Assumptions in the 2014 Energy Reform: What was the reform meant to resolve for Pemex?

The 2014 energy reform entailed a profound chain in the way the Mexican power and hydrocarbon sector is run- In the case of Pemex, specifically, the idea was to overhaul the legal framework governing the parastatal enterprise, modernizing it to strengthen the industry and boost oil revenues (^{Presidencia de la República, 2015}). The official diagnosis underscored the deficit in the realms of financial, human, and technological capital, reflected in three aspects: 1) lack of technology and resources to drill deepwater oil (500-meter sea floor) and ultra-deepwater oil (more than 2,000 meters),² to restore the reserves before Cantarell, the largest oil field accounting for 63% of Pemex's total production, is depleted; 2) outdated technology for extracting shale gas-rock that needs to be fractured to obtain the gas-and under-use of production potential; 3) a fuel market cornered by Pemex-especially gasoline-and the risk of running out of the national supply (^{Presidencia de la República, 2014}, ²⁰¹⁵; ^{Pemex, 2013}, ^2014a).

The response of the reform was to change Pemex's legal regime, transforming it from a parastatal enterprise into an EPE, which is a figure that grants not only administration but also ownership to the State, by modifying Articles 25, 27, and 28 of the constitution, enabling complete autonomy via CG, and empowering it to partner with other oil companies (^{Pemex, 2015}). The objective was emphatically financial, setting Pemex's goal as maximizing profits (^{H. Congreso de la Unión, 2014b}). With the legal adjustments, the oil reserves were monetized, becoming a business plan that could be harnessed by the public and private sector (^{Pemex, June 10, 2017}).³ The partnership with private investment-at the corporate and subsidiary level-⁴ came from a new paradigm to manage natural resources, turning them from means to development into financial usufructs. The Hydrocarbons Law established the primacy of drilling for oil and gas over any other activity in the Mexican surface or subsurface, even refining (^{H. Congreso de la Unión, 2014c, pp. 38-39}; ^{Pemex, 2014a}), a model that failed to consider the business approach of the transnational companies, whose main strength is end-to-end exploitation of the chain, and many of which had already made partnerships with Pemex.

The regulatory framework set in the strategic farming out and joint venture associations the public-private co-participation method to identify priority fields that are highly technically complex and require lots of capital (deepwater oil and gas, mature fields, extra-heavy oil fields), to accelerate production and restore reserves (^{Pemex, 2014a}). Pemex EPE ended up being subject to the Mercantile Law, which opens it up to sanctions if it violations the rules of competition (^{Pemex, June 12, 2017}).

Efficiency and Competitiveness: The New Parameters of the Hydrocarbon Sector

Corporate Governance (CG): Autonomy and Minimal Regulation

In the context of globalization (^{Rivas, 2002}), management of public companies for the purposes of greater autonomy, such as the CG for Pemex EPE, finds its roots in the nineteen-nineties. The first version is in the Organic Law for Petróleos Mexicanos and Subsidiary Bodies, from 1992, which established a general Management Board and, for each subsidiary, another board, signaling the main failure as the subordination to the Executive and to unions (^{Presidencia de la República, 2014, p. 4}). As part of its parastatal classification, Pemex was a Director Budgetary Control Body (known as ODCPD); that is to say, its investment spending was exclusively defrayed by the government (^{SHCP, 2014}). The new form of organization partially removed the centralized system under the command of the Federal Executive, which was entitled o name 6 of the 11 members of the Management and remove them, too. The second change is rooted in the 2008 energy reform and is an administrative change, which only affected the service link of the chain for the company (cargo transport). Its purpose was to strengthen the duties of the Management Board to better manage the budget. Up until that point, in an attempt to give strategic management to an important sector, he management bodies were endowed with best decision-making practices without affecting the matter of state ownership. Pemex continued to be a parastatal enterprise. The third is that the 2014 energy reform designed a company beyond the reach of excessive state intervention, creating for this reason an autonomous governance, charged with maximizing the company's profits and State revenue (^{Presidencia de la República, 2014, p. 16}; ^{H. Congreso de la Unión, 2014a} and ^2014b; ^{Pemex, 2014a}). CG, through the Management Board, assumed, finally, the prerogative of enforcing the laws of a sector of such magnitude as the hydrocarbon sector, now with the powers to dispose of allocate the company's immovable assets by virtue of market needs, as well as to divest and seize them (^{Pemex, 2014a, p. 34}; ^{Presidencia de la República, 2015, p. 3}). Legally, the involvement of the Executive was slowed down, leaving its sole responsibility the appointment of five of the 10 members of the board (Secretary of Energy, Secretary of Finance, and three members from the federal government), and delegated to the Senate the designation of five other independent members (^{Pemex, 2014a}; Presidencia de la República, 2014, pp. 24-28).

