Petroleos Mexicanos History

Company Perspectives:

"Our Mission is both simple and ambitious: to maximize the long-term value of Mexico's vast hydrocarbon resources in the face of a rapidly changing, global economy."

Company History:

Petroleos Mexicanos (Pemex) is Mexico's largest enterprise in terms of total sales, total assets, personnel employed, and tax payments. By the early 1990s it was the fourth-largest crude-oil producer behind Saudi Arabian Oil Co., National Iranian Oil Co., and Chinese National Petroleum Co. In 1995 it averaged 2.7 million barrels of crude oil production a day, increasing to 2.9 million barrels a day in March 1997. In addition to crude oil, Pemex produces natural gas, petrochemicals, gasoline, and diesel fuels.

Company Origins

Oil has been known in Mexico since ancient times, and Mexico was one of the earliest oil- and gas-producing countries in the Western Hemisphere. The first significant commercial exploitation was started by Edward L. Doheny in 1901 at Ebano, in the eastern part of the state of San Luis Potosi. Until 1938, when Pemex was founded, production was largely controlled by American and British interests, including Royal Dutch/Shell, Exxon, the Pearson family, Sinclair, and Gulf Oil. Production increased considerably during World War I, reaching a peak of 530,000 barrels per day. In 1921 Mexico was the second-largest oil producer in the world after the United States. It was responsible for about a quarter of the world's oil supply.

The seeds for the creation of a national oil company in Mexico can be traced back to the 1910 revolution. In order to ensure adequate supplies of fuel for its locomotives, the National Railways of Mexico created a petroleum division to exploit the hydrocarbons found on its lands in the rich Ebano and Panuco oil fields. Soon afterward it became apparent that the government itself, in order to meet its oil demand, would have to develop the oil fields found on its federal lands (not including the land belonging to the railway company). At the end of December 1925, the Control de Administración del Petróleo Nacional (Control of the Management of National Petroleum) was set up in order to concentrate into one entity the government's participation in the development of its reserves. This government entity competed directly with private capital in the production and refining of crude oil but at the same time regulated the domestic price of petroleum products. In December 1933 a Congressional decree established Petróleos de México S.A. (Petromex)--a publicly traded company in which only Mexican nationals could purchase equity--with the purpose of supplying the fuel requirements of the National Railways in particular and the domestic market with petroleum products in general. It was also given the responsibility of regulating the domestic petroleum markets and training Mexican personnel in all aspects of the industry. Petromex lasted only until September 1934, when it was dissolved owing to a lack of interest on the part of the investing public, and the assets and shares of the company were transferred to the Control de Administración del Petróleo Nacional. In November 1936 a law was passed that expropriated for the state all assets considered to be of public utility, including oil and natural gas, and in January 1937 the state-owned Administración General del Petróleo Nacional was created to explore and develop the national reserves that were assigned to it.

As a result of long-existing conflict between the oil workers' union and the companies, which at one stage threatened to bring the oil industry to a standstill, President Lázaro Cárdenas nationalized the oil industry on March 18, 1938. A number of reasons were given for this drastic measure, among which the most important were the following: the foreign-owned companies had adopted inadequate conservation measures for existing reserves; there was a lack of interest on the part of the companies in exploring for new reserves; and the companies had used unfair labor practices.

On March 19, 1938, the day after expropriation, the Consejo Administrativo del Petróleo (Petroleum Administrative Council) was established, with nine government members, to administer the assets it had taken over. In June the administration of the country's oil and gas industry was split between two government agencies: Petróleos Mexicanos, or Pemex, which took over the properties and functions assigned to the Petroleum Administrative Council, and the newly created Distribuidora de Petróleos Mexicanos, which distributed and marketed petroleum products. By August 1940, however, it became obvious that this delegation of responsibilities was not working because of conflict between the two agencies, and so it was decided that all matters related to hydrocarbons should become the sole responsibility of Pemex. The Administración del Petróleo Nacional and the Distribuidora de Petróleos Mexicanos were abolished.

With the creation of Pemex, Mexico faced an economic boycott instigated by the governments of the expropriated companies, which included an economic blockade to prevent the company from selling its oil in world markets; a ban on selling raw materials, replacement parts, and equipment needed by Pemex; pressure on shipping lines to refuse transportation of Mexican oil; legal action to embargo the oil that Pemex managed to export through other countries; and a massive withdrawal of bank deposits held in Mexico by foreign companies. After long and strenuous negotiations, the Mexican government finally agreed to indemnify the foreign oil companies for US$114 million, with the first payment beginning in 1940 and the last one in 1962.

