The Remaking Of An Oil Giant, 1993

At Chi-Chi's restaurant in steamy Ciudad del Carmen, on the Gulf of Mexico's southern coast, the country music is blaring. Blond-haired drilling engineers are gulping down plates of guacamole and chiles rellenos and calling for more beer in sign language, since they don't speak Spanish. Recently transferred from Kazakhstan and China, these American oilmen are flocking to Mexico to take part in what's becoming the world's latest oil boom.

It's the first time so many gringos have been seen in the Mexican oil patch since the early 1970s, when they were last allowed to drill under contract. And it's the most welcome they have been since President L zaro C rdenas nationalized the Mexican oil industry.

NEW DRILL. What's driving this radical change? Petr leos Mexicanos, the state oil monopoly, has new marching orders from President Carlos Salinas de Gortari: Start acting like a modern oil corporation. That's a big order for any company, especially a state-owned behemoth such as Pemex, which was created more to provide jobs than to make money. Insiders say obstacles--from suffer-no-change nationalists to money-skimming bureaucrats--may make modernizing Latin America's biggest oil producer nearly impossible.

Pemex was created in 1938, when Mexico retook control of its oil industry from American and British wildcatters who struck pay dirt at the turn of the century. No one seemed to care if the company was well-run, as long as it provided a social safety net for a bloated work force and poured 90% of its profits into the national Treasury. Pemex earned $10.8 billion in 1992, roughly the same as it did in 1991. Revenues rose 10% last year to $21.3 billion.

That laissez-faire attitude changed with Salinas. A month after he took office in December, 1988, he had legendary oil union leader Joaqu n Hern ndez Gal cia, nicknamed "La Quina," arrested on weapons and murder charges that put him in jail for 35 years. La Quina's union had hog-tied Pemex for decades, forcing the hiring of tens of thousands more workers than necessary. The union had amassed a huge fortune from a 2% cut of all oil contracts. In Salinas' plan, crippling the union was an important step in turning Pemex around.

Salinas also called in international consultants and ordered Pemex officials to start monitoring the company's internal finances. Next, Pemex began massive layoffs. To date, the work force has been slashed by 94,000, or 44% of the total payroll. It will drop by an additional 12,000 later this year. Pemex also rushed to become more nimble financially. In 1992, the company tapped the European bond market for the first time since the foreign debt crisis, issuing $200 million in Eurobonds. In all, Pemex raised about $2.5 billion last year. Officials are hoping to issue U.S. Yankee bonds next year and are hustling to bring Pemex' books in line with U.S. accounting procedures--no small feat for a company that didn't even make its annual report available to the public until three years ago.

The next big change at Pemex was not in Salinas' plans. In April, 1992, a massive explosion rocked the city of Guadalajara, killing at least 200 people and leveling dozens of city blocks. Gasoline from a Pemex pipeline had leaked into sewer lines. Residents had complained of gasoline smells for days--to no avail. The tragedy emphasized that Pemex was an unwieldy bureaucracy, accountable to no one.

MODEST GAINS. The disaster gave Salinas the opportunity to shake up the oil giant even more. He announced a major restructuring, creating four subsidiaries, each responsible for its own budget and planning: exploration and production, refining, gas and basic petrochemicals, and secondary petrochemicals.

So far, officials say the Salinas reforms are paying off. Finance Chief Ernesto Marcos predicts a 15.3% drop in operating costs this year--only half of it due to layoffs. Productivity is up: Sales per employee are $3.60 per ton, up from $2.10 in 1988. Thanks to more efficient drilling, it now costs Pemex $3.16 per barrel to add new reserves; it costs companies elsewhere from $5 to $7. "For the first time, we're comparing costs per unit and costs per employee," Marcos says. "We never used to reveal these figures--partly because it didn't pay and partly because we were embarrassed."

But if Salinas' bid to remake Pemex is bold, it is also fraught with political risk. As the touchstone of nationalism, oil is enshrined in Mexico's constitution as the property of the state. If Salinas takes too many liberties with Pemex, the ruling Institutional Revolutionary Party could pay the price in presidential elections next year. At the same time, failing to transform Pemex into an efficient oil company with strong reserves would be a much larger loss in the long run for Mexico's energy independence, foreign exchange earnings, and sovereignty.

