Cardenas expropriated and nationalized private oil companies operating in Mexico.

That action came amid growing nationalism over Mexico's natural resources-not to mention Cardenas' personal displeasure over what he considered a lack of respect by foreign oil companies toward Mexicans.

PEMEX SCOPE

Pemex's contribution to the Mexican economy is imposing.

As the nation's largest taxpayer, with 1992 sales of $20.6 billion, Pemex provided $16.8 billion to the Mexican government's income last year through hydrocarbon extraction duties, a special production and services tax, and a valued added tax. Including domestic sales and exports, Pemex accounts for a third of public sector revenue in Mexico.

Pemex is the world's sixth largest producer of crude oil and in first quarter 1993 was the fourth biggest exporter of crude to the U.S. after Saudi Arabia, Venezuela, and Nigeria. As Mexico's largest exporter, Pemex pulls in more than 30% of Mexico's export earnings, averaging slightly more than $8 billion/year in recent years. In 1982, Pemex provided 79% of Mexican export earnings with hydrocarbon export revenues of $16.6 billion.

Despite extensive recent cuts in its work force, Pemex still is considered the largest enterprise in Latin America. Peak employment in 1986 swelled to 210,000, but by yearend 1992, Pemex's payroll had been trimmed to 125,000. Insiders say more cuts are on the way.

About half of Pemex's crude oil output serves domestic consumption, and half is exported. About 58% of Mexico's oil exports go to the U.S., with the remainder broken out as Spain 17%, Japan almost 7%, Canada and France 2% each, and other nations combined 14%.

PEMEX'S ROLE

Under Article 27 of the 1917 Mexican Constitution, and other laws, the government through Pemex maintains monopoly control of exploration and extraction of all hydrocarbons in Mexico, refining of crude oil, and the production of basic petrochemicals.

Despite constitutional and political constraints, Pemex under President Carlos Salinas de Gortari has opened new doors to foreign investment, either within the traditional bounds of Mexican law or under new interpretations of old rules.

Mexican law, for instance, dictates that only Pemex may produce basic petrochemicals, loosely defined as compounds derived after one conversion from the hydrocarbon feedstock. In 1986, 60 petrochemicals were considered basic and thus off limits to private sector involvement. The Mexican government - notably under Salinas - has chopped the number of basic petrochemicals to 8.

A list of secondary petrochemicals similarly has shrunk from 67 to 13 compounds. Mexican law allows private companies to produce this product category provided they are no more than 40% foreign owned. Chemicals not on either list carry no restrictions on foreign ownership.

The changes already have brought tangible results. In April, Pemex signed a pact with Valero Energy Corp. and a Spanish construction firm to build a $350 million plant to produce methyl tertiary butyl ether, an oxygenate that Pemex in 1989 began adding to its gasoline to help mitigate severe urban air pollution in the country. The Ixhuatlan, Veracruz, complex is to have capacity of 500,000 metric tons/year when complete in 1995.

GROWING COOPERATION

Among other examples of the quickening pace of growing cooperation between Pemex and the private sector:

Pemex in 1992 imported an average 250 MMcfd of natural gas from a variety of U.S. suppliers to supply northern Mexico - an arrangement that for Pemex is less costly than transporting natural gas from Campeche Sound fields. Mexican petroleum industry analyst George Grayson, a government professor at William & Mary College, estimates Pemex's natural gas imports could grow to 300 MMcfd by yearend. A shortage of capital has sparked speculation that Pemex soon will sign turnkey service contracts with U.S. firms to develop natural gas in Mexico's north, Grayson contends.
In February, Pemex formed a 5050 joint venture with Shell Oil Co. to own and operate Shell's 225,000 b/d Deer Park, Tex., refinery, where a major upgrade is under way (OGJ, July 19, p. 28). Under the joint venture, Shell can sell Pemex as much as 45,000 b/d of unleaded gasoline. For its part, Pemex secured access to a refinery that can process more than 100,000 b/d of Mayan heavy crude, which accounts for 67.5% of Mexico's crude oil exports. Mexico's growing demand for unleaded gasoline outstrips Pemex's refining capacity. It had to import 75,000 b/d of gasoline in 1992, more than double what it imported in 1990.
Of 55 wells being drilled in Campeche Sound, about a third of the work is to go to private companies. Triton Engineering, Houston, last year drilled a well for Pemex under a turnkey, lump sum contract in 127 days, compared with 249 days usually needed by Pemex. Sonat Corp., Houston, and Mexican partner EPN Arval won a bid in late 1991 to drill six wells for Pemex.
In February, Pemex announced a major change in strategy for its 60 intermediate petrochemical plants. Obsolete plants will be closed, some will be privatized through international open bidding, and others may be transformed to operate as joint ventures in restructuring to take place this year.

