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Mexico's Pemex Appoints New CEO

Will new CEO Juan Jos? Su?rez Coppel turn the company's dwindling fortunes??nd reserves??round?

It's a classic formula: When a company is underperforming, the CEO gets the boot and a younger, fresher face is brought in to shake things up. That's what happened Sept. 7 at Pemex, Mexico's state-owned oil company, when top executive Jes??s Reyes Heroles was shown the door and was replaced with Juan Jos?? Su??rez Coppel.

However, unless Su??rez Coppel obtained an iron-clad promise from President Felipe Calder??n that he can work without interference, there's little reason to believe he'll enjoy any more success than his predecessor, experts say. In his annual State of the Union address last week, Calder??n pledged to push through a fresh set of reforms aimed at strengthening Pemex, the government's largest single source of tax revenue. "We must take profound [reforms] and move quickly," he said.

Reyes Heroles, 57, a politically savvy economist who served as ambassador to the U.S. in the late 1990s, officially "resigned" to make way for Su??rez Coppel, 50, a University of Chicago-trained economist. He is expected to take dramatic steps in an effort to stem losses at Petroleos Mexicanos, where production dropped 7.3% in the first half of the year and revenues plummeted 30%. On Sept. 7, Calderon praised Reyes Heroles for helping to win passage of the "historic" reforms Congress approved in 2008, measures which the President said would put Pemex "on the path to once again becoming ?? one of the most important oil companies in the world." He also said that Su??rez Coppel's task would be to "transform Pemex profoundly, to its roots."

Having served as Pemex's chief financial officer from 2001 to 2006, Su??rez Coppel knows the company's numbers well. But he also knows that his ability to turn Pemex's fortunes around will be limited by the fact that the company doesn't operate autonomously; it is subject to budgetary and spending decisions dictated by the finance and energy ministries and by Congress. Even Pemex's divisional chiefs of exploration and refining are named not by the CEO, but by President Calder??n, notes George Baker, an energy analyst in Houston. "The head of Pemex really has very little authority, so it's not clear how much this change in CEOs will mean," Baker says.

To David Shields, a Mexico City-based expert on Pemex, Su??rez Coppel's appointment means that Mexico's powerful Finance Secretariat will exercise even more control over the state-run oil company than it already does. "Pemex is only allowed to keep a profit when the finance secretariat doesn't need the money," says Shields. "And the Treasury needs more revenues now."

Pemex, which had $98 billion in revenues in 2008, posted an $8.3 billion loss after paying $57 billion in taxes and royalties to the national treasury. It hasn't posted a profit since 2006. The government relies on Pemex for nearly 40% of its total tax take.

BP's Gulf Discovery Highlights Deficiencies

Lower world oil prices aren't the only thing hitting Pemex and the Mexican treasury: A precipitous drop in oil output is just as worrisome. A year ago, Mexico was producing some 2.78 million barrels of oil a day; in July, production totaled just 2.56 million barrels a day. And exports, which totaled 1.31 million barrels in July, were down some 5% year over year. Government officials said recently that the drop in oil production last year, at a time when world oil prices were at a record high, cost the country some $20 billion in lost oil sales. That revenue is sorely missed, as Mexico's economy is set to shrink nearly 8% this year, hurting corporate profits and cutting the government's tax collections. Mexico faces a 300 billion-peso budget deficit??round $22 billion??nd already has carried out two big rounds of spending cuts.

Mexico has been one of the world's leading oil exporters since the mid-1970s, when a gigantic offshore oil reservoir called Cantarell was discovered. For more than two decades, Pemex relied on that gusher and failed to invest enough in exploration for future needs. Cantarell's production has plummeted over the past five years, and Mexican oil output has fallen some 25% since peaking in 2004. Pemex has been unable to ramp up production at new, less promising fields fast enough to make up the difference.

The company also lacks the technical expertise to explore for deepwater reserves in Mexico's territorial waters in the Gulf of Mexico. Last week, after British oil company BP (BP) announced that it had made a large deepwater discovery in U.S. Gulf waters, Calder??n told a radio interviewer that Mexico had to move quickly to develop technical skills or obtain them elsewhere. "I hope this sign from the Gulf of Mexico tells us something," the President said in that interview. "We don't have, whether you want to admit it, the technology or the organizational and operational capacity to do it by ourselves."

Energy Reforms Fail to Improve Output

Last October, Congress approved energy reforms designed to give Pemex more autonomy, allowing it to draw up new contracts that would make it easier to recruit international oil contractors as limited partners in new ventures. Because Mexico's constitution bars joint ventures where partners share oil production or profits, coming up with schemes that would be sufficiently attractive to private oil companies has been difficult. Nearly a year has passed, and the new contracts haven't been unveiled.

Earlier reforms provided Pemex some relief in the amount of taxes it must pay to the treasury, but that has had negligible effect on the company's operations. Although Reyes Heroles ramped up Pemex's investment??t is roughly $19.5 billion for 2009??ome experts question whether the company is making the best possible use of its financial resources. Since private participation in oil activities has been restricted for many years, Pemex is believed to pay above-market costs for standard well-drilling and seismic work provided by such contractors as Schlumberger (SLB) and Halliburton (HAL).

Mexico's Energy Secretary, Georgina Kessel, sent a report to the Senate last week saying that Pemex had fallen short on two-thirds of the operating efficiency goals it set for itself, adding that "Pemex must take measures to achieve efficiencies similar to international standards if it is to reverse its negative financial results."

Su??rez Coppel, who served as chief of advisors to the Finance Secretary under former Mexican President Vicente Fox, was brought in to improve those efficiencies. But he doesn't have a long track record of success: His most recent job in the private sector, as chief financial officer of Mexican beer brewer Grupo Modelo, ended in July after the company suffered big losses on foreign currency derivatives.

He faces even bigger challenges at Pemex, whose proven oil reserves are expected to last only another nine years. Some experts believe that Mexico, which is one of the top three oil suppliers to the U.S., could become a net oil importer within the decade.

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