Pemex needed better forms of management far before the 2014 reform. It was a parastatal enterprise for over 70 years; for 54 years, it was governed by bylaws that conferred complete control to the State (1938-1992); and 22 years under laws that made this control more flexible to varying degrees (1992-2014) (^{Presidencia de la República, 2014}). But resorting to ^{Buchanan's (2006, pp. 23-33)} critique of state interventionism and the consequent defense of the market, the freedom given to the Board can play against both the management of finance and assets, as well as incentives for transparency and corruption, areas in which there have been inefficiencies over the past 23 years and especially from 2000 to date (^{Pérez, 2012}; ^{Morales and Dávalos, 2015}).

Economic policy management, influenced by any interest other than welfare and development, is a deviation from its nature, which is amply backed by economic and political theory (^{Meny and Thoenig, 1992}; ^{Serrano, 2001}) and by studies that measure corruption in Mexico (^{Casar, 2015} and ²⁰¹⁶). However, it would be mistaken to categorically concede ineptitude to the State and efficiency to private management. Nothing is exempt from the games of interests; for example, following in the footsteps of ^{Palazuelos and Vara (2008)}, the experience of energy liberalization in the European Union led not to a common policy but rather to the predominance of multinationals and weakened governmental regulatory capacity. Also noteworthy is the fact that Pemex EPE requires technically and geo-strategically qualified boards; a less political and more professional Management Board. The involvement of the federal executive continues to be a possibility because although the five independent board members (the counterweight) are ratified by the Senate, it is the executive who must nominate them (^{Presidencia de la República, 2014}). In turn, the chair of the Management Board, the head of the CG, according to OECD guidelines, ought to have a highly competent profile (^{OCDE, 2012, pp. 13-17}). At Pemex EPE, inconsistency in the profiles of the board members⁵ is explained by the preponderance of partisanship and the lack of experts in management strategy able to neutrally mediate between the State and private shareholders in order to prevent problems of information asymmetry and moral risk. Moreover, someone who can reconcile the role of the Sener and that of the SHCP to turn Pemex into a competitive firm with greater independence, under the condition of reducing the fiscal debt, which is no easy task. Additionally, sensitivity to global market movements limits the scope of the reform in terms of the true capacity of CG to work in favor of the company. Pemex is a price-taking company and playing the game entails having organizational models with specialized profiles, an integrated chain, and good competition tactics (^{Rivas, 2002, p. 15}).

The OECD monitoring (2012) in Latin America concluded that the combination of CG principles with the political activity of the State tends to foment boards composed mainly of career civil servants, rather than people with qualified profiles. The discretionary designations continue to be reproduced in those public companies that have adopted the scheme and Pemex EPE is no exception.

Table 1 Evaluation of EPE´s* Corporate Governance* 

*EPE: State Productive Enterprise.

Source: Created by the authors based on: (^{OCDE, 2004}) (^{OCDE, 2011}) (^{OCDE, 2012}) (^{Presidencia de la república, 2014}) (^{Pemex, 2014a} and ^b) (^{Pemex, 2015}).

Fiscal Regime: Between the Budgetary Autonomy of Pemex EPE and its Role as a Financial Agent of the Government

The management model given to Pemex EPE thanks to its CG entailed better used of its finances, fundamentally where payment of taxes, duties, and contributions are concerned, which depends on the difference between available and committed profits. Diverse studies (^{Tello, 2015}; ^{Caballero and Tello, 2008}; ^{Morales et al., 2013}; ^{Cornejo et al., 2012}) analyze the company's fiscal regime. ^{Caballero and Tello (2008)} examine in detail the fiscal obligations and make a proposal to adjust them to reduce the company's tax burden. ^{Cornejo et al. (2012)} and ^{Morales et al. (2013)} use the accounting method and draw conclusions about Pemex's profitability before the taxes, duties, and contributions and its ability to finance its investments. ^{Castañeda and Kessel (2003, pp. 81-82)} furnish arguments to support the budgetary autonomy of public enterprises.

