Labor, Political Corruption Is Undermining Mexican Oil Industry

Unless one has been in hiding these past few months, the most defining aspect of our nation’s daily life, beyond the inevitable rah-rah of the presidential campaign, has been soaring crude oil and retail gasoline prices, now well over $4 a gallon – unthinkable even a half-year ago.  Of the many explanations for this state of affairs, one in particular merits more attention:  the oil industry south of the border.  For better or worse, Mexico is America’s third-largest foreign supplier of crude oil, right behind Canada and Saudi Arabia.  And the union representing most of the workers in that industry is shot through with corruption.  That’s something that may come to play a greater role than ever in our own energy and immigration policies.      


It’s been a fact of life for 70 years:  Mexico’s oil industry is a state-run monopoly.  In 1938, in a pique of nationalist fervor, the Mexican government, led by President Lazaro Cardenas, expropriated (i.e., stole) the assets of American and Anglo-Dutch petroleum companies against whom Mexican workers were striking.  The government reorganized this wealth into an entity called Petroleos Mexicanos, or simply Pemex.  Just to make sure the new company wouldn’t get any ideas about asserting its independence, the government amended the national constitution of 1917 granting to itself complete authority over the processing and distribution of oil and natural gas.  Believe it or not, in Mexico the date of this seizure – March 18 – is celebrated as a national holiday, Oil Expropriation Day.  The enforced commingling of industry and state has been a mixed blessing at best.  Having been shielded from competition, Pemex has been reaping the consequences of high operating expenses and low exploration levels.  The result is an economy, and not just an industry, in perilous straits. 


As Pemex goes, so goes the Mexican economy.  The company generated nearly US$200 billion in revenues in 2006, making it the tenth-largest oil-based enterprise in the world.  Pemex is also the main source of foreign currency earnings for Mexico.  What’s more, about 40 percent of the Mexican federal government’s tax and royalty revenues come from Pemex, most significantly from a 71.5 percent levy on the value of all oil and natural gas produced.  This has put Pemex at the whim of successive six-year presidential administrations.  “It’s effectively a government department of the moment,” observes Matthew Shaw, senior Latin American analyst for the Edinburgh, Scotland-based energy industry consulting firm, Wood Mackenzie. 


To understand oil corporatism, Mexican-style, it’s necessary to understand the lethal mix of government and organized labor.  Pemex’s work force in recent years has averaged about 150,000 employees, roughly three-fourths of whom belong to the Union of Oil Workers of the Mexican Republic.  Yet the company is hamstrung in labor negotiations.  There are a few good reasons. 


First, the distinction between company, union and government is blurred.  Of the 11 persons who sit on Pemex’s board of directors, six also are members of the Mexican President’s cabinet and the other five are union officials.  Undoing this arrangement would require a constitutional amendment, and few people are in the mood to go that extra mile.  It’s hard to negotiate with a union that to a large extent doubles as an employer. 


Second, the government effectively negotiates at the union’s behest because it controls the company.  Pemex has all the appearances of a real business, right down to its gleaming high-rise headquarters in Mexico City.  But it isn’t permitted to behave like one.  Aside from paying heavy tribute to the government – about 60 percent of its revenues go straight to paying taxes and royalties – the company doesn’t have the freedom to hire and fire at will.  The result is that a sizable number of employees get paid for doing little or nothing.  Example:  Guillermo Najera, 42, a machine operator at the firm’s ammonia processing plant in Ciudad Camargo.  He still shows up for work, even though the plant ceased production in 2002.  “We don’t have anything else to do except keep our areas clean,” he admits.  “I want to go back to work.”  Unfortunately, the main priority of the Union of Oil Workers isn’t much concerned about productivity.  Were that not enough, Pemex has been saddled with government control of a magnitude that would be considered unacceptable almost anywhere else.  The Mexican Finance Ministry, not the market, sets Pemex’s prices.  The ministry also controls its budget and debt. 


Third, obstacles to imposing market discipline, even under a supposedly reform-minded president, have proven nearly fruitless.  Mexico’s previous head of state, Vicente Fox, learned the hard way.  Things looked promising when he took office in December 2000 as the first president in over 70 years who didn’t carry the banner of the Institutional Revolutionary Party (PRI), Pemex’s longtime political benefactor.  What’s more, he knew the business world well, having served years earlier as a Coca-Cola executive.  And he had an ambitious agenda, vowing to bring in private investment, shift a portion of the tax burden onto non-Pemex sources, modify labor laws, and make shares of Pemex stock available to the general public.  He appointed Raul Munoz Leos, at the time president of DuPont’s Mexican operations, to head Pemex, with instructions to run it like a private company.  But the reform program went nowhere.  Furious opposition from the union, Mexican Congress, the Finance Ministry and officials within the company made sure of that. 


All of this has enabled union and company officials alike to treat Pemex like a private bank.  And this bank has paid well, if not necessarily legally.  Here are a few examples of corruption on an eye-popping scale:


  • In a scandal that came to be known “Pemexgate,” then-CEO Rogelio Montemayor Seguy approved as much as $200 million in questionable company payments to the union, most of which ended up in the PRI’s 2000 campaign war chest.  Montemayor fled to the U.S., was arrested in Houston, and then extradited back to Mexico.  He managed to avoid prison. 


  • A labor official, Jorge Diaz Serrano, went to prison in the 80s on charges that he’d pocketed tens of millions of dollars from a secret deal to buy oil tankers.


