How easy will it be to turn around Pemex?

by on June 10, 2014 at 3:18 am in Economics, Education, Law | Permalink

Not that easy.  Here is one excerpt from a generally interesting article:

The failure of Pemex and its government overseers to invest in the latest drilling and exploration technology is partly to blame for the decline. A critical issue for the future of Pemex is manpower. The company is overstaffed with unskilled workers whose jobs are guaranteed for life and understaffed with engineers and skilled laborers, says Marcelo Mereles, a former Pemex director and now a partner at EnergeA, a consultancy.

‘Cultural handicap’

“Pemex continues to have a very big cultural handicap,” Mereles says. “The government has converted Pemex into a very bureaucratic company that operates like a government office and not like an international oil company.”

Pemex’s ability to compete with foreign companies will also be hampered by deficiencies in Mexico’s educational system.

“We’ve all heard the excellent news about Mexico’s great potential in the energy sector, but the question is, who’s going to do it?” said Rangel, of the hydrocarbons commission. “We have few universities committed to oil production, petrochemicals, chemical engineering or physics. And we produce few engineers.”

Until now, petroleum engineers’ main potential employer in Mexico was Pemex, and they could earn more money abroad.

Of course it is hard enough to turn around bad, already-private companies.  The new reforms, allowing Pemex to undertake shared ventures with private partners (Chevron being one example on tap), are all to the good.  But Pemex itself is not about to suddenly become an economic tiger.  It is scary to hear this, although fortunately it is likely to prove wrong:

As President Peña Nieto put it to Pemex employees in March, “The energy reform is the most important economic change in Mexico in the last 50 years.”

Here is further information on the new energy reforms.

Steve Sailer June 10, 2014 at 3:21 am

The guy who got to take the Mexican government phone company private in the early 1990s, Carlos Slim, became the richest man in the world. I wonder how much you could make off the Mexican oil company?

carlospln June 10, 2014 at 6:04 am

Not as much as you’d think.

You only get one Cantarell in your life

and its on the way out http://en.wikipedia.org/wiki/Cantarell_Field

Steve Sailer June 10, 2014 at 3:31 am

How much business do American oil companies do in Mexico via Mexican frontmen these days?

For example, in the early 1960s George H.W. Bush’s Zapata oil firm was in business drilling in Mexican waters with Jorge Diaz Serrano as their local frontman. Diaz Serrano later became head of Pemex and then was sent to jail by new President de la Madrid to encourage the others. Zapata Oil was sort of a CIA front and Bush’s oil platforms probably helped out logistically with staging the Bay of Pigs invasion. The Wikipedia page on Zapata/Harbinger is pretty informative:

http://en.wikipedia.org/wiki/Harbinger_Group

Axa June 10, 2014 at 7:18 am

This is why I love MR, the links to non-conventional media. Thanks Tyler.

Axa June 10, 2014 at 7:21 am

My mistake, I tried to post as a new comment. Anyway, Mexican frontmen are not needed anymore. Pemex keeps 25% of the investment ownership and the rest can be anyone else.

Art Deco June 10, 2014 at 9:08 am

Zapata Oil was sort of a CIA front and Bush’s oil platforms probably helped out logistically with staging the Bay of Pigs invasion. The Wikipedia page on Zapata/Harbinger is pretty informative

Probably help you in the future to eschew literature of the Birchite-LaRouchite-Christic Institute sort. Thinking you’ve got the inside scoop is attractive to some people. Not to prudent people.

Steve Sailer June 10, 2014 at 4:37 pm

Why in the world would it be implausible that future CIA director George H.W. Bush, son of a U.S. Senator and Skull and Bones brother of a lot of CIA men, had lent a hand with the logistics for the Bay of Pigs?

Art Deco June 10, 2014 at 8:16 pm

I dunno, Steve.

1. Why is it implausible to suggest that a position a man held 15 years in the future for which he was selected due to a concatenation of unplanned circumstances has no bearing on whether or not a commercial company he founded is a CIA front?

2. Why would one suggest that any identifiable commercial company ‘had a hand’ in some intelligence operation? The probability that any given enterprise is engaged in such work is vanishingly small. Or is it your contention that he dragged Barbara out to west Texas to found a CIA front?