Pemex's original brief from the Mexican government was to supply the Mexican market with oil, gas, and petrochemical products at the lowest possible cost. The mandate was not profit motivated, and there was a strong desire on the part of the government to improve the living standards of its employees.

Growth of Pemex: 1940 to the 1980s

Since 1940 Pemex's board of directors, headed by the secretary of patrimony and industrial development, has been filled with five other government representatives--the secretary of finance, the secretary of commerce, the deputy secretary of patrimony and industrial development, the director general of the Federal Electricity Commission, and the director general of the Nacional Financiera, a financial institution&mdash well as five union representatives. The executive officers of the company are headed by a director general and seven subdirectors in charge of production, refining, finance, sales, exploration, personnel administration, and project administration.

About 72 percent of Mexico's surface area of 2.5 million square kilometers is covered by sedimentary basins--potentially oil-producing areas--and only about 10 percent of this area has been explored. The proved hydrocarbon reserves are located mainly in the Chicontepec basin in the northern part of the state of Veracruz, the Tabasco-Chiapas Mesozoic area in the continental shelf of the Gulf of Campeche, and the Sabinas basin in the states of Coahuila and Nuevo Leon.

In 1938 Pemex inherited total reserves of 1.276 billion barrels of what is termed oil equivalent (boe)--including oil and gas--from the expropriated oil companies. This number increased steadily to reach 5.568 billion boe in 1960, undergoing a spectacular rise in the 1980s to 60.126 billion boe in 1980. At the end of 1990 it stood at 64.96 billion boe.

After the first commercial exploitation of the country's reserves at Ebano, production was concentrated in the zone of Tuxpan in the northern part of the state of Veracruz, where the famous Golden Lane complex, dating from the first two decades of the 20th century, was located and where the productivity of the wells was legendary. Between 1910 and 1937 the Potrero del Llano well produced 117.3 million barrels of crude oil, and the Cerro Azul well produced an average of 261,400 barrels per day of crude in the early stages.

At the time of nationalization, Pemex's production averaged 104,110 barrels per day of crude oil and liquid natural gas (LNG), increasing to just over 197,260 barrels per day in 1950 and undergoing a spectacular rise in the 1980s to an average of 2.54 million barrels per day of crude oil and LNG. After leaping into the forefront of world crude oil production a decade earlier, Pemex in 1989 reached its production plateau of 2.5 million barrels per day of crude and almost 400,000 barrels per day of LNG. In 1989 more than two-thirds of Pemex's crude output was heavy Maya crude from the offshore Gulf of Campeche, while the lighter Olmeca and Isthmus blends came from onshore areas where reserves were declining.

Most of Pemex's gas production was associated with crude oil production, although there were also natural gas fields independent of oil fields. Gas production at the time of nationalization was 600 million cubic meters per annum, and in 1990 stood at around 36 billion cubic meters. Pemex's oil fields was able to produce much higher ratios of gas per barrel of oil than was previously estimated.

In 1976 Pemex launched an ambitious program for gas treatment plants to enable the company to handle the large amounts of gas produced from its oil fields. Most of the gas was processed by Pemex's petrochemical complexes in southern and central Mexico, and a proportion of it was fed into Mexico's gas system. The gas was transported through Pemex's 12,788-kilometer network of gas pipelines.

Until 1971 Mexico was self-sufficient in crude oil and natural gas, as well as being a net exporter of refined products. In the early 1970s, in order to meet its domestic consumption requirements, Pemex became a net importer, importing 64,600 barrels per day of crude oil in 1973. As a result, there was a radical adjustment of Pemex's role, which up until then had been to provide energy to the ever-increasing domestic market at low prices. When the country's balance of payments was adversely affected in 1974, Pemex was forced to double the prices of its products to reduce demand, and a decision was taken to allow the company to invest more money in exploration and development in order to reestablish itself as a major oil exporter. Pemex was called on by the government to export oil, gas, and petrochemical products and to become the cornerstone of Mexican industrial development. The 1974-1976 development plan, costing $3 billion, was the largest in Mexico's history and called for $240 million to be spent on geological and seismic studies and $728 million to be invested in drilling development and exploration wells. This plan was followed by an even bigger one in 1977, when Pemex approved an ambitious $15.5 billion development program with the aim of increasing by 1982 the company's production in the following areas: crude oil to 2.2 million barrels per day; gas to 113.3 million cubic meters per day; crude oil exports to 1.1 million barrels per day; refining capacity to 1.7 million barrels per day; and petrochemical output to 15.5 million tons per annum. Almost half the budget would be spent on the drilling of 2,152 development wells, and $1.2 billion would be spent on drilling 1,324 exploration wells. The plan called for the surveying of 1.2 million square kilometers of prospective oil-bearing areas.

