Running dry: Pemex, Mexico's national oil company, faces dwindling reserves, mounting debt and resistance to reforms.

Raul Munoz Leos, chief executive of Petroleos Mexicanos, stood beside a 20-foot bust of former Mexican President Lazaro Cardenas and told workers and government officials what they didn't want to hear: Cardenas' vision that oil would enable Mexico to control its economic future without foreign investment may be obsolete.

"The transformations that are required are different now," Munoz Leos said to the throng celebrating Cardenas's 1938 founding of the government-owned oil monopoly. "They are based on a distinct reality and different values."

Four years after President Vicente Fox named him CEO to spur Mexico City-based Pemex to become as efficient as its publicly traded rivals, Munoz Leos has made little headway.

Mexico, the world's fifth-largest petroleum producer, may run dry in a decade unless Pemex updates its exploration and drilling equipment and refineries. Pemex's oil reserves have dropped for 22 straight years because the company is pumping faster than it can explore.

Mexico's constitution bans foreign investment in the nation's oil industry. Exxon Mobil Corp. and ChevronTexaco Corp., the second-largest U.S. oil company, have technology for deep-water drilling to open Mexico's untapped oil deposits; Pemex doesn't. "Mexico has remained still. Pemex has remained still," said Munoz Leos, seated in a library on the 44th floor of Pemex headquarters. "Not only have we not kept up with technological advances; we have stayed significantly behind."

Mexico's failure to bring Pemex up to global standards is making investors nervous. With $37.1 billion in debt, Pemex is the world's most indebted oil company, according to Standard & Poor's.

Roberto Sanchez-Dahl, who helps manage $600 million in emerging-market debt at Federated Investment Management Corp. in New York, said he's cut his investment in Pemex bonds by a third during the past six months to less than 1 percent of his holdings.

'Bailing out'

"Pemex is bailing out the government," he said. "They need a lot of resources to get things improved, ,'red the government is putting is putting a lot of pressure on Pemex."

In 2003, Mexico took 60 percent of Pemex's 626.1 billion pesos ($56.3 billion) in revenue to fund about a third of the federal budget. An additional 8 percent helps cover about 200 billion pesos in pension liabilities. "That gives you very little room to invest in exploration," said Sanchez-Dahl.

Pemex had so little capital to invest when Munoz Leos joined the company that it was facing the need to important oil as early as 2006. That would force the country to pay &s much as $25 a barrel for what it now produces for about $4.

Munoz Leos is battling six decades of history. Cardenas, who ruled Mexico from 1934 to 1940 and died in 1970, is revered in elementary school history books as the president who brought Mexico into the modern world. He built Pemex into Mexico's biggest company and a national treasure by seizing assets from 17 foreign oil companies that had refused worker demands for higher wages.

Today, Mexico is the only oil-exporting country that prohibits foreign companies from investing in its oil industry.

"Pemex is a symbol for the nation," said Jonathan Brown, a history professor at the University of Texas at Austin and author of "'Oil and Revolution in Mexico." "Nationalizing the oil industry gave Mexico economic independence."

Pemex's 142,725 workers enjoy perks rare in public corporations. They hold jobs for life, and the lucky ones pass them on to their children. Fox's plan in hiring Munoz Leos from DuPont Co. in 2000 was to make Pemex less a welfare state for workers and more a profitable business. Fox charged him with fulfilling a campaign pledge: push the monopoly to become as efficient as publicly traded rivals such as Exxon Mobil that are leaving it further behind every year.

"We have to operate more like a public company," Munoz Leos said. If Pemex were a publicly traded company, his mission would be simpler: reduce costs, fire workers, cut perks, seek outside investment and team up with a partner.

But Munoz Leos hasn't made much progress with Mexican lawmakers, former union leaders of Pemex retirees. Manuel Bartlett, a senator in the Institutional Revolutionary Party, or PRI, and Rosa Maria Aviles, a lower house deputy, have spent most of Munoz Leos's tenure campaigning to solidify government control of Pemex.

In November, they organized a 50,000-strong march in Mexico City against deregulation. For two years, they've prevented a Fox proposal that would allow foreign investment in power plants from reaching a vote.

"We are not willing to let Pemex open to private investment, whether it be domestic of foreign," said Aviles, a member of the Party of the Democratic Revolution, the country's third largest. "It's about sovereignty."

Former Pemex workers claim Munoz Leos' plan is a return to foreign domination. 'There is no Pemex anymore," said Joaquin Hernandez Galicia, 81, known as "La Quina."

Hernandez led Pemex's union for 30 years until 1989, when federal troops arrested him on charges of arras trafficking and murder. Hernandez, who was convicted and served nine years in prison, said former President Carlos Salinas de Gortari trumped up the charges to oust him from the union.

"Pemex needs to go back to what it used to be: something that benefits the people," he said.

Inflexibility

Mexico's biggest oil deposits lie under the Gulf of Mexico, and Pemex lacks the expertise and funding to drill deep-water wells.

When Pemex does get moving on exploration, as many as 14 government agencies must audit the project. Instead of hiring a single services company to erect an oil rig, as most companies do, Pemex parcels the work among as many as 40 contractors, each requiring a separate agreement.

"The problem in Pemex is the lack of financial, administrative and operational flexibility," said Juan Jose Suarez Coppel, Pemex's chief financial officer. "The same types of rules that apply for buying elementary school desks are the rules that apply to us for building offshore platforms."

Munoz Leos has broken through the logjam in some areas.

While the constitution prevents him from offering investments to foreign companies, he can pay foreigners a flat fee for drilling wells. Last year, he auctioned $10 billion of these contracts to Madrid-based Repsol YPF SA, Techint Group of Argentina and Petroleo Brasileiro SA of Brazil, among others.

The contracts are stopgap measures. Munoz Leos says they won't solve Pemex's need to raise capital. The company still must rely on debt to fund new drilling and refinery updates.

Munoz Leos has piled on debt to fund a drilling spree, part of his strategy to find new oil and replace the company's dwindling reserves. In the past three years, Pemex's total debt has climbed to $37.1 billion from $22.4 billion.

Last year, Mexico's congress gave Pemex the capability to boost its investment budget by cutting costs of increasing revenue. Previously, Pemex had no incentive to improve financial results because the government took any revenue that exceeded estimates. The new law may increase Pemex's investment by as much as $2.4 billion this year.

Munoz Leos said the results are proof his strategy can work. They also underscore Pemex's shortcomings. While the surge in drilling boosted production, it hasn't returned Pemex to profitability because of the government claim on revenues.

Plant manager Benjamin Guerrero said even the newest part, built eight years ago, is behind the times. Antiquated equipment requires repairs, slowing production and raising costs, he says. He calculates the refinery makes about $2.30 in profit on every barrel of refined fuel--less than half the industry standard of $4.80.

If Pemex doesn't evolve and find new sources of capital, Mexico may lose its energy independence and be forced to import foreign oil, he says. And Pemex may scare away more investors like Sanchez-Dahl, who worry that it will never become a modern oil company.