There's little question that foreign companies can help. In 1991, Houston-based Triton Engineering Services Co. completed Mexico's first privately drilled, offshore, turnkey well in 127 days--half the time Pemex takes--and at half the cost. Now, turnkey contractors are drilling nearly half of Mexico's exploratory wells.

Salinas insists that "ownership and control of the oil will remain in the hands of the Mexican people." But that still leaves plenty of room for foreigners to participate in developing Pemex' oil potential. For example, a consortium led by San Antonio's Valero Energy Corp. has won permission to build, own, and operate a $350 million gasoline-additives facility in Veracruz, the first time the private sector has been allowed to encroach on Pemex' exclusive control of refining. It's just one of a growing number of ventures undertaken for Pemex by foreign oil companies (table).

For Pemex, it's a matter of survival. Analysts warn that Mexico could become a net importer of oil and natural gas by 2000 if investment in capital-starved Pemex isn't forthcoming soon. In the 1980s, investment in exploration and refining dropped by nearly 80%. Now, to keep pace with Mexico's 5%-a-year increase in oil consumption, Pemex estimates it needs $23 billion over five years just to maintain reserves.

For American companies, the new, if limited, access to Mexico is figuring in long-range plans for North America. Just as the auto, agriculture, and retail industries are beginning to integrate along North American lines, so is the energy industry. Energy companies already are seeing windfalls as Mexico, the U.S., and Canada negotiate the free-trade agreement. Mexico is under pressure to upgrade its aging refineries and move toward cleaner-burning fuels, especially to power electricity plants and factories along the 2,000-mile border. Pemex has boosted its purchase of cheaper natural gas imports 40-fold over the past four years. "The future of our company is in Mexico," says Bill Greehey, chairman and chief executive officer of Valero, a refiner and natural-gas pipeline operator.

IN THE WINGS. Of course, what the oil majors really want is to explore for oil, take a percentage of the find, and help manage Mexico's vast fields. They lobbied heavily for such privileges during negotiations over the North American Free Trade Agreement last year, but Mexico held firm. Hopeful that Mexico will eventually soften, they are waiting in the wings--and snapping up whatever peripheral business comes along. "The door may not have opened in the area we wanted, but other doors have opened, and you would be crazy not to take advantage of them," says Floyd W. Boyd Jr., president and general manager of Amoco Mexico Inc. Amoco has been doing geological and geophysical evaluations for Pemex for a year on a project-by-project basis. And Texaco Inc. is providing Pemex with the basic engineering to desulfurize fuel oils for use in polluted areas such as Mexico City, a project financed by the Japanese Overseas Development Cooperation Corp.

Many Mexicans have trouble allaying their mistrust of foreign, especially American, ambitions. That concern is fueled by such studies as one issued recently by the Heritage Foundation, urging Mexico to privatize Pemex and all of its oil assets and use the estimated $148 billion in proceeds to retire forever the country's foreign debt.

Such unsolicited advice helps ensure that Mexico will never go as far as Argentina did last month when it sold off 45% of YPF, the state oil company, to local and foreign investors for $3 billion. And it may be years before Mexican nationalism eases up enough to permit foreign companies to help develop oil fields, as Venezuela has done. Still, the oilmen who gather at Chi-Chi's in Ciudad del Carmen figure that the current boom will last long beyond next year's presidential elections--and perhaps long enough for them to learn the Spanish words for "explore" and even "profit."

        -- Shell Oil's Deer Park (Tex.) refinery will process 150,000 barrels per day 
      of Mexico's heavy Maya crude. Pemex paid $1 billion for a 50% stake in 1992.
        -- Valero Energy in San Antonio and partners are building a $350 million 
      gasoline-additive plant in Veracruz, the first such private investment.
        -- Amoco has contracts to conduct geophysical evaluations, and Texaco is 
      engineering a fuel desulfurization plant for Pemex.
        -- San Antonio-based Diamond Shamrock opened its first service-station Corner 
      Store franchise in Monterrey in June. It's one of 200 stores planned with 
      Mexican operators, skirting a ban on foreign ownership of service stations.
        -- Ten Mexican and foreign contractors have deals to drill 36 offshore wells 
      in Mexico's Bay of Campeche.
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