thebajarunner - 4-24-2012 at 07:48 AM
April 23, 2012
In a Change, Mexico Reins In Its Oil Monopoly
By ELISABETH MALKIN
COATZINTLA, Mexico — For seven decades, Pemex, Mexico’s state-owned oil monopoly and a mainstay of the government’s revenue, regulated itself — which
is a polite way of saying it could do pretty much as it pleased.
No authority challenged the wisdom of investments like the billions it has spent here in the Chicontepec oil field to extract just a trickle of
petroleum even as private companies have pulled torrents from similar shale rock in Texas and North Dakota.
The company’s safety procedures went largely unscrutinized as it joined the oil majors drilling in deepwater areas of the Gulf of Mexico. And the
company faced no serious consequences for not keeping its promises to raise output or operate more efficiently.
But in the last few years, that has begun to change. The tiny National Hydrocarbons Commission, created by the Mexican Congress in 2008 to increase
regulatory oversight of the company, is proving to be a surprisingly sharp thorn in Pemex’s side.
The five-member panel of energy specialists, which has a staff of 61 and an annual budget of about $7 million, has begun to confront the company’s
executives over where and how they drill for oil. With a raft of new regulations and its own blunt assessments of the practicality of Pemex’s
projects, the commission is pushing the company to explain its plans.
Pemex does not have to follow the regulators’ recommendations, but the commission’s young president, Juan Carlos Zepeda, is speaking out when it does
not.
“The strength of the commission is in public opinion,” said Mr. Zepeda, 42, an economist who contends that Pemex, officially Petróleos Mexicanos,
should be more transparent as it spends $20 billion this year to find and pump oil. “The force of change will come from Congress, from opinion
leaders, from national universities, from society.”
As a symbol of Mexican nationalism, created in 1938 when the government expropriated foreign-owned oil companies, Pemex occupies a peculiar place in
the country’s energy policy. The jobs it generates give it powerful political allies, and its union is so strong that no president risks defying it.
The government relies on the company’s oil revenue for as much as 40 percent of the national budget, taxing it so heavily that last year the company
lost $6.5 billion on sales of $111.5 billion.
As long as oil gushed from Pemex’s giant offshore fields, there seemed little reason for anyone to challenge the status quo. But production has
declined since 2004, and the company’s ability to find and exploit new sources of oil has been cast into doubt.
The commission has closely tracked the Chicontepec project, on which Pemex has already spent nearly $9 billion. The regulators told the company that
in its haste to meet ambitious production goals, it was drilling hundreds of new wells without studying the region’s geology or the best recovery
techniques.
The criticism was quickly picked up by members of Congress.
Mr. Zepeda is also scrutinizing Pemex’s plans to push deeper into the Gulf of Mexico. The memory of the BP disaster there in 2010 is still fresh, and
Mr. Zepeda is concerned that Pemex does not have enough experience to drill three new exploratory wells at depths of almost 10,000 feet — more than
twice the average depths it has been drilling in the region.
David Shields, an independent oil analyst based in Mexico City, said the change in approach was significant. “It was heresy in the past to question
whether Pemex was doing things properly,” Mr. Shields said. The commission’s five members all had previously worked for Pemex or for government
entities involved in energy. But their decisions have shown independence, said Miriam Grunstein, an oil specialist at the CIDE, a public research
university in Mexico City.
“They have integrity,” Ms. Grunstein said. “They’re really admirable. It’s completely unexpected.”
In the last few weeks, Pemex and the chief of its production and exploration subsidiary, Carlos Morales Gil, have begun responding to the pressure.
The company officially reduced its estimate for probable reserves in Chicontepec by about 30 percent, to 6.49 billion barrels of oil equivalent,
ending two years of wrangling with Mr. Zepeda’s team.
Then, at the end of March, Pemex announced that it had signed a contract with Wild Well Control, a Houston company that handles oil well disasters,
including the 2010 BP spill, to provide deepwater containment systems, and it is in talks with a consortium of gulf oil companies to provide
additional services. Pemex is also analyzing whether it should buy additional insurance for the deepwater wells, Mr. Morales said.
Jeremy Martin, the director of the energy program at the Institute of the Americas in the La Jolla neighborhood of San Diego, said that Mr. Zepeda was
right to take his concerns about Pemex public. “He is holding their feet to the fire, especially Carlos Morales. At a minimum, he is forcing Morales
to respond.”
Mr. Zepeda said he sensed the beginning of a shift at the company but added, “for Pemex to fully recognize an authority, it will take a cultural
change that is going to take some time.”
