ANALYSING THE COMPANY PEMEX : Environmental Mapping with PESTEL

By Abiodun Musa

According to report by Power energy investor, the world consumes approximately 30 billion barrels of oil a year and has discovered on average only 8 billion barrels of oil a year during the last decade. Much of today’s complacency is due in large part to the lack of knowledge about what is really going on in the oil-producing world. PEMEX as a state owned company has a monopolistic market outlook. It is not a flexible company as it operates a pure monopoly market structure where the oil industry in Mexico is the firm. This has caused the company to operate inefficiently and ineffectively as it should perform. PEMEX has minimal competition to deal with as well. This article will be focusing on analysing PEMEX within the framework of PESTEL external environmental factors. Here we put into consideration the political, economical, socio cultural, technological, environmental and legal factors that affect PEMEX and inadvertently weaken or strengthen the company.

Political Factors

Mexico as a country gained independence in 1821,even whilst it gained independence it  was characterised by civil war, territorial secession, economic and political instability, foreign intervention to mention a few. It was also characterised with two long domestic dictatorships and this led to the promulgation of the 1917 constitution and emergence of the present current political system. As I stated in my overview of the company, PEMEX was formed in 1938 when the then president Lazaros Carnedas sided with oil workers striking against foreign owned oil companies for an increase in pay and social services. On March 18, 1938 the then president embarked on state exploration by the article of 1917 constitution of all resources and facilities thereby nationalizing the US and Anglo Dutch companies hence PEMEX was created. Since many exploration projects took longer than the six year presidential term to be valuable, the politicians had powerful incentives to spend oil reserves rather than reinvest in them. PEMEX being a state owned company depended greatly on decisions of the government of the day. The political instability of the country has affected the operations of the oil company. The state owned Oil Company has been seen as a cash cow by politicians and they feel it’s the bone marrow of the Mexican sovereignty. From reports I understand that PEMEX does not run in the interest of Mexican people who are the notional owners; rather it runs in the interest of the workers and their trade union. PEMEX profits are directed to the Federal government and its capital budget must be approved by the Mexican Congress annually as it is a state owned company. The transparency of the present regime of the Mexican government has allowed the world to observe the struggles of the company; having gradual production decline from one known of its largest fields and the difficulties they experience in developing new oil fields.

Economic Factors

The world has been globally hit by financial recession and has not recovered since .Mexico has a state has not recovered fully from this .The Mexican economy was hit by the slump that followed the collapse of Lehman brothers; part of the problem really is that Mexico has increasingly exported goods to the united states of America cheaply, a strategy which I consider to be on unfortunate right now especially when the American consumers lack funds. They have been able to use this strategy since the creation of North American free trade agreement (NAFTA).[1]Other countries such as Brazil have diversified investments unlike Mexican government which has not put much effort into diversification and concentrated more on the major source of income for the commodity. The Brazilian nation which is rich in commodity is benefiting highly from exporting to china and has made up for cheaper exports to America; as most of its industry is tied to the worsening segments[2] of the American economy since the global economic slowdown hit. Prior to this PEMEX as a producing company benefited from price oil hike as revenue doubled since 2003 and this covered the decline of production and shrinking reserves.

Two-fifth of Mexico’s Federal Government revenue has been accounted for by taxes and royalties from PEMEX. Presently, 64% of the sales revenue is used to pay tax compensation for one of the weakest tax regimes which collects just 11% Gross domestic product. According to the Economist magazine, many industry workers fear that oil output might drop below 2mb/d, if this happens the Mexican government will have to cut down on spending by more than 10% or increase taxes accordingly in order to avoid an unsustainable budget deficit and this might threaten economic recovery. PEMEX’s annual investment budget was $3 billion between 1938 to year 2000. In as much as the company has over 140,000 people on its payroll, there is still no efficiency and no maximum utilisation of the manpower. Unqualified and untrained workers are recruited based on sentiments and power of their trade union hence resources are more wasted in paying up and maintaining this number of employees. With the high level of political control over PEMEX, the company’s history of overstaffing, graft and under-investment has kept the company from developing into a modern, technologically driven oil and gas company.

 Socio-cultural factors

This basically refers to the class of people in Mexico and generally their way of life. Unfortunately, the country has been seen to be a failed state with high level of insecurity. Its powerful citizens are drug lords who abuse power and make life unbearable for its citizens and other neighbouring states too. The high rates of drug cartel is highly depressing and alarming, kidnappings have also been rampant in recent times. The government is trying its best to take on the drug barons’ and their cartel and this has caused for retaliation from them hence brutal violence has been the result of this action. The government’s lack of success against organised crime has been to seen by the world to be on par with its failure to reform the economy. The level of corruption is so high in the state that enforcement agencies have been held handicapped. Foreign investors have also being discouraged by the level of violence. Despite this Mexico has always been known for its rich culture and traditions. Tourists were still always interested in visiting and this served as a source of income to the country but until the epidemic of the swine flu. The tourism sector has been affected hence there is still concentration on PEMEX as the major source of government.

Technological factors

On the 24^th of February, 2005, PEMEX reported possible new reserves of up to 54 billion barrels further out in the gulf. If these reserves are exploited it could increase the company’s output to 6m-7mb/d. The new deposits are located in very deep water, a couple of thousand metres below sea level. Developing these new fields will be financially and technologically challenging as PEMEX has inadequate funds and has no deep water experience. The chief executive of the company, Luis Ramirez mentioned at a conference in Veracruz that in developing these new reserves a double of the firm’s investment levels will be required to more than $20 billion a year. The level of technological infrastructure and know how is usually high in the oil industry. It involves huge financial commitments. The requirements of PEMEX are by no means different but because of the lack of flexibility in the management of the company, resources are not utilised. When there is no technological infrastructure to develop these fields, forecasted output cannot be met hence the company remains stagnant. The technological factor exposes weaknesses of the company whereas if the company was not so rigid, other companies with high level of technological would have shown interest, trained the workers and helped even financially thereby sharing mutual benefits between countries or companies.

