By Abiodun Musa
To provide an interdisciplinary frame work for strategic analysis of firms and markets in the oil and gas industry, I am interested in analysing the challenges of state owned oil companies using PEMEX as a case study. My focus will be on the background of the company, how it came into existence and identifying major problems faced by state owned oil companies (such as PEMEX[1]). In order to do this, I will also examine- in a 3-part series- the external context, regulations and conditions in which PEMEX operates its business, we will find out if the major stake holders in the company (Mexican people and its government) are really benefitting from their major resources (also the major source of income to the government). I will also analyse the market structure of PEMEX as a monopolistic company solely run by the Mexican state government- with a view to determining if that is good enough; if it has created any end product, etc. These are some of the questions that will be answered in this series. It will also be helpful to have an understanding of the performance of the company in the period under review, an understanding of its competitive advantage and thereafter I will make suggestions as are applicable. Come on this intellectually stimulating journey with me.
PEMEX: COMPANY PROFILE
PEMEX is México’s state owned Oil and Gas Company. It was formed in 1938 when President Lazaro Cardenas decided to nationalise the foreign dominated oil field into one state asserting that “El petroleos es nuestro[2]" (the oil is ours). In that year, president Lázaro Cárdenas sided with oil workers striking against foreign-owned oil companies for an increase in pay and social services. On March 18, 1938 citing the 27th article of the 1917 constitution, President Lázaro Cárdenas embarked on the state-expropriation of all resources and facilities, nationalizing the U.S. and Anglo-Dutch operating companies and creating PEMEX. In retaliation, many foreign governments closed their markets to Mexican oil. Despite the boycott, PEMEX developed into one of the largest oil companies in the world and helped Mexico become the fifth-largest oil exporter worldwide. (Source: Wikipedia).
In the year 1971, a fisherman from Campeche, Rudesindo Cantarell notified PEMEX of the discovery of an oil spot, springing up from the bottom of the sea in the Sonda of Campeche. Eight years later production from well Chac, would set up the beginning of the exploitation of one of the world's biggest offshore reservoirs. In 1979, the drilling of well Maalob 1 confirmed the discovery of the second most important reservoir in the country, after Cantarell. The Ku-Maalob-Zaap asset is the thirteenth one, at world level, in terms of reserves, equivalent to four thousand, seven hundred and eighty six (4,786) million barrels of crude. It is a vertically integrated company. The major branches or subsidiaries of Pemex are PEMEX Exploration and Production (PEP), PEMEX Refining (PXR), PEMEX Gas and Basic Petrochemical (PGPB), PEMEX Petrochemicals (PPQ). In 2005, during the months of April, May and June, Petroleos Mexicanos produced a daily average of three million, four hundred and twenty five (3,425) thousand barrels of crude. A million, eight hundred and thirty one (1,831) thousand barrels were exported to customers in America, Europe and the Far East. The remainder was sent over to the reefing national system. In 2006, Petroleos Mexicanos had turned into the biggest enterprise in Mexico, and one of the world's biggest petroleum enterprises, both in terms of assets and income, it also launched premium Ultra Low Sulphur fuel to the national market. In 2007, the company kept on intensifying its exploratory activity in different locations in the country and in the continental plateau, also in this year there was reconfiguration of the Lazaro Cardenas Refinery, the oldest in the refining national system, which would encourage recovery of the national petrochemical industry; with the aim of increasing gas production to satisfy the domestic market supply, decreasing fuel imports.
