Fueling the future: Pemex prepares for the fight of its life.

When it comes to satisfying Mexico's growing energy needs, state-owned oil company Petroleos Mexicanos (Pemex)--notoriously inefficient and superannuated, battling corruption charges on one front, while on the other downplaying a string of oil spills and deadly accidents--is not the problem. Just the opposite, Pemex is the answer.

Or so Mexican President Vicente Fox--who has oft vowed to make Pemex "successful, competitive, honest and transparent"--would have the nation believe.

"I've said it again and again, and it's worth repeating now," he announced early this year. "Mexico will maintain sovereignty over its energy resources."

While not every Mexican may agree with him, Fox does seem to be sticking with repeated promises not to privatize the turgid monopoly (as most analysts would have him do). Rather, his goal seems to be to transform Pemex into a lean, mean fighting machine--a true company in the modern mold, a company capable of stepping into the ring to trade blows with any of the world's petrochemical heavyweights.

Prima facie, Pemex has the makings of a true contender. Ranked No. 9 in the global oil industry based on revenues, Mexico, one of the three main exporting countries outside of the Organization of Petroleum Exporting Countries (OPEC), ranks No. 3 in oil exports and No. 5 in production. After Venezuela, Mexico boasts the second-largest proven crude oil reserves in the Western Hemisphere. Last year alone, Pemex churned out more than 3.5 million barrels of oil per day, more than 1.5 million barrels of which were exported. These are by no means the attributes of a flyweight.

Not only does Pemex weigh heavily in the world arena, it also enjoys unrivaled support at home. Many Mexicans consider Pemex--the company created by a mass expropriation of foreign oil companies in 1938 by President Lazaro Cardenas--the veritable symbol of Mexican sovereignty. What's more, over the past decade, Pemex has accounted for almost 40% of government revenue. Add to that the fact that more than 140,000 people work for Pemex, and it's easy to see why the company has long been touted the single most important entity in the Mexican economy.

I COULDA BEEN A CONTENDA

By virtue of so much obvious vigor and might, Mexico would seem to merit a shot at the heavyweight title. If Pemex hopes to make it past the first round, however, it is going to have to spend a few months in the gym, because while Pemex has come to symbolize national pride, it has also come to symbolize a few less desirable traits.

To wit: Pemex is the embodiment of inefficiency. For more than 60 years, the government-owned monopoly has been a breeding ground for cronyism and nepotism, to the degree that it now takes more than two Pemex workers to produce the same amount of oil made by one worker in Venezuela. Last year, Fox, in an attempt to transform Pemex into a more competitive entity, broke with tradition and, instead of naming politicians to the advisory board, appointed some of the nation's most successful businessman. Despite the relatively cosmetic nature of his appointments, legislators decried so-called "conflicts of interest" and had the board disbanded.

In addition to being inefficient, Pemex is subject to a tax regime that has left it woefully under-funded. Because it lacks the necessary resources to invest in the latest technology, refining capacity has plunged, so much so that Mexico must now import more than a quarter of its gasoline. Likewise, Pemex enjoys very little funding for exploration, which has led to shrinking crude-oil reserves. According to company estimates, unless Pemex can get its hands on as much as US$30 billion for production and exploration projects, crude oil exports could drop by as much as a third.

Ever-tightening government purse strings have led to an unreliable and ramshackle infrastructure, which, in turn, has made Pemex at times a hazard to its customers and employees. A series of accidents in early January led to oil leaks, the destruction of several homes, the illness of dozens of people, and the death of a 4-year-old girl. This is not to mention the four blazes that sprang up at various Pemex plants at the end of last year, one of which cost a Pemex worker his life.

To make matters worse, Pemex is reeling from an exceptionally damning corruption case, in which the current president of the oil workers' union, Carlos Romero Deschamps, faces serious charges of having channeled more than US$120 million from Pemex to former presidential candidate Francisco Labastida's campaign coffers. Federal investigators have frozen the bank accounts of nine current and former Pemex executives, and the saga continues. For a company that has suffered numerous allegations of skullduggery in the past, the latest charges could not have come at a more inopportune moment.

THE TRAINER'S REGIMEN

No one recognizes how rigorous Pemex's training regimen must be more than Raul Munoz, appointed general director of the company in December 2000. Selected expressly for his business experience, the former president of Dupont de Mexicon has often claimed this is the year that Pemex will begin to get back in shape. So far, with his outspoken goal of strengthening all of Pemex's activities--from expanding proven oil reserves and stepping up crude and gas production to improving refinery capacity and eliminating governmental restrictions--he seems to be heading in the right direction.

In a recent speech given to AMERICAN CHAMBER/MEXICO, Munoz said, "our paradigm is to grow, independent of current internal and external conditions."

For one thing, Munoz has more resources with which to work than his predecessors did. Although he may not have the total amount he would like, Pemex's 2002 budget comes to about US$23.9 billion. Thanks in part to the increase, Munoz plans to invest more than US$40 billion over the next four years to increase crude-oil production from 3.1 million barrels per day (b/p) to 4 million b/p, an increase of 30%. Within the same timeframe, natural gas production is to increase by 50%, from 4.5 billion cubic feet to nearly 6 billion cubic feet. Munoz has also called for an intensive exploration campaign to increase reserves by 30% to 67%, which would be the highest level in 10 years.

Pemex, which has announced its intention to boost refinery production this year by 14%, has also announced a number of refinery improvements, which include 24 new processing plants and nine plant upgrades. Upgrades at the Cadereyta, Ciudad Madero, Tula and Salamanca refineries are nearly complete, allowing a crude-processing increase of nearly 8% to 1.35 million barrels per day. While such projects are certain to improve fuel quality, more importantly they will allow Pemex to reduce gasoline imports drastically.