3. What would his father’s retirement job have to do with it? Simply stating an association is not an argument much less a demonstration.

4. The sheer quantum of defamatory muck about Prescott Bush online should persuade you to tread very carefully. You’re way into the territory where you find Kennedy Assassination literature.

Steve Sailer June 10, 2014 at 10:04 pm

The CIA had a reasonable and fairly effective policy of avoiding recruiting traitors by recruiting from the inner circle of the American Establishment, the people least likely to sell out their country because they kind of already owned it. Like when Joe Pesci asks the James Jesus Angleton character in “The Good Shepherd,” “What do you guys own?” Matt Damon replies, “The United States of America.”

George H.W. Bush was a Senator’s son and grandson of the guy who gave the Walker Cup amateur golf tournament trophy. Yale was famously the Agency’s favorite recruiting ground (e.g., WF Buckley), and Skull and Bones, which Bush belonged to, was the inner circle of the best connected Yalies.

The elder Bush had Yale friends who went full time into the CIA. Much evidence suggests that Bush sometimes helped his CIA friends out with their projects when he could do them a favor. They probably did him a favor or too, in return. What are friends for? Don’t think of the CIA as puppet master of vast global conspiracies but as a player in an international version of the municipal favor bank familiar from The Wire and The Bonfire of the Vanities.

Thus when he became the first “outsider” to become CIA Director he was accepted by the CIA ranks because he wasn’t completely an outsider.

Art Deco June 11, 2014 at 10:04 am

he was accepted by the CIA ranks because he wasn’t completely an outsider.

He had the job for a year, and was a lame-duck office holder for 20% of that year. The previous ‘outsider’ was James Schlesinger, who engineered a mass purge of long-term employees. His successor was Stansfield Turner, who did something similar. I imagine the residual employees found him more congenial.

stuart June 10, 2014 at 4:21 am

I imagine Barry Weingast is sceptical that this will turn out well. He’s been on Econtalk twice saying how the reason PEMEX is overstaffed with unskilled workers who have jobs for life is that it’s a private army, who’s job it is to prevent something like this.

Steve Sailer June 10, 2014 at 5:18 am

Old Man Doheny, the model for the I-drink-your-milkshake oilman in “There Will Be Blood,” had a 6,000 man private army when he was in Mexican oil during the Revolution. It kind of goes with the turf.

dearieme June 10, 2014 at 6:34 am

A note on usage: in British English you can’t say “skilled labourers”; if a chap is skilled he’s a tradesman, not a labourer. Labourers are by definition unskilled.

Z June 10, 2014 at 8:28 am

In America, noticing such things is strictly forbidden so we use a lot of modifiers to cloak the obvious.

Art Deco June 10, 2014 at 9:18 am

So what? The moderator lives in Fairfax County, Va., not in Surrey.

Just another MR Commodore June 10, 2014 at 9:33 am

Quite.

JWatts June 10, 2014 at 11:48 am

“Labourers are by definition unskilled.” vs “skilled laborers”

The “u” is apparently important. ;)

Urso June 11, 2014 at 2:08 pm

It stands for “unskilled” apparently. Who knew?

andrew' June 10, 2014 at 7:56 am

Gasoline fired power plants!

Art Deco June 10, 2014 at 9:17 am

They might consider disaggregating the enterprise. Perhaps you auction off the retail stations, the distributorships, and the tanker shipping and just have state companies which drill and refine oil and auction it off to distributors and shippers in crude or refined form. Then reconstitute the residual state company into a multiplicity of enterprises under separate boards and each with their own fields. They’d be free to operate as enterprises setting their own prices and setting their own compensation (with a legal limit at the apex) and establishing their own personnel systems. You could dissolve the extant unions and just have company unions for each enterprise. The unretained income income would then be funneled into sovereign wealth funds of which only the interest and dividends would be consumed by the state.

JWatts June 10, 2014 at 11:49 am

Or you just could privatize the whole industry and let the state charge a fee for extracting minerals from state land.

Steve Sailer June 10, 2014 at 4:38 pm

Worked well for Carlos Slim, not so well for Mexican telephone users.

JWatts June 10, 2014 at 7:41 pm

Did phones get worse and the costs go up?