Meanwhile, Pemex has actively sought outside financing to pay for offshore development drilling, exploratory drilling, new refinery construction and revamps, and other capital improvements (Table 1). A March 1992 U.S. General Accounting Office report put Pemex's 5 year capital needs at $20 billion.

ln June, Pemex issued its first bonds in U.S. financial markets. The $250 million package was Pemex's fifth foreign market bond issue this year, bringing year to date bond financing to $1.5 billion. In addition to bonds in international credit markets, Pemex gets foreign loans through institutions such as the Export-Import Bank and Canada's Export Development Corp. Pemex obtained agreement from Eximbank to provide as much as $6 billion in loan guarantees in a 5 year period beginning in 1991.

MANDATE FOR CHANGE

Pemex General Director Francisco Rojas Gutierrez describes the job of changing the course of Mexico's oil behemoth as "canceling dogmas of any order while keeping to the words and spirit of the constitutional mandate."

The need for modernization was underscored in April last year, critics say, when a series of sewer system explosions tore open 22 blocks of some of Guadalajara's oldest neighborhoods, killing at least 210 people. Four Pemex officials were charged with criminal negligence in connection with the incident, and a Pemex tank farm on the city's south side was closed permanently by presidential order.

Pemex has denied any responsibility for the blast. But Salinas in midway 1992 gave Pemex 30 days to complete a far reaching reorganization that moved toward modernization goals he has espoused since taking office. Many observers said the move was prompted by the Guadalajara disaster.

The reorganization reportedly was drafted by Rojas, Pemex Director of Operations Adrian Lajous, and presidential advisors including Energy Sec. Fernando Hiriart Valderrama. After a review by Salinas, Mexico's Congress approved the reorganization in July last year.

NEW STRUCTURE

Under Pemex's new decentralized structure, the state retains control of a holding company that sets national energy policy, lays down operating guidelines, and allocates resources between four independent subsidiaries created under the reorganization (Fig. 1). The parent company holds 3% of corporate assets.

The parent company is governed by an 11 member administration council: 6 members appointed by the Mexican president and 5 representatives of the Petroleum Workers Union, who must be union members and on Pemex's payroll. Pemex's director general is appointed by the president.

The four subsidiaries are to function as stand alone profit centers, accountable for their actions and performance. "The fundamental philosophy," Rojas said, "is the management of all operations in international and commercial terms."

A Pemex statement at the time of the reorganization said, "The companies' commercial and financial transactions will be conducted on an arm's length basis, including transactions with sister companies to ensure financial accountability."

E&P

Pemex Exploration & Production, whose general director is Manuel Javier Ortiz de Maria, is responsible for exploration and extraction of oil and gas, field gathering pipelines, and crude export facilities.

Of Pemex's $40 billion in assets, Pemex E&P received 55% under the reorganization. The unit took 58% of the Pemex budget this year. After falling for a decade, official Pemex crude oil reserves figures have stabilized since 1991 and stood at 44.4 billion bbl at the start of the year.

Pemex's official figure for total hydrocarbon reserves, including crude oil, condensate, and natural gas, has hovered around 65 billion bbl of oil equivalent (BOE) since 1990, down from 72 billion BOE a decade ago. Rojas said Mexico's current level C) of reserves "guarantees the supply for national demand during the next 50 years."

Pemex's reserve estimates have been a recurring source of debate. In late 1991, retired Pemex engineer Francisco Inguanzo Suarez set off a firestorm by saying in a published interview that the monopoly's reserves actually were less than half of official figures, or good for only about 20 years (OGJ, Mar. 9, 1992, p. 34). Pemex stands by its estimates.

