Twenty-one years ago, a new Pemex Law was approved, which included the first step towards Pemex modernization: the law determined the creation of a corporate governance structure, and four subsidiaries – Pemex Exploration and Production, Pemex Refining, Pemex Gas and Basic Petrochemicals, and Pemex Petrochemicals. Last Wednesday, the new members of Pemex’s Board decided to evaluate the possibility of overturning this ruling, after Fluvio Ruiz Alarcón, a Professional Board Member for Pemex, requested a change in the model.
On January 16th, during Pemex’s Board Meeting, Ruiz Alarcón mentioned his urge to reconsider if Pemex was addressing the national market requirements in the most adequate way. After concluding his argument with the thought that the fragmentation that originally happened in 1992 wasn’t the best solution to respond to the actual challenges faced by the national oil industry, he requested the board to propose a new model where the four subsidiaries would be merged into one.
The Professional Board Member explained the reasoning behind this proposal. “The original argument behind the creation of the four subsidiaries in 1992 was to, first, accelerate Pemex’s transformation to face the growing demands of the national market and the risks of competition that it was facing from external markets; and then, to increase the efficiency and effectiveness of the national oil industry in order to enlarge