According to Hoovers- a D & B company, Pemex accounts for some one-third of the Mexican government's revenues and about 7% of its export earnings. Comercio Internacional subsidiary manages the company's trading operations outside the country. In 2008 PEMEX had estimated proved reserves of 14.3 billion barrels of oil equivalent. That year PEMEX produced about 4 million barrels of oil equivalent per day. Apart from strong political power that makes the company inflexible, PEMEX also has a major operational problem. Earlier this year, earlier this decade, the Company decided to raise expansion capital through the issuance of bonds in the US. PEMEX had supplemented its state provided capital expenditure budget with over $54 billion in US dollar denominated long term debt as of September 30, 2008. (Source: http://www.secinfo.com/dsvr4.tgZ5.htm ) PEMEX’s borrowings have increased despite the company’s decline in reserves over the last decade. The chart below clearly illustrates the company’s declining reserve base:
Figure 1
According to a report by the Editor -Power Energy Investor -Bill Powers on the world oil problem, PEMEX’s major challenges in coming years would not be financial; they will continue to be operational. The real question for the company is how to make useful utilisation of resources and stabilize production with its huge offshore Cantrell field in severe decline. The Cantrell field, located 50 miles offshore in the Bay of Campeche in southern Mexico, was discovered in 1976 by fisherman Rudesindo Cantrell .He complained to the local PEMEX office that oil kept clogging up his nets. The Cantrell field was then created approximately 65 million years ago when the Chicxulub meteor crashed into the earth at 60,000 miles per hour and created a hole a 100 miles wide. Needless to say, the impact of such a huge meteor killed most living things on earth. Eventually, the crater filled with some 35 million barrels of oil that went undiscovered until 1976.
The field was put into production shortly after discovery and by 1981 was producing 1.16 million barrels of oil per day (bopd). By 1995, production had dropped to approximately 1 million bopd. Engineers discovered that as the field was depleting, its pressure began to drop. In an effort to reverse the field’s declining pressure and production, PEMEX began injecting nitrogen into Cantrell in 2000. Field pressure and production began to increase and by 2004 Cantrell was producing 2.1 million bopd. This made Cantrell the second most productive field in the world behind Saudi Arabia’s Ghawar.
According to a September 9, 2009 article in the Wall Street Journal, production from Cantrell is now under 500,000 bopd and falling. The article stated that PEMEX is unable to explain the reason for the huge declines at Cantrell and did not identify any remedial action the company is taking. Unfortunately for PEMEX, the decline of Cantrell is dropping the company’s overall production.What makes PEMEX’s drop in production even more disconcerting is that the company has been vigorously pursuing the development of fields outside of Cantrell to stabilize production. For example, the company’s largest field is now the Ku-Maloob-Zap (KMZ) field which is adjacent to the Cantrell field and produces nearly 800,000 bopd. While KMZ will help offset some of the declines in Cantrell, the field will shortly head into decline since it also received a nitrogen injection treatment similar to Cantrell’s.
Far and away the biggest hope for PEMEX to replace Cantrell production and keep overall production stable is the company’s Chicontepec[3] field. It was previously not developed due to its challenges and costs. Chicontepec is a massive field with small pockets of oil spread throughout that will require a huge number of wells to be fully developed. Despite high hopes and a lot of rhetoric, Chicontepec has been a miserable failure so far. With an estimated 139 billion barrels of original oil in place according to a February 2009 report (Source: reservoir engineering firm De Goyler & McNaughton), Chicontepec holds massive potential for PEMEX. However, the field is technically challenging due to its heavy gravity oil (the field contains oil between 14 to 24 API) and poorer quality reservoir rock compared to other fields in Mexico. After spending $3.5 billion so far on the development of Chicontepec, the field is only producing 31,000 bopd, far below the 70,000 expected by year-end. Progress has been so poor that the recently established National Hydrocarbons Commission, which was set up to oversee Mexico’s oil and gas exploration and development, openly challenged PEMEX’s decision to proceed with Chicontepec’s development in a Congressional hearing. Despite cost over-runs and poor production results so far, PEMEX will continue with development since it believes the field is too important to discontinue its efforts.In this first installment of a 3-part series on PEMEX, Mexico's National Oil Corporation, Abiodun takes a look at the background to the company's operations. She lays a foundation upon which she will further build more detailed analysis of the company's immediate and external environment. In this study, Abiodun seeks to lead us to appreciate the need to appropriately dimension the challenges of state owned oil corporations. In the next instalment, Abiodun shall take a detailed examination of the PESTLE factors which influence the business of PEMEX.
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Well done Biodun
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