Pemex and the Factors Affecting Privatization in Mexico 11

PEMEX AND THE FACTORS AFFECTING PRIVATIZATION IN MEXICO 1

Pemex and the Factors Affecting Privatization in Mexico

Ricky Menendez, Madeline Cohen, Theresa Kettler, and Benjamin Erickson

Drake University

September 21, 2015


Every country has had a fight for power or an overthrow of government at some point in

its history. For Mexico this was about a decade after it had declared its independence from Spain.

In 1910, the Mexican people were tired of the unbalanced power between wealthy and poor.

Dictator Porfirio Díaz, although had Mexico’s best interests at heart in trying to better the

country with railroads and building, had caused a great wealth gap among the people. He also

lost a great deal of the Mexican land to America, which made it hard to win over the people, thus

began the Mexican Revolution. The revolution consisted of many different people attempting to

take power and better the government. While some tried to do good things, the majority of the

candidates failed. Most agree the revolution ended in 1917 when the official Constitution of

Mexico was crafted. The revolution was supposed to make a better life for the lower class, but in

the end it did little to fix it.

Mexico is on a slow road to recovery. Throughout the years the government has been

doing its best to become the democratic republic it had always sought to be. But the Mexican

people themselves have changed very little. Despite the country’s poor conditions, the Mexican

culture still thrives today. About 92% of Mexican people speak Spanish, and 82% are Catholic. It

is obvious the influence that the Spaniards brought was very strong and will never leave the

Mexican people. The people also hold very high values; family being number one. Mexicans

have large families, and it always comes first. Nowadays, most people live in the city, but there

are still a number of people that live in rural areas, still hosting very large parties for the whole

neighborhood and their families. In addition to ordinary family parties, there are many major

holidays the people celebrate. The Day of the Dead is celebrated on November 2, in

remembrance for those they have lost. Feast of our Lady of Guadalupe is on December 12, when

the Virgin Mary first appeared, and there are many other celebrations that remain prevalent in


Mexican culture. Culture plays a very important role in the behavior of Mexican citizens,

because everyone would do anything to protect their family.

Though generally thought of in a positive light, some of Mexico’s cultural traditions have

only increased the hardship in the country. One of the hardest cultural powers to overcome is the

infamous Mexican “drug wars”. For many years now, Mexico has been a major exporter of

heroin, cocaine, marijuana, and many other hard drugs. There have been several attempts to put

the drug trafficking to a stop, but an uncountable number of high officials are corrupt or paid by

the cartels to allow them to continue. The average person spends about 25% of their income on

bribes. Though Mexico’s corruption is prevalent and obvious, there are more pressing matters

currently that require attention.

In recent news, 12 Mexican’s were killed in Egypt. There is controversy of whether the

group was in a restricted area or not. The group of tourists were apparently being escorted by the

police and had every right to be in the area of desert they were. Investigations are still ongoing

and people want answers they are not receiving. In other news, last year 43 Mexican students

disappeared from a bus. It was thought that the students had been burned but that theory has

recently been disproved. There were many flaws while trying to uncover this case but the police

now think they are on the right track. It was also reported that there was money and drugs in a

compartment of the bus, which explains the motive. This is proof that there is no doubt about the

still ongoing drug problem in Mexico. The students are not the first or last to have disappeared in

the country. This is yet another problem that Mexico has on its plate.

While there are many crises in the country of Mexico, the country must also be concerned

about its wealth. Mexico’s top source of income is its oil. Until 1938 Mexico participated in

foreign direct investment - it allowed other foreign investors to take control over its oil. In one


example, American companies had a tight hold on Mexico’s oil production. With other countries

in control, the Mexican locals who worked for the oil companies were forced into horrible

working conditions and could not unionize. To fix this issue, President Cardenas created

Petroleos Mexicanos (Pemex) by nationalizing - expropriating Mexico’s oil holdings from

private companies in other countries and making solely Mexican property. To this day, Mexico’s

economy heavily relies on Pemex and it is one of the largest oil companies in the world. Pemex’s

current CEO is Emilio Lozoya Austin.

Mexicans have always been incredibly proud of their private oil sector - they even

celebrate Oil Expropriation Day every March 18th to commemorate President Cardenas’ work

for the people of Mexico. However, their celebrations were put to a halt in 2013 when President

Felipe Calderón began pushing constitutional reforms that would allow the Mexican government

to re-privatize Pemex and open Mexico’s oil supply to the world.

Calderón’s argument stated that Mexico “lacked the equipment and technology to explore

for new reserves in deep water or to extract shale gas” (CBC News, 2013). Calderón believed

that opening the oil market to interested foreign parties would continue to propel the Mexican

economy forward and help reduce Pemex’s growing debt.