Furthermore, Pemex has unveiled a program designed to halve the nation's chemical trade deficit, which currently stands at about US$6 billion. The program will entail, among other things, improvements to extant petrochemical complexes, as well the construction of new polyethylene units at Morelos and Cangrejera.

SHOW ME THE MONEY

With a mind to free the federal budget from the vicissitudes of oil prices, Fox proposed an ambitious fiscal-reform plan last year. His would-be tax increases, however, were summarily dismissed by the opposition-led Congress, which instead passed a watered-down version that has done little to unhitch Mexico's wagon from the bright star of oil revenues. Without any considerable increase in federal tax income, Pemex now, more than ever, must perform like a top-ranked, modern company.

That said, it goes without saying that planned improvement projects are going to require enormous amounts of capital, and even though Pemex's budget this year is bigger than ever, it none the less falls far short of what will be needed. This shortfall has led many in both the public and private sector to call for varying degrees of private participation.

Both Munoz and Fox have been calling for a plan to allow limited private investment, particularly in the natural gas industry, which not only would increase natural gas production and decrease imports, but would also unfetter much-needed funds for crude-oil exploration. Private-investment advocates have met a united front of union workers and politicians from both the Institutional Revolutionary Party (PRI) and the Democratic Revolution Party (PRD), both of which seem to equate the government's attempts to modernize Pemex with the profanation of national heritage. Little progress on the issue has been made. The president is expected to introduce an energy-reform proposal in May, but it remains to be seen exactly what Fox will be able to achieve in the face of such fervid resistance.

A growing number of Mexicans, however, do seem more open to the notion of private participation in the oil sector as a means of bridging the enormous gulf between Pemex's current resources and future needs.

"Maybe nationalization was a good idea in 1938," former Energy Undersecretary Andres Antonius was quoted as saying recently, "but it's probably not a good idea forever."

And even more surprising were the comments of Michoacan Gov. Lazaro Cardenas, the very grandson of the man who nationalized the oil industry in the first place. A member of the PRD, Cardenas was recently quoted as saying that Pemex should be run more like a modern company and therefore open to more foreign and domestic private investment.

"The issue," he said, "is whether we want control over our present and our future, or if we want to surrender to the army of our sovereignty."

In light of his parentage, such utterances came as quite a shock to fellow party members, many of whom felt the governor's comments bordered on sacrilege.

DE FACTO PRIVATIZATION?

Despite all the pushups, sit ups and heavy-bag sessions Munoz would put Pemex through, there are some, including union members, nationalists, and globophobes, who take serious issue with the proposed training routine. Constitutional loopholes exploited by those who favor the oil sector's aperture, they claim, have already led to its de facto privatization. Indeed, the notion of permitting private-sector participation whatsoever, ipso facto, strikes many politicians as unconstitutional, and numerous lawmakers, perhaps foremost among them Manuel Bartlett Diaz, have promised to scuttle any attempts--by Fox, Munoz, or anyone else--to do so.

One proposal to which the opposition may take particular exception is the so-called "multiple service" contract, under which investors will be able to build and manage projects to develop natural gas fields. With the aim of being able to accept bids on up to a dozen contracts by year's end--each to be granted for three years, but capable of being extended for up to 20 years--Munoz plans to present the Mexican legislature with a rough draft of the documents by early May.

The proposed multiple service contracts have already piqued the curiosity of some of the most powerful multinational oil companies in the world: BP Amoco, Exxon-Mobil, and Shell Oil, to name but a few. Not only will the contracts add an anticipated US$7.5 billion to Pemex coffers, they will also allow the outdated company to ride the back of the private sector and leapfrog technologically into the 21st century.

The inveiglement of Congress will be an admittedly slow affair, if only because Munoz wants to allow skeptical legislators ample opportunity to pore over the contracts and, after deliberating and debating to their hearts' content, ultimately declare the contracts constitutional. He has often downplayed preemptive objections from the PRD and PRI by calmly pointing out the simple fact that no one can really determine the constitutionality of something yet to be seen. In fact, he seems supremely confident that the contracts, once they have been properly studied, will be deemed constitutional, no matter how verboten the notion of private participation in Pemex may seem at the moment.

THE FINAL BELL

To say Munoz will have to work tirelessly and with great patience before he can allay widespread and deep-rooted fears that Mexico's crown jewel might once again enrich outsiders (U.S. corporations especially) certainly begs the question of whether it will even be possible. It also remains to be seen if he will be able to pry Pemex--if only a smidgen--from the suffocating grip of the federal bureaucracy. And convincing Pemex workers will present yet another hurdle.

In a speech delivered to the Mexican Oil Workers Union (STPRM), Munoz said that for Pemex to improve as a company it will require "very close collaboration among all Pemex employees, as well as open communication and the sharing of goals"--an understatement if ever there were one.

So far, there are only two sure bets: first, that Pemex, while certainly an up-and-corning prospect, is still out of shape; and second, that it will take a considerable amount of time, possibly years, before it can get down to its ideal fighting weight and contend with the world's heavy-hitters. If Congress can prevent President Fox from traveling to the United States, as it did in April, you can rest assured it will have little difficulty delivering a knockout blow to energy reform. Whatever the upshot, legislators' decisions will determine whether Pemex plays the prizefighter or the pugilist at rest.

Jim Robinson is a freelance writer and a finance editor for a Mexico City daily.