Mr. Morales of Pemex expressed exasperation with the commission’s oversight.
“It is like being the coach of the national soccer team,” he said in an interview. “Everybody wants to tell the coach what to do.”
Mr. Morales suggested that some of the guarantees that the commission wants from Pemex before the company begins drilling in deeper waters reflect the
commission’s inexperience.
“We have been doing these things for 70 years,” he said.
But Ms. Grunstein said that Pemex’s efforts in deep water had little to do with sound business management. “They want to prove to Mexicans and to the
world that they can do it,” she said. “It’s a heavily reputational thing.”
Although Pemex does not have the experience to easily develop unconventional fields like Chicontepec, where the oil is tightly locked in the rock, it
has no choice. The Mexican Constitution prevents Pemex from doing what would be standard practice anywhere else in the world — striking partnerships
with private companies to share costs and revenue.
Some positive news has occurred. Pemex’s oil production has stabilized at about 2.5 million barrels a day, down from the 2004 peak of 3.4 million.
This year, Pemex will finally replace each barrel it produces with a new barrel of proven reserves, a goal that had long eluded it.
And a new boss, Antonio Narváez Ramírez, is in charge at Chicontepec, where 2,100 oil wells are spread over low hills covered with orange groves and
cattle pastures. Mr. Narváez has spent 18 months overhauling operations and adopting many of the commission’s suggestions.
“Pemex is used to doing things in a conventional way because the oil fields were conventional,” he said. “But that’s finished, and we have to go
against the conventions.”
When Mr. Narváez arrived, he monitored the wells with different colored Post-it notes on a wall. Now he has a computerized system to transmit
production information in real time to his tablet computer.
Some of his changes are low-tech but effective, including keeping a fleet of maintenance trucks that can be deployed immediately to fix most of the
mechanical problems in an oil pump. Others are more complex, including new types of well design to permit horizontal drilling and multistage hydraulic
fracturing.
The subsequent impact on the local community is just beginning. “There is more movement, more jobs,” said Marisol Tapia Rodelo, 29, who runs a
roadside restaurant in the village of Palma Sola, where giant trucks operated by Pemex and its contractors rumble by and workers turn up every
lunchtime.
Chicontepec’s production, now about 65,000 barrels of crude oil a day, is rising, although the goal Pemex now cites — 300,000 barrels — is far off.
“In the end, we will learn how to produce in the field,” Mr. Zepeda said. “The shame is that it cost a lot of money. The learning curve is too
expensive.”
This article has been revised to reflect the following correction:
Correction: April 24, 2012
An earlier version of this article incorrectly said La Jolla is a part of Los Angeles. It is part of San Diego.
durrelllrobert - 4-24-2012 at 08:25 AM
“They have integrity,” Ms. Grunstein said. “They’re really admirable. It’s completely unexpected.”
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Why do you think integrety would be unexpected in Mexico?
DavidE - 4-24-2012 at 09:49 AM
Or in the USA, or Russia, or Korea, or China?
LaPazGringo - 4-24-2012 at 10:25 AM
Let the beatings begin...
Ateo - 4-24-2012 at 10:32 AM
Now if only they could they keep their restrooms clean. 
Bajaboy - 4-24-2012 at 10:53 AM
Drill baby drill....
The reason I posted this today
thebajarunner - 4-24-2012 at 03:42 PM
At a recent Baja/LABay campfire, one of the more lib dudes said he hated US corps, that the government should run all business.
Pemex is the 'poster child' reason you do not allow government into this arena.
They have mismanaged their great natural reserves through poor engineering and massive treasury raids to support the rest of Mexican government.
Monies that should have been re-invested were instead funneled into government pork projects (sound familiar US Social Security System?)
So, as we say around the poker table - "Read 'em and weep"
The birds have come home to roost over Pemex, sad to say they look a lot like vultures.... (Apologies to our fellow traveler Audubon guy that says
there is no such creature as a "vulture")
DaliDali - 4-24-2012 at 03:50 PM
It's a good thing Bush beat Gore.
I would HATE a windmill on top of my truck.
Ateo - 4-24-2012 at 04:13 PM
Im a lib and just for the record, the government should NEVER run all businesses.
There are times the government should regulate, but run the business - never!
rts551 - 4-24-2012 at 04:34 PM
At a recent campfire one my more extreme right friends said there should be no government. The country should be run by corporations and for a
profit. They know what is best for the people. Just ask BP or ExxonMobile.
Maybe we could bring Bernie Madoff back for president!