Environmental factors

There have been efforts by PEMEX to be more environmental friendly. According to EDF[3]In 2001, the company introduced internal green house gas reduction programme, it was an emissions cap-and-trade program to cut carbon dioxide emissions to 1 %below 1999 levels. It also announced its 10year carbon green house gas reduction program that same year. All these efforts were to enhance its environmental integrity. The attempts in taking these precautions will help save energy and at the same time reduce cost and make the company more competitive amongst its peers; their natural resources will also be spread over a longer period. The company happens to be the first latin American company to publicly announce its interest in taking reduction to green house gases seriously. The company gains more influence and is more recognised by other countries and companies that are focusing on implications of climate change. For PEMEX being a world class company it is important for it to portray its corporate social responsibility by addressing global programs such as climate change.

PEMEX like most oil companies is subjected to risks like explosion of pipelines, plants, equipment, refineries, drilling wells and other facilities, fires, mechanical failures, natural disasters and other geological disasters and accidents like hurricane in the gulf of Mexico and more recently like the one experienced in the Mexican state of Nuevo Leon from rain associated with former Hurricane Alex, which stormed. Due to the nature of production of oil and gas, pollution is almost inevitable, companies contaminate the air with gas flaring, pollute the water with oil spills which are hazardous and they kill living things especially in the sea. The BP recent spill is a good sample of this. Agreed, it is mostly impossible not to pollute when production of oil and gas is on, but precautions should be in place for these incidents; hence more attention and precautions should be put in place to repeat occurrences. The occurrence of all this could result in personal injuries, loss of lives, environmental damage to mention a few and this results in high clean up and repair expenses. Prevention they say is better than cure, why not work on logistics to prevent these incidents or minimise the accidents and avoid paying for damages which would cost more than if cautiously monitored?

Legal factors

The Government of Mexico has attempted to reform some aspects of its energy sector. The Government approved seven bills including the national oil company’s legal regime. The major objective of this set of reforms is to enhance flexibility when engaging in contracts with private companies. It is based on liberalizing the hydrocarbon sector and reversing the declining trend in production and reserves hence modernizing the monopolistic structure of PEMEX. As the solid rock of public finances in the state, it has financed its investments with debt using long term production infrastructure projects or PIDIREGAS[4].

On October 29, Congress passed seven bills that address different aspects of the institutional framework. The main features of each bill approved can be summarized as follows:

1. A reform to the Regulation of Constitutional Article 27, which strengthens the prohibition of private participation in exploration and production of hydrocarbons. This bill authorizes contracts for services, leases and procurement, while it emphatically forbids concessions, production sharing agreements or incentive-based service agreements.
2. A new Act to regulate Pemex activities, which stresses objective of keeping Pemex's monopoly over the oil sector and Pemex as a state-owned company. This Act modifies the NOC governance structure, creating a new Managing Board with four professional members that will have a large role in overseeing operations. Second, it expands managerial autonomy in an effort to cut Pemex from excessive control from the Ministry of the Treasury. Third, it specifies three methods for awarding contracts for procurement, leases or services (direct award, invitation to a limited auction, and open auctions), providing more flexibility to the company. Finally, there is a schedule for a transition for Pemex to increase its stake from oil revenue that would extend for at least five years.
3. An expansion of the Energy Regulatory Commission powers, which gives the Commission authority to oversee sales of gas, fuel and petrochemicals.
4. Creation of a government Fund to finance projects in renewable energy sources and mandated to promote clean and renewable energy sources.
5. An extension of the authority of the Secretary of Energy, which increases its power to regulate and oversee Pemex, design an energy strategy, create a consultative National Council of Energy, grant Pemex licenses and permits to explore and produce hydrocarbons, set a production target, and issue regulation, among other roles.
6. Creation of a National Commission of Hydrocarbons, which will provide technical support to the Secretary of Energy's new tasks, such as evaluating exploration and production projects, concentrating geological information and overseeing Pemex's operations.
7. Creation of a National Commission of Energy Efficiency, which will promote sustainable energy technologies and energy efficiency.

The reforms look impressive and ambitious, but the possibilities of modernizing this state owned monopolistic company and its regulation and at the same time improve efficiency without competition is quite unrealistic. More criticism arises with the level of limitation and restrictiveness.

Comparing the state with Brazil and some other American countries like Columbia, the latter have embarked on reforms to boost investment and improve efficiency by firstly eliminating the state monopoly over their upstream and downstream sectors. Secondly, roles were clearly created to function more effectively with autonomy; NOC’s main role was limited to commercial operations, while policy making and regulations were trusted to the sectors ministries and new hydrocarbon directorates Finally, although these countries did not full privatise their companies, they transformed NOC’s into publicly traded companies to enhance flexibility in an effort to impose commercial discipline while increasing their autonomy.

 NUTSHELL:

 In this article, Abiodun focuses on the the business context within which Pemex operates. Her message is simple....Pemex management needs to branch out of the norm and go from good to great (assuming we don't focus on the company's contemporary inconsistencies); this can only start with an appropriate understanding of its business environment- albeit a tough one. For more information on this article and to view Abiodun's professional profile and his other articles, click here.-->

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[1] Is a trilateral agreement signed by Canada ,the united states and Mexico

[2]  Referred to herewith are the cars and construction segments of the united states

[3] Environmental defence fund

[4]Proyectos de inversion Diferida En El Registro del Gasto