Mexico: The New Institutional Framework Of Pemex

Just like oil is a resource that is inextricably tied to the Mexican national identity, Pemex, which literally stands for "Petróleos Mexicanos" (Mexican Oil), is one of the core institutions not only of the Mexican Government, but the entire country. When talking about Pemex, one may at times ignore or forget the nature and size of the company. Pemex is by far the largest company in Mexico with over one and a half trillions pesos in revenue and over 150,000 employees1; gargantuan proportions to say the least. Furthermore, its activities represent 7.6% of the Mexican Gross Domestic Product2, and, due to the special oil taxation regime to which it is subjected, it is also responsible for 20-33% of the total Federal Government income3.

Like all oil companies, Pemex is currently suffering and adapting itself to the economic environment caused by the recent drop in the price of oil in all markets. All this while facing the challenge of an open oil & gas industry that has ended its 75 year monopoly, more stringent regulation by strengthened independent regulators and dealing with a declining production of crude, a trend that has not been reverted in several years. Nevertheless, Pemex still has several assets and qualities such as its years of experience of operating alone in most parts of the Mexican territory and the ownership of substantially all the infrastructure related to all stages of the Mexican hydrocarbons industry. These unique qualities give it an advantage over the rest of its competitors while also making it a natural and attractive partner in new possible joint ventures by private investors. Such elements combined with the legal and operative transformation that is currently taking place inside this monumental Mexican public company, if well exploited, can ensure its strength in the Mexican market going forward. This article aims to briefly depict how Pemex is changing and how its new institutional framework will work going forward with the Mexican Energy Reform.

Now, in order to understand the new Pemex, a look at the way Pemex was organized before the Energy Reform is needed. Prior to the substantial constitutional, legal and regulatory changes in the industry, Pemex was a State company with its own personality and assets that had technical autonomy but whose budget was controlled by the Federal Government. In order to carry out the full scope of its operations as the only hydrocarbons company in the country, Pemex was divided into 4 Subsidiary Bodies:

Pemex-Exploración y Producción ("PEP"):

PEP's purpose under the previous legal regime was the exploration and exploitation or oil and natural gas as well as its transportation and storage in terminals. Thus, it was the subsidiary body in charge of all upstream activities in Mexico, but carried out other actions as well.

Pemex-Refinación ("PR"):

PR's purpose was the performance of all industrial refining processes and the production of all petroliferous and oil derived products, including basic petrochemicals,4 along with the storage, transport, distribution and marketing of refined products.

Pemex-Gas y Petroquímica Básica ("PGPB"):

PGPB was the subsidiary body in charge of processing natural gas along with its liquids as well as artificial gas, along with the storage, transportation, distribution, and marketing of these products as well as basic petrochemicals.

Pemex-Petroquímica ("PQ"):

On the other hand, PQ was in charge of all petrochemical industrial processes which products were not considered basic petrochemicals, as well as all related activities, including its storage, distribution and marketing.

P.M.I. Comercio Internacional S.A. de C.V. ("PMI"):

Finally, although not technically a subsidiary body, but rather a subsidiary company, PMI was relevant for Pemex's operations due to the fact that it was the commercial branch in charge of trading and exporting crude oil and other derived products.

It is worth mentioning that under this legal regimen, activities that were attributed to PEP, PR, and PGPB were considered strategic to the Mexican State and therefore, could solely be carried out by such subsidiary bodies of Pemex.

Now, as a result of the Energy Reform, Pemex has now been transformed into a productive State-owned company (empresa productiva del Estado) that is still exclusively owned by the Federal Government, with its own personality and assets, as well as technical and operative autonomy. Pemex now has the legal mandate to generate economic value and be profitable to the State. In order to fulfill its purpose of performing activities of the hydrocarbons sector in a profitable manner, it may form productive State-owned subsidiaries (empresa productiva subsidiaria, "EPS"). Additionally, Pemex and/or its EPS's may form subsequent affiliate companies (empresas filiales) to carry out their activities.

The new corporate structure of Pemex includes 7 EPS's which shall be in charge of performing different activities as described below:

Pemex Exploración y Producción ("PEP"):

PEP as an EPS has modified its purpose so that is purpose it is exclusively the exploration and extraction of petroleum and other hydrocarbons, in the national territory, in the exclusive economic zone of the country and abroad, for such purposes however, it may carry out related activities such as hydrocarbons gathering.