In 1992, Pemex's crude oil production averaged 2.67 million b/d, or about 8,000 b/d less than in 1991, when production hit levels not seen since 1984 (Table 2).

Pemex crude exports averaged 1.37 million b/d in 1992 and generated about $7.4 billion in revenues for the year, about the same as in 1991, or about 89% of total Pemex exports (Fig. 2). Pemex 1992 crude exports broke out as 67.5 % Maya, 21 % Isthmus, and 11.5% Olmeca. Mexico uses Isthmus grade crude for most domestic consumption.

REFINING

Pemex Refining, whose general director is Fernando Manzanilla Sevilla, controls production and marketing of all refined products in Mexico.

It owns and operates Pemex's seven refinery complexes, more than 85 refined products distribution terminals, and crude and products pipelines. This division got 20% of Pemex's assets and 27% of the 1993 budget.

In 1992, Pemex refineries processed 1.57 million b/d of crude, natural gas liquids and condensate, and secondary process liquids, an 0.8% decline from 1991 (Table 3).

The more than 3,000 filling stations that display the Pemex logo are not part of Pemex Refining. They are private concessionaires that earn a commission based on the quantity of fuel sold. Domestic fuel prices and taxes are set by the Secretariat of Finance Ministry Hacienda), the Commerce & Industrial Development Secretary (Secofi), and Pemex.

GAS, BASIC PETROCHEMICALS

Pemex Gas & Basic Petrochemicals, whose general director is Jose Luis Alberro Semerena, manages supply and marketing of LPG, natural gas, and basic petrochemicals in Mexico.

It owns and operates Pemex's gas processing plants, LPG pipelines and distribution terminals, natural gas transmission pipelines, and all basic petrochemical plants. The division was allocated 12% of Pemex's assets.

Pemex produced 3.58 bcfd of natural gas in 1992, a 1.4% decline from 1991 and the second consecutive year of slight drops in production. The southern zone accounted for 54% of natural gas production, Campeche 33%, and the northern zone 13%.

Pemex processed 3.16 bcfd of natural gas at nine plants in 1992, a .3.7% decline from the previous year.

In all, Pemex subsidiaries produced more than 19 million tons of petrochemicals in 1992 and recovered 646,000 tons of sulfur from crude oil.

PETROCHEMICALS

Pemex Petrochemicals, whose general director is Jaime Mario Willars, owns and operates Pemex's 60 secondary petrochemical plants within 10 petrochemical complexes.

The unit received 10% of Pemex's assets.

It produced 13.7 million tons of intermediate petrochemicals in 1992, selling 5.6 million tons domestically and exporting 1.2 million tons.

Pemex claims its biggest petrochemical complex, La Cangrejera in Veracruz, ranks fourth in size in the world with a 4.3 million ton/year capacity.

HOW THE NEW STRUCTURE WORKS

Decisions within each of the subsidiaries are made in a manner similar to that of Pemex's holding company.

Each subsidiary has a director general appointed by the president, and policy is set by an eight member administrative council. The councils consist of four presidential appointees, three Pemex subdirectors general, and the director general of the Pemex parent company.

The sister companies set their own budgets, chart their own plans, and carry out the transport, storage, and sale of their products. Each manages its own personnel, operations, investments, and property.

Pemex International, the international products market representative since 1989, continues to manage foreign holdings and exports of crude oil, natural gas, and oil products. Also left intact was the Mexican Petroleum Institute, which employs more than 3,000 engineers and technicians to conduct most of Pemex's engineering work.

PEMEX GOALS

Pemex lists among its goals increasing efficiency and productivity, promoting energy savings, meeting internal petroleum needs while increasing exports, improving quality of its products, reducing pollution associated with its activities, and fostering private investment in selected areas.

Opportunities may expand for foreign oil service firms looking for business with Pemex.

Although the monopoly expects it will retain total control over petroleum resources even if the North American Free Trade Agreement passes, the treaty would expand foreign access to energy service and equipment markets under open and competitive bidding rules.