The exploration and development effort led to a spectacular increase in reserves and production in the 1980s. With increased production, Pemex also boosted it exports, which in 1989 were just under 1.3 million barrels per day. In 1976 the Mexican government established a ceiling on exports of 1.35 million barrels per day to keep its prices high in world markets. Pemex had three main export markets, with the United States being by far its largest customer, taking 57 percent of its exports in 1989. It was followed by Spain with 15 percent and Japan with 13 percent.

During the 1980s Pemex's crude oil reserves remained remarkably static despite a significant reduction in the number of exploration wells drilled during the period--from 305 in 1983 to 123 in 1989--because of the country's austerity program, which involved a reduction in government expenditure. Domestic demand was heavily geared toward transport fuel, such as gasoline and fuel oil, which accounted for 32 percent and 33 percent, respectively, out of the total consumption of petroleum products in 1989 of 1.3 million barrels per day.

In 1977 Pemex embarked on an expansion program intended to triple its petrochemical output by 1982. It aimed to be self-sufficient in basic petrochemicals by 1979 and subsequently to develop large volumes of feedstocks--raw or partially processed products destined for further processing--for export. This policy was successful, with basic petrochemicals production increasing from 1.931 million imperial tons in 1980 to 16.9 million tons in 1989. Private capital was allowed to account for up to 40 percent of total issued capital in the petrochemical industry mainly because of Pemex's lack of technological expertise. In 1989 petrochemicals exports climbed by 50 percent to US$110.4 million, while imports declined to US$21.7 million. Export earnings from petrochemicals represented only 1.4 percent of Pemex's total export earnings, but their growth helped to offset the company's deteriorating trade in refined products, which accounted for 6 percent of Pemex's gross exports. Pemex operated a shipping fleet that grew from 6,438 dead-weight tons in 1938 to 618,780 dead-weight tons in 1988.

Although not as dependent as Venezuela on oil, this commodity in the early 1990s accounted for 70 percent of Mexico's foreign exchange and provided around 45 percent of government tax receipts. Crude oil exports also enabled the country to keep up with the repayment of its $103 billion foreign debt. As a decentralized public agency of the Mexican government, Pemex paid 18 percent tax on total revenues from oil and gas, 13 percent on total revenues from petrochemicals, and a 50 percent corporation tax.

Privatization in the 1990s

In June 1990 the international marketing division of Pemex was split off from the main organization. This division, Petróleos Mexicanos Internacional Comercio Internacional, was responsible for the marketing of crude oil, refined products, and petrochemicals. In 1992 Pemex itself was split into four operating divisions, one each for exploration, refining, gas, and chemicals.

In October 1995 Pemex announced that it would begin denationalization of its petrochemical division. Pemex was prepared to offer 10 petrochemical complexes, consisting of 61 plants, as possibilities for privatization. The plan received heavy criticism in Mexico, however, especially from Sindicato de Trabajadores Petroleros, the oil workers' union. Carlos Romero Deschamps, head of the union, said, "We cannot permit the crisis that we face to destroy the solidity of Pemex, which is a fundamental pillar of Mexican development."

Though Pemex had cut its staff almost in half in the years between 1989 and 1995, the company still employed 108,000 people. Even the American oil producer Exxon, which had approximately five times Pemex's revenues in 1995, had fewer employees. Much of the criticism, then, could be attributed to fear that more efficient, private companies would eliminate employees. Opposition to privatization had the law on its side, as Mexico's constitution forbid anyone but the state to invest in oil development.