Pemex Transformación Industrial ("TRI"):

TRI shall be in charge of activities that were formerly carried out by PGPB and PR. It shall be Pemex's EPS that performs refining, transformation, processing, and sale of hydrocarbons, oil, natural gas, and petrochemicals.

Pemex Perforación y Servicios ("PPS"):

PPS's purpose shall be to provide all services related to hydrocarbon wells, including without limiting, drilling, termination, maintenance, and repair thereof. It shall provide these service to PEP, but may also render them to third parties.

Pemex Fertilizantes ("PF"):

PF shall perform the production, distribution and marketing of ammonia, fertilizers and their derivatives, as well as the provision of services. This EPS was created to focus on business opportunities related to fertilizers that are byproducts of many of the activities carried out by Pemex.

Pemex Etileno ("PE"):

PE's purpose is the production, distribution and marketing of derivatives of methane, ethane and propylene, on their own through third parties. Like PF, PE will be in charge of certain types of petrochemicals

Pemex Logística ("PL"):

PL's shall be in charge of the transportation and storage services of hydrocarbons, petroliferous and petrochemicals and other related services. It shall render these services to Pemex, its EPS's, affiliate companies, and third parties. For such purposes, it shall device and implement logistic strategies using pipelines and maritime and terrestrial media strategies as well as the sale of capacity for its safekeeping and management. It may be implied that PL has absorbed and centralized all storage and transportation activities that were previously separated among several subsidiary bodies that specialized on different types of products.

Pemex Cogeneración y Servicios ("PCS"):

PCS's purpose shall be to generate, supply, and trade electrical and thermal energy for production in power plants and cogeneration; as well as the provision of technical services and the provision of administration associated with such activities. It is an EPS that was created in order to develop and fully take advantage of the cogeneration activities related to the hydrocarbons activities or Pemex.

It should be noted that although the EPS's have all legally commenced operations, the transition of assets and personnel is still underway. The corporate restructuring of all former subsidiary bodies and other types of subsidiary entities of Pemex implies an impressive amount of work and movements. In this transition, the new EPS's will substitute and absorb (subrogación) all the rights and obligations of the former subsidiary bodies in order to bring legal certainty and continuity to the all the previous acts of Pemex.

Other relevant changes

As mentioned before, Pemex is now a productive State-owned Company that will operate in a competitive environment. Previously, the Pemex monopoly operated under idiosyncratic circumstances in which its focus was production rather than profitability. This was caused partly because it had no competitors within Mexico and partly because the Ministry of Treasury Public Credit controlled its budget and took full advantage of the high prices of oil to extract resources from Pemex to finance government expenses, in accordance with the special taxation regime.

Although Pemex will still be subject to a special oil taxation regime, this new regime is substantially equivalent to the one that will apply to private parties that carry out exploration and production activities in Mexico. Additionally, Pemex will now be financially autonomous from the Federal Government and thus, will be able to set and control its budget. These fundamental changes will allow Pemex to fulfill its purpose of becoming a productive, profitable and competitive entity that benefits the Federal Government, which will contribute additional financial resources to it as a company would with its shareholders: through dividends, but if and when there are profits to be distributed.

Pemex is currently facing many challenges arising from both the Mexican Energy Reform and the overall situation in the international oil and & gas sector. In order to face these trials it is adopting a new institutional framework and changing the way it works both within its organization and outside. This is the first set towards ensuring that Pemex will remain a core institution for both the Mexican government and its people, but it is not enough. If Pemex is to remain a powerful player in the Mexican energy industry, the regulators will need to balance the need for asymmetric regulation that ensure the participation of new economic agents in the market while not overwhelming Pemex as the national oil company. Likewise, Pemex needs to adapt itself to a 21st century oil industry, training and acquiring efficient, first class personnel while adopting and developing state of the art technology.

Footnotes

[1] Information based on the Annual Report of Pemex for the fiscal year of 2013.

[2]Information contained in a public presentation by the Mexican Ministry of Energy.

[3] Information obtained from the Annual Reports of Pemex for the fiscal years of 2004-2013 and the Federal Income Laws (Leyes de Ingresos de la Federación) applicable to such years.

[4] Under the previous legal regime, Mexico had a particular and technically artificial division of the petrochemical industry that made a distinction between basic petrochemicals (which are used as industrial raw materials) and secondary petrochemicals that are used for other purposes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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