On the other side, Mexico’s left party wanted to maintain state ownership of Pemex

(COHA, 2008). They believed Mexican oil and gas should belong to the Mexican people. It was

also a topic concerning national pride and aversion to foreign oil companies (Carlsen, 2014).

The people were unsure how foreign influence would affect their entire government, not just the

oil and gas industry. Also, few details had been made public about the reason for Pemex’s huge

debt. The people began to worry they would see none of the benefit from privatization, but still

be forced to pay off the debt already plaguing the company (Ocean, 2014).


In December of 2013, the Mexican Congress approved oil privatization. It was officially

accepted in August of 2014, though over 80% of Mexico’s population was opposed to it

(Proceso). Mexican historian Enrique Krauze wrote in the New York Times that, “for many,

allowing foreign investment in Pemex feels like ‘bargaining away the country’s soul’” (as cited

in Wade, 2013). “The equivalent in the U.S. would be privatizing social security,” said John

Ackerman, a law professor at the National Autonomous University of Mexico (as cited in Wade,

2013). The population felt betrayed, and they are still dealing with the backlash from this

decision. Over a year after privatization, Pemex’s current debt is $42.5 billion and shows no

signs of decreasing (Carlsen, 2014).

Today, there have been very few improvements in Mexico’s oil industry. During the first

half of 2014, the price of an oil barrel hovered around $100. Then in the next half of the year the

price fell to $50 per barrel (Nasdaq, 2015). Why did the price of oil fall so steeply and quickly?

The U.S. has doubled their domestic oil production in the past six years, and as a result, Middle

Eastern countries shifted their oil exports to other foreign markets. The Organization of the

Petroleum Exporting Countries (OPEC) has refused to decrease their production of oil resulting

in a huge global supply of oil. Moreover, oil demand from Europe and developing countries has

tapered off due to weaker economies, and new technology has allowed for more energy efficient

vehicles (Krauss, 2015). This increase in supply and decrease in demand has caused in huge

impact on the prices. Additionally, Pemex remains low in their oil reserves and is losing money,

now on its way to its 11th straight year of production decline. If the company does not act fast to

execute a different successful solution, it will soon find itself no longer amongst the world’s top

oil producers. The company is short on available funds and needs to find a way to save money to

help the company rise again. Mexico sits on top of fuel sources (oil and gas) that have not been


reached due to the difficulty of them being tapped into. In addition, Mexico still has oil reserves

in the Gulf that have not been drilled due to unavailable resources, even though privatizing was

supposed to solve this problem. Tapping into these sources requires new techniques and

equipment that are highly complicated and expensive to learn and execute. The company’s

leaders hoped to get Pemex back on its feet by further globalizing and offering investment

opportunities to private and foreign companies, which only became an option when the

constitution was amended in 2014. The idea was to encourage profit-sharing partnerships with

the world’s largest oil companies that are known to have the resources and expertise to tap into

these untouched fuel reserves that are on Mexican territory. Due to the complete lack of success

after such a drastic change in Pemex and Mexico’s laws, it is suspected the company might have

ulterior motives in their quest to privatize.

In 2011, Pemex signed off on a $9 million contract to have an oil rig moved from the

United Arab Emirates to the Gulf of Mexico. Government auditors examined the contract and

revealed signs of fraud. The rig had the wrong equipment for the assignment. Most importantly,

the rig did not need to be moved. It was in the Gulf of Mexico the entire time. Consequently, the

contract was signed off. In 2013, auditors advised the company to discipline the employees that

were responsible for handling the contract. Pemex looked the other way, just as their workers did

when they handled the contract.

Additionally, auditors found a total of $11.7 billion worth of Pemex contracts that were

signed between 2003 and 2012 and involved in serious issues. “Auditors issued 274

recommendations that Pemex take serious action over contract irregularities[...]only three of

them was action taken[...]dismissed 157 of the cases[...]108 were unresolved” (Comlay, E.,

Rosenberg, M., & Pell, M., 2015). It is clear that workers below senior management are not the


only ones that need to be disciplined. Corruption runs from beginning to end of the vertical and

horizontal organizational structure. “In Mexico, no one gets punished,” said Arturo Gonzalez de

Aragon, a former head of the Federal Audit Office (as cited by Comlay, E., Rosenberg, M., &

Pell, M., 2015). How does Pemex expect to ever recover when its leaders are encouraging

corruption as they see the company’s balance sheets not balancing out? The company claims it is

losing money, and vulnerable stakeholders are concerned with where all the oil income is going

to.