Steve Sailer June 10, 2014 at 10:08 pm

Telephone costs are radically higher in Mexico than in the U.S. or in most countries where the guy who owns the phone company isn’t worth $60 billion.

Slim makes huge profits especially on phone calls between America and Mexico, so quite a few of his billions are due to massive illegal immigration. He now owns the second largest chunk of the New York Times, which regularly denounces anybody wanting to limit illegal immigration as a vicious racist. But I’m sure Slim never ever considered the leverage bailing out the NYT from ruin in 2008 gave him. He seems like a happy-go-lucky simple fellow who never thinks two steps ahead in the game.

Art Deco June 11, 2014 at 10:00 am

The problem with your contention is that its contingent on the specific method of how the state enterprise was turned over to private ownership.

Roy June 10, 2014 at 10:44 am

Pemex is nerfed because it was used too long as a piggy bank for the state and its master the PRI. It was also too politicized internally, so its managers only cared about patronage. The modern oil industry requires engineers and geologists trained at the highest standards, but Mexico’s educational system did not produce these because its petroleum engineering and geology students were trained by a system with one customer Pemex. Compounding this as the Mexican state disintegrated from the late 60s on it became impossible to attract foreign academics to these departments. This wouldn’t be a disaster if foreign trained workers were available, but Pemex’s national importance and Mexican politucal sensitivities being what they are required that only Mexican nationals could be hired for anything other than glorified contract work.

This compounded with the same same sensitivity that until recently prevented Mexicans from holding dual citizenship, in addition to the political issues with Pemex management meant that Mexican nationals who were trained outside the country only returned if they couldn’t get well tracked at a multinational. Thus only the worst of foreign trained workers returned.

Rinse and repeat for 30-40 years and you get Pemex.

Oh there are other issues, but what killed Pemex was insularity and the PRI-state. It may have worked if not for some of these but combine them and you are doomed. It doesn’t help when you are next to the USA which will plunder any decent worker you have and allows complete assimilation of both them and their families.

JWatts June 10, 2014 at 11:51 am

“the USA which will plunder any decent worker you have”

Plunder: Remember loot first, then burn.

Roy June 10, 2014 at 12:43 pm

I never saw the point of burning, especially if you are planning on coming back.

dirk June 10, 2014 at 10:48 am

Saying Pemex hasn’t invested in the latest drilling and exploration technologies doesn’t make any sense. No oil company, not Exxon, Shell, BP, Chevron, Saudi Aramco, etc. , has these technologies. The technology in the oil industry is with the oil service companies: Halliburton, Schlumberger, Baker Hughes and a thousand other niche players, all of who have been working in Mexico for decades. What Pemex has lacked is capital to invest in projects in their half of The Gulf of Mexico. All they need are some smart JV partners and the willingness to let their partners call most of the shots.

Steven Kopits June 10, 2014 at 11:51 am

Let me add some thoughts based on my experience in Hungary. I did a good bit of privatization and consulting work for various government ministries and state-owned enterprises there. This included Hungary’s oil company, MOL, which I knew both before and after privatization.

Here are some central principles regarding SOEs which I derived from the experience:

1. Institutions assume the objective functions of their owners. If the Mexican government has a controlling interest in PEMEX, then PEMEX will reflect the policy priorities of the government over time.

2. Governments seek to maximize political acceptability subject to budget constraints.

What is politically acceptable in Mexico?
a. High employment
b. Job security
c. National autonomy (via state ownership)
d. Various industrial / developmental policies
e. Social programs

What is the budget constraint in Mexico?
a. Cash flow from PEMEX for the government budget
b. Cash flow from PEMEX to maintain PEMEX production levels
c. Cash flow from the government to fund PEMEX capex

Political acceptability and budget constraints will continue to conflict in the government’s handling of PEMEX. To allow PEMEX to operate efficiently, the route with the best odds is privatization. Personally, I would float 25% of PEMEX on the NYSE, and be prepared to float another 25.1% a year or two thereafter. The government could retain a minority or golden share. Both seem to work OK.

The key is not regulatory reform, but rather to allow PEMEX to operate under a different objective function.

So, to reiterate, the principles above are central, and they derive not from theory (OK, I could give you theory, too), but from observed behavior.

1. Institutions assume the objective functions of their owners. This is why SOEs are almost always problematic in terms of efficiency and profitability.