  • Former union chieftain Joaquin Hernandez Galicia was convicted and sentenced to prison in 1989 after acquiring enough weapons to outfit a private army.


  • Pemex employees have been active siphoning off gasoline for personal use.  Mexican officials estimate the value of lost sales at $1 billion annually.


  • Documents from the Mexican Federal Audit Office reveal Pemex in 2006 incurred $157 million in unexplained or unapproved expenses. 


The company is a giant piñata clothed in patriotism.  One Pemex worker, on the condition of anonymity, recently explained it this way:  “Pemex is a can of worms.  If you do something right, they come after you; if you shut up about some irregularity, they reward you; and if you take part in corruption, you profit.”  Fox-era CEO Leos stated that the proceeds from illegal activity by company employees and union bosses were comparable to those of Mexican drug traffickers.  He should know about corruption on a grand scale:  In 2007 he was fined $80 million and banned from holding public office for 10 years for misusing Pemex funds and illegally transferring more than $170 million to the oil workers union and another $12,500 for a more critical domestic need – his wife’s liposuctions. 


Corruption and its first cousin, inefficiency, are draining Pemex’s coffers.  It’s a key reason why even as crude oil prices rose above $100 a barrel last year, resulting in record-high profits for companies around the world, Pemex went into the red.  This has caused cuts in infrastructure and supply spending.  Worker safety has suffered accordingly, at times with tragic results.  In October 2007, at least 21 company workers were killed following a collision between the oil platform on which they were working and an undersea oil well.  The workers drowned when their lifeboats broke up in a raging storm as they left the platform.  Several persons accused the company of knowingly buying flimsy boats to cut costs.  Infrastructure also has taken a turn for the worse.  This spring, Pemex had to shut down a pipeline in its Ixtal oil field for a full month, prompting it lower its overall production target by 6.5 percent.   


Reforming the Pemex behemoth is far easier said than done.  Current President Felipe Calderon at least is taking tentative steps in the right direction.  He’s urging Mexican Congress to pass legislation enabling Pemex to establish performance-based contracts with private firms.  He wants to open 37 of Pemex’s 41 divisions to private subcontractors.  Calderon openly acknowledges Brazil’s successful privatization program as a model.  Yet even though his program would not apply to revenues from Mexican-produced crude oil, the union and the political Left have vowed to fight the effort.  


As for political opposition, its most forceful voice is that of Andres Manuel Lopez Obrador, the radical populist leader of the Party of the Democratic Revolution, who lost the 2006 presidential election to Calderon by a razor-thin margin (and to this day insists he is the “legitimate” president).  “Oil profit belongs to the Mexican people, and there’s no reason to privatize it,” he said at a February 11 press conference.  He prefers a strategy of raising company spending and reducing corruption, unaware perhaps that it is so much of the first that is driving so much of the second.  He’s also making veiled threats.  At a rally in front of Pemex headquarters on February 24 that drew a crowd of thousands, Lopez Obrador warned that privatization could lead to violence. 


It’s not as if there hasn’t been violence already.  On July 10, 2007, a domestic Marxist-Leninist guerrilla group, the Popular Revolutionary Army, claimed responsibility for explosions at Pemex pipelines occurring that day and five days earlier.  The upsurge in far Left populism, in Mexico as well as in the rest of Latin America, may be the unspoken reason why the Mexican government is walking softly on the privatization issue.  Current Pemex CEO Jesus Reyes Heroles, a former energy minister, began advocating loosened state controls only this past March, well over a year after his appointment. 


The ultimate oil issue is the availability of oil itself, or more to the point, the ability of Mexico to extract it.  Industry experts believe some 30 billion barrels of crude oil reserves lie in deep waters below the Gulf of Mexico.  Yet Pemex lacks the technology, money, and trained personnel to engage in deep-water exploration.  And Mexico’s constitution bars the company from entering into partnerships with foreign companies.  Some analysts recently estimated that given the current rate of consumption, Mexico’s oil production will last only 9.2 years and its oil exports will end even sooner.  Even more optimistic projections concluded daily production from Pemex’s existing fields will drop by 1.8 million barrels by 2021.  The country already is feeling the pinch.  In April 2008, daily output fell to 2.77 million barrels, down from 3.18 million in April 2007.  Of this, about 1.7 million barrels are exported, about 1.25 million of which arrive in the United States.  President Calderon knows what is at stake.  In a recent televised address, he stated:  “We must act now because time, and oil, is running out on us.”


To make up for a projected 1.8 million barrel-a-day shortfall, company officials plan to step up production by 700,000 barrels in southeastern fields, 600,000 barrels in Chicontepec, and 500,000 in deep water.  Pemex also is drilling an exploratory deepwater well in the Gulf called “Tamil 1.”  These are encouraging signs.  Yet long-term success ultimately depends on one thing above all else:  shedding the plutocracy that lies at Pemex’s foundations.  Record-high crude oil prices may be the only thing right now masking collapse.  And if and when prices do drastically decline, the government would have to provide Pemex with larger subsidies (the company right now needs $9 billion for infrastructure repair alone), and hike taxes on everyone else to avoid severe service cutbacks.  This in turn may trigger yet more immigration, legal and otherwise, to the U.S., raising further the political pressure for amnesty.  Mexico’s oil industry corruption is our business, not just theirs.  (New York Times, 7/2/02; Dallas Morning News, 9/20/03; International Herald Tribune, 11/22/06;, 4/9/08;, 5/4/08;, 5/29/08; Bahia de Banderas News, 5/08; other sources).