By Jeffrey Ball | The Drama of Mexico's (Black) Gold | Fortune | September 2014
By Jeffrey Ball
Mother Nature long coddled Mexico’s national oil company, blessing it with fountains of homegrown black gold. But in recent years she has gotten ornery, frustrating Petróleos Mexicanos with juicy but recalcitrant fields of oil. One day this spring she played a nasty joke. She unleashed a 6.4-magnitude earthquake on Mexico that caused the 50-story headquarters of the company known as Pemex to sway woozily, like an aging prizefighter struggling not to fall. Inside the iconic but timeworn building, the second-tallest in Mexico City, doors rocked on their hinges, metal blinds banged against windows, and frightened workers braced themselves inside door frames, hoping to ride out a threat they all knew was beyond their control.
Scant hours later, Pemex’s 39-year-old chief executive, Emilio Lozoya, sits at the head of the massive conference table in his cloud-level office. The Pemex tower has stopped shaking, but the Pemex corporation faces a foundational challenge. In a move that has both shocked and thrilled the global oil industry, Mexico’s government is performing an about-face.
For the first time in three-quarters of a century, it intends to invite international oil firms into the country to sink their drills into its petroleum-rich earth. That decision has infuriated many Mexicans, and it fundamentally threatens Pemex, which has always been a monopoly. As the oil giants prepare to pounce, Lozoya, a Harvard-educated investment executive and an oil industry newcomer, has the task of whipping the bloated behemoth into competitive shape.
“It is, by all means, the most important transformation Pemex has suffered in our entire 76 years,” says the fresh-faced CEO, who speaks excellent English and chooses his words—including his verbs—deliberately. As he talks, he jots talking points onto a small white notepad that has been placed in front of his high-backed chair. By his right hand sits a red phone, a direct line to the office of Mexican President Enrique Peña Nieto, the oil reform’s architect and Lozoya’s friend and boss. Everything about Mexico’s energy opening is being carefully choreographed. But in Mexico’s rough-and-tumble energy business, even the most meticulous plans have a way of getting blown up.
Ever since 1938, when Mexico expropriated its gushing oilfields from foreign companies in a burst of revolutionary nationalism, that bounty has been off-limits to outside producers. The oil has been the exclusive purview of Pemex. Favored by geology as well as by law, the company has had the luxury of getting most of its oil from a couple of huge, easy-to-tap underground formations—known in the industry as “elephants.” Indeed, Pemex has become legendary in the oil world for its factory-like approach to pulling oil from a particularly Mexican type of elephant: fields in shallow water, just off the country’s Gulf coast. But along the way, Pemex has become notoriously inefficient. The company ranked No. 36 among the Fortune Global 500 last year, with revenue of $126 billion. But Pemex also posted a $13 billion net loss. The company is laden with bureaucracy, teeming with superfluous workers, and, by its own executives’ admission, thwarted by corruption. The result is both stunning and not very surprising: In a country that ranks ninth or 10th in global oil production, depending on who’s counting, and that some geologists say contains the largest unexplored petroleum area beyond the Arctic Circle, Pemex has presided over a steep decline in Mexico’s oil output.
That decline—Mexico’s oil production has tanked 25% over the past decade, to 2 million barrels per day—threatens the country’s ability to pay its bills. Pemex’s oil revenue is the single biggest contributor to the Mexican treasury, supplying roughly one third of the national budget. It’s doubly embarrassing for this proud country because it comes as an oil boom is exploding next door in the U.S. That’s why Mexico now is rolling out the red carpet for the international oil firms it once threw out.
If it works, foreign players ranging from super-majors to wildcatters will pour into Mexico and pull up the crude and natural gas that Pemex has failed to tap from Mexico’s increasingly technically challenging fields. Pemex will be guaranteed favored-son status, granted an initial slate of fields in a much-anticipated government decision known as Round Zero that was to be unveiled as this issue went to press. But unless Pemex can prove itself competitive, it will be largely relegated to the relatively simple fields it has learned to exploit well, while foreign companies will dominate the vaster troves of Mexico’s harder-to-get hydrocarbons, from the deep waters of the Gulf of Mexico to shale plays near the U.S. border. The government hopes this race will boost the amount of Mexican oil that flows onto the market—raising the take for the state, which will get a cut of every barrel. Equally important, it hopes the surge in Mexican oil and gas production will have a raft of spillover benefits for the country, slashing electricity prices, attracting industry, and bankrolling services for the people.
But whether Mexico rocks the energy world will depend on whether it can execute its pledge to reform Pemex, a sprawling bureaucracy that for generations has had its hands in every aspect of the country’s oil sector. A few months in, the attempt is hitting major roadblocks. The difficulty is partly that Pemex is a poster child for corporate dysfunction. It’s also that Pemex, however dysfunctional, is seen by much of the Mexican public as the guardian of the nation’s patrimony.
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