So, where is all the oil income going? Amongst the fraudulent contracts identified by

auditors is a contract worth tens of millions of dollars. It was signed to a company owned by a

member of one of Mexico’s most murderous drug cartels known as Los Zetas. The contract is

one of the dismissed cases after the Federal Audit Office recommended an action be taken by

Pemex. “This contractor was later convicted in U.S. federal court on unrelated charges of

laundering money for the Zetas” (Comlay, E., Rosenberg, M., & Pell, M., 2015). Corruption is

Pemex’s major issue, not the fact that it is low on oil reserves nor its confusion on oil income

distribution.

Due to the weak oil industry, the Mexican government has recently cut the budget of

Pemex to account for lesser revenues and increasing debt. The original Pemex budget for 2015

was based on the price of oil being $79 per barrel. However, by 2015 the price of oil fell $30

under that price point. Additionally, Pemex’s forecasted deficiency for 2015 was $9.3 billion.

Consequently, the budget was cut by 11.5% or $4.16 billion. Most of the budget cuts focused on

reducing personnel and services and changing existing contracts with suppliers (Critchley, 2015).

Over 10,000 contract jobs were lost in the Mexican service industry at the beginning of the year,

and analysts estimate that Pemex’s cuts could ultimately lead to up to 50,000 jobs lost in the


Mexican economy as a whole (Williams, 2015a). To put into perspective, Pemex employs over

150,000 employees. Additionally, they managed to negotiate with labor unions to accept over

$650 million in cuts of perks and benefits and to allow for early retirement plans for old

employees (Malkin, 2015). Despite attempts to fix their financial situation, Pemex’s debt rose to

a record $84 billion this year. Moreover, even though Mexico still plans on searching for oil for

the next nine years, in September the government announced that they planned to further

decrease the 2016 budget by 20% to just 17 billion dollars. In comparison the budget was over

$27 billion in 2014 (Williams, 2015b).

The reaction from workers eventually led Pemex to further attempt to fix their pension

problem. Pemex’s pension and retirement obligations totaled over $100 billion in 2015 which is

four times larger than the Exxon Mobil’s obligations. Recently, Pemex has renegotiated with the

labor union and agreed to raise the retirement age from 55 to 65. Additionally, they made a deal

to transfer 42% of their liabilities to the Mexican government, essentially ensuring that workers

will get paid (Navarro, 2015). Historically, there has been a good relationship between Pemex

and unionized workers, and there has never been a work strike in Pemex history (Montes, 2015).

It is clear that, though Mexico has made several attempts to overcome Pemex’s debt and

internal problems, more must be done. After looking at Mexico and Pemex’s current issues,

corruption is obviously a major contributor to the lack of improvement in conditions. Pemex

attempted to ‘fix’ their situation by reverting back to when foreign direct investments were

allowed on Mexican oil. They aimed to further help the situation by cutting benefits, and there

are no clear signs of benefits showing for Pemex, just an increase in debt and corruption. The

solution to Pemex’s problems lies amongst making changes to the corporate structure by

eliminating those that are corrupt. Pemex is government owned and should take an action to


dissolve this corrupt group of people in leadership positions. The government did right by

allowing foreign direct investment opportunities into Mexico’s oil reserves. Mexico and Pemex

cannot increase their income and improve their economy without foreign aid because they

currently do not have the funds to provide research and development opportunities in other

industries. Pemex should let itself grow as a company by allowing and encouraging the majority

to be under foreign ownership, especially considering the fact that the majority of government

income comes from Pemex.

From a nationalist perspective, the Mexican oil industry has always been under the

control of the government without any foreign investment and has seen good and bad times as a

public company. Overall, it has been successful, and only in recent times, has it been failing.

Theoretically, eventually prices will rise, and the market will fix itself.

In refutation of nationalists against privatization, one can point out that in the past year

the market for oil has drastically changed with the U.S. increasing their production and OPEC

causing a huge saturation of supply in the market. Mexico needs to globalize in order to stay

competitive in the market, and history has shown that overall, their output has been steadily

falling while their obligations have continued to grow. Additionally, even though the past has

shown economic success, there have also been many examples of corruption which cannot be

easily fixed by maintaining tradition.

In the end, Mexico made the right decision in privatizing Pemex, but it has a long way to

go. Theoretically, foreign direct investment should move Pemex in a direction of growth and

prosperity, which has not been the case. In actuality, this seemingly brilliant economic move has

had relatively no effect on the dire situation in Mexico, thus pointing fingers at obvious

corruption in Pemex and Mexico’s leadership. Pemex is unsustainable as a Mexican-owned


public company, and globalizing it is the best way to decrease its debt and help it maintain its

status as one of the world’s top oil producers. It will never improve with the corrupt leadership

that is currently running Pemex and also the entire country of Mexico, and it should select new

leadership, foster new and healthy business relationships, and allow foreign influence to guide its

economy in a positive direction.


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Pemex and the Factors Affecting Privatization in Mexico 11

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