2. Government officials and politicians seek to maximize political acceptability (admittedly a woolly concept), subject to budget constraints. They do not maximize growth or fiscal sustainability, unless that is the politically acceptable policy.

And let me add a third:

3. If SOE management is given conflicting objective functions, then management will escape accountability to owners. For example, imagine that SOE management is told to maximize revenues and profits, as well as maximizing employment and keeping selling prices artificially low. Under such circumstances, it is impossible to tell if the company is doing well. It will probably be making a loss. Therefore, it is also impossible to tell if management is managing well, and the company is virtually impossible to benchmark. This in turn facilitates corruption, both within the SOE and between the government and the SOE. (MOL was used as a slush fund prior to privatization.)

At the same time, SOE capital expenditures will become part of national budget negotiations. For example, the capex of PEMEX (broadly, EBITDA minus transfers to the government) will be a function of, say, Mexican national healthcare spending. The Finance Minister will allocate the funding based on political acceptability. The amount of cash taken from PEMEX (more starkly, PDVSA lately), will be a function of internal negotiations within the finance ministry and between ministry officials and national politicians.

PEMEX business needs will not–repeat, not–be the primary driver of PEMEX’s revenues, cost structure, capex or cash flow. This is one source of unending frustration to SOE management, who is simultaneously unaccountable and impotent.

Roy June 10, 2014 at 12:44 pm

Exactly

Art Deco June 10, 2014 at 3:38 pm

1. Why not break it up before you auction it off? No need to have a single and vertically integrated enterprise.

2. How do you arrange the auctions so they do not decay into insider scams? What happened in Russia, anyway?

3. What about the severance tax revenue? Need a constitutional amendment in Mexico which says it goes into a fund and the principal is untouchable.

Steven Kopits June 10, 2014 at 3:54 pm

Deco -

1. You can think of an oil company as a machine that converts a nation’s oil resources into cash for the government. There’s a conversion cost (the oil company’s revenues), and from the government’s perspective, you’d like to minimize that. The more efficient and competitive the conversion process, the more available for the government. From my perspective, whether PEMEX or, say, Shell does that conversion is a matter of indifference. You could break up PEMEX, but the more important issue is to provide domestic competition.

2. If you are speaking of auctioning off PEMEX, it should be listed on a stock exchange. The investment bankers handle the share sales. If you’re auctioning blocks for drilling, that can be made quite transparent if the government is so inclined. That doesn’t preclude some graft and corruption, but the system can tolerate a bit of that.

3. There are a number of ways to structure oil production agreements including production sharing agreements, concessions, service contracts, etc. I don’t know that you need a constitutional amendment regarding an oil fund. I think simple legislation would be fine. The last time the Mexicans thought about oil and the constitution, they passed the amendment that got them into this mess.

Art Deco June 10, 2014 at 4:14 pm

You need an amendment or they spend it.

Steven Kopits June 10, 2014 at 4:32 pm

There’s nothing wrong with spending it. Blowing it, on the other hand, is not so good.

To solve your problem, Deco, you need a different approach. You want politicians to make good use of social resources. You achieve that with performance-based bonuses based on GDP growth less growth in government debt. It’s (almost) the same as aligning incentives at the PEMEX level, but instead you do it a level higher, at the political level.

Art Deco June 10, 2014 at 7:41 pm

You cannot implement a set of performance bonuses for politicians.

we live in interesting times. June 10, 2014 at 12:40 pm

Didn’t or doesn’t Mexico’s constitution cause some of these issues and until that portion of their constitution dealing with nationalized companies like Pemex was changed, Mexico’s hands were tied?

charlie June 10, 2014 at 3:35 pm

I could write the same thing in 1992 about the Soviet oil industry. See how that turned out?

Steve Sailer June 10, 2014 at 4:42 pm

Mexican oil in 2014 is to Texas Republicans what the Russian aluminum industry was to Wall Street Democrats in 1991

Art Deco June 10, 2014 at 8:18 pm

There actually is a corpus of private industrialists in Mexico. No such set existed in Soviet Russia.

Yancey Ward June 11, 2014 at 12:07 am

What Mexico should do is sell carbon credits to stupid Americans and leave the oil in the ground.

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