In Mexico, Pemex is the most fiscally penalized company; in the time period 1990-2016, taxes, duties, and contributions represented 93% of profits; in 2014-2016, they exceeded 100%. As a percentage of total revenue, they represented 61%; in the case of Petrobras, by contrast, this figure was just 33% (^{Huerta and Ruíz, 2012, pp. 129-131}), Ecopetrol is at 11%, and Petróleos de Venezuela is at 40% (^{OCDE, 2014}). Pemex's fiscal treatment has been directly related to the low tax burden; Mexico collects 17.4% of GDP, while Brazil collects 32$, Colombia 20.8%, and Venezuela 20.9% (^{OCDE, 2017, pp. 23-24}; ^{OCDE, 2016}). Unlike the 2015 statistics, they show an increase of 2.3% in collections with respect to GDP (17.4%). In 2015, the figure reached 15.1%, but Mexico continues to be below the OECD average (34.3%) and the Latin American average (22.8%) (^{OCDE, 2017, p. 25}).

In accounting terms, the strong tie between the public budget (and to a certain point, development) and Pemex's revenues as a parastatal and an EPE, the proportion that the taxes, duties, and contributions payment represents in the primary balance sheet can be seen (revenue less total expenses, without including amortization for interests) (see Figure 1).

Table 2 Pemex EPE* Fiscal Regime 

*EPE: State Productive Enterprise.

Source: Created based on (^{Pemex, 2014a})

*EPE: State Productive Enterprise

Source: Created by the authors based on the budgetary monitoring section of <http://www.pemex.com>

Figure 1 Percentage Share of Taxes, Duties, and Contributions Payments in the Pemex Primary Balance Sheet (before and after 2014; parastatal and EPE)* 

There is a contradictory relationship between prices and fiscal obligations when 2008-2013 and 2014-2016 are compared. These two time periods correspond to the two energy reforms (2008 and 2014) and it is clear, on the one hand, the propensity to tax 98.7% of Pemex's profits in a high-price period in the first case (86 dollars per barrel [dpb] on average). But also the tendency to continue doing it at 107.5%, in a time period when prices fell precipitously in the latter time (55 dpb on average). This reflects Pemex EPE's vulnerability to being governed by its new management model; it challenges the competency of the CG to autonomously manage finances in light of market instability and with the owners of the company being Sener and SHCP; that is o say, it goes against the principle of maximum self-regulation of public companies open to private capital. There is no denying that taxes, duties, and contributions account for more than 90% of hte primary balance in the entire period 1993-2016 and more than 100% in the time period 2014-2016. Pemex bears the fiscal, market, and corporate pressure with a debt of 100 billion dollars (^{Fitch Ratings, 2016}) and a labor liability (pensions and other employment benefits) that amounts to 8.3% of GDP (^{ASF, 2015, pp. 22-24}).

When it comes to debt, the Fitch Ratings sensitivity analysis (2016) underscores the likelihood of financial insolvency due to the high fiscal burden and the lack of containment policies. As a result of low oil prices in 2014-2016, much of Pemex's profits were taken for the federal budget, and debt grew to cover taxes; in 2017, the debt amounted to 125 billion USD, 25% more than it was in 2016 (^{Fitch Ratings, 2016}). The costs to produce crude and gas are competitive; savings from there are not the way out. The problem with the debt is that it is being used to cover productive and operating expenses, including fiscal obligations. The biggest debt lines up with the time period 2008-2016, when taxes, duties, and contributions exceeded 100% of the primary balance, a situation which was backed by the federal government, given that financing proposals are examined by the SHCP to be included in the Financial Program for the General Public Debt Law, which is subject to the annual overall debt ceiling approved by the Congress (2014a and 2014b).

Pemex EPE needs fiscal treatment that is consistent with the purposes of competitiveness and efficiency (^{Terrazas, 2009, pp. 55-56}), which prevents subordination to private capital. Fiscal pressure and the external market play the biggest role in influencing autonomy. Lightening the fiscal burden is a prerequisite for efficiency, but it will mean aligning the objectives and balancing powers within the Owner State, personified in the form of Sener and SHCP.