Pemex has taken steps to work around the constitutional restrictions--for example, entering joint ventures with Amoco Corp. and Mobil Corp., both of which opened stores in Mexico to sell Mexican fuel. Still, much of Mexico saw the petroleum industry as belonging to Mexico and the Mexican people. As a compromise, the Mexican government agreed in March 1996 to limit foreign participation in the sale of its petrochemical complexes to 49 percent. This was intended to guarantee participation of local companies in the privatization.

Meanwhile, Pemex continued to suffer environmental and safety setbacks. In April 1992 a Pemex depot leaked fuel into the Guadalajara sewer system, resulting in an explosion that killed more than 200 people. In November 1996 Pemex workers were repairing a valve at a storage facility when it caught fire. The resulting explosion and fire killed 4 people and injured 19, and eventually more than 5,000 people were evacuated from their homes. In May 1997 an explosion at a Pemex gasoline storage plant in northern Mexico killed 2 people and injured 3. Responding to safety difficulties, Adrian Lajous, Pemex general director, said, "It is likely that we are not clearly in line with standards that prevail in other countries around the world."

At the Cosoleacaque petrochemical facility near Coatzacoalcos, more than one million cubic meters of wastewater was dumped into the Coatzacoalcos River each day in 1996. Cosoleacaque was to be the first plant to privatize, though analysts said it would be one of the toughest to sell, partly because its antiquated facilities would make it difficult to compete in a market made more competitive by NAFTA (North American Free Trade Agreement). Some environmentalists had hoped that the sale of this facility and others would initiate environmental cleanup of the sites by the new owners. Others feared that Pemex was simply dumping an environmental hazard before it became too much of a problem.

In February 1997 Pemex petrochemical workers signed wage accords and agreements that recognized the breakup and privatization of the state petrochemical assets. The contracts were signed with four new petrochemical companies--Petroquimica Camargo, Petroquimica Cosoleacaque, Petroquimica Escolin, and Petroquimica Tula. This was just the first step in selling the 49 percent stake in Pemex petrochemical interests, and Mexican labor made it clear that privatization would not be an easy or speedy process. Even so, the need to improve efficiency and safety conditions at Pemex was creating strong pressure for increased privatization.

Principal Subsidiaries: Tetraetilo de Mexico S.A.; Compañía Mexicana de Exploraciones S.A. (COMESA); Instalaciones Inmobiliarias para Industria S.A. de C.V.; Compañía Operadora de Estaciones de Servicio S.A. de C.V.; Distribuidora de Gas Natural del Estado de Mexico S.A. de C.V.; Distribuidiora de Gas de Queretaro S.A.; Cloro de Tehuantepec S.A. de C.V.; Empresas del Grupo PMI; Respol, S.A.

Further Reading:

• Baker, George, Mexico's Petroleum Sector: Performance and Prospects, Tulsa, Okla.: PennWell Publishing Co., 1984.
• Bermudez, Antonio J., The Mexican National Petroleum Industry: A Case Study in Nationalization, Stanford, Calif.: Stanford University Press, 1963.
• Mack, Toni and Joel Millman, "Petroleum Machismo," Forbes, April 10, 1995, p. 46.
• Philip, George, Oil and Politics in Latin America, Cambridge: Cambridge University Press, 1982.
• Randall, Laura, The Political Economy of Mexican Oil, New York: Praeger, 1989.
• Richards, Don, "Ammonia Complex to Start Pemex Privatization Push," Chemical Marketing Reporter, October 2, 1995, p. 7.
• Sepulveda, Isidro, "Pemex in a Dependent Society," US-Mexican Energy Relationships, by Jerry R. Ladman, et. al., Lexington, Mass.: Lexington Books, 1981.
• Sissel, Kara, "Ownership Restrictions Drive Mexican-Multinational Linkups," Chemical Week, March 27, 1996, p. 8.
• Szekely, Gabriel, La economía política del petróleo en México, 1976-1982, El Colegio de México, 1983
• Thurston, Charles W., "Mexican Slowdown," Chemical Marketing Reporter, September 4, 1995, p. SR10.
• "Troubled Waters: Mexico's Economy," The Economist, October 19, 1996, p. 77.
• Williams, Edward J., The Rebirth of the Mexican Petroleum Industry, Lexington, Mass.: Lexington Books, 1979.
• "Workers Sign-On to Sell-Off," The Oil Daily, February 28, 1997, p. 5.

Source: International Directory of Company Histories, Vol. 19. St. James Press, 1998.

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