Table 3 Evaluation of Pemex EPE´S* Fiscal Treatment 

*EPE: State Productive Enterprise.

Source: Crated by the authors based on: (^{OCDE, 2004}) (^{OCDE, 2011}) (^{OCDE, 2012}) (^{Presidencia de la República, 2014}) (^{Pemex, 2014a} and ^b) (^{Pemex, 2015})

Strategic Partnerships with Other Oil and Petroleum Companies

The first Pemex EPE Business Plan (^{Pemex, 2015}) set out to free the company from financial and capital restraints and get up and running a system of licensing, production contracts, and shared profits, as well as service contracts (^{FMP, 2015}) in the crude and petroleum sectors (^{Pemex, 2014a} and ^2014b; ^{Schlumberger, 2001, p. 22}) (see Figures 2 and 3).

*Petroleum products: liquefied gas, propane, gasoline, naphtha, diesel, turbosine, gasoil.

Source: Created by the authors based on <http://www.pemex.com>

Figure 2 Oil Exports. Petroleum Product Exports and Imports* 

Source: Created by the authors based on http://www.pemex.com

Figure 3 Value of Foreign Trade in Crude Oil, Petroleum Products, and Natural Gas 

When it comes to petroleum products, the official argument about the risk of a national shortage ended up opening the gasoline market (freight forwarding, pipelines, new brands), now the fuel that accounts for 52% of total imports in the sector and the demand for which is burgeoning (^{Pemex, April 29, 2017}), alongside increased production (assembly) of cars in Mexico and more vehicles on the road (^{INEGI, April 29, 2017}) (see Figure 4).⁶

Source: Created by the authors based on information from http://www.pemex.com>

Figure 4 Gasoline Exports and Imports 

In crude oil, via the subsidiary Pemex Exploración y Extracción the reform foresaw for the short term a scheme of partnerships centered around foreign companies; in petroleum products, via Pemex Logística, with national companies, in the form of commercialization service contracts based on the import of fuels. In crude oil, of the first three contracts signed with transnational companies, awarded in Round One, two were deepwater exploration projects. Investment in the first four years amounted to 100 million pesos, used to conduct exploratory studies that will define the commercial potential in the Norte Plegado of the "Lost Belt" of the Gulf of Mexico (^{Pemex, February 28, 2017}). From Round Zero, there was the field development project, the first in the farming out model, between Pemex EPE and BHP Billiton, the Australian oil company that will drill the Trion Block in the Gulf of Mexico. The total project cost is 11 billion dollars, and first production is expected to be obtained in six years with over 100,000 bdp equivalent crude (^{Pemex, March 3, 2017}). There is certain commercial viability, given that the Trion Block was discovered back in 2012 by Pemex and has 3P reserves (Possible, Probable, and Proven) worth 485 million barrels (see Table 4).

Table 4 Pemex EPE´S* Strategic Partnerships and Service Contracts 

*EPE: Empresa Productiva del Estado.

Fuente: elaboración propia con base en la información de <http://www.pemex.com>

In petroleum products, the first six contracts are for gasoline supply (^{Pemex, March 6, 2017}); in this case, Pemex Logística shall continue importing fuel and distributing it through the pipeline system, while private parties may use their own cargo transport. The opening of the pipelines is in process, and given the demand for construction and maintenance, it is expected that multinationals will come in to compete with Pemex. In refining, the impacts are premature. The transition is happening pursuant to sectoral performance; private parties move within the confines of importation, not transformation, a capital-intensive activity in which environmental regulations are a key factor for it to be viable (^{Romo, 2016, p. 141}). Nevertheless, partnerships are needed to reactivate the National Refining System. In the immediate term, under the transportation, storage, and distribution permit model (not tied to pipelines), companies shall resell Pemex Logística gasoline, and they will not incur infrastructure expenses for facilities, as they will refurbish Pemex stations to their own brands (^{Pemex, March 12, 2017}).

Table 5 Evaluation of Pemex EPE´s Strategic Partnerships and Contracts 

*EPE: Empresa Productiva del Estado.

Fuente: elaboración propia con base en: (^{OCDE, 2004}) (^{OCDE, 2011}) (^{OCDE, 2012}) (^{Presidencia de la República, 2014}) (^{Pemex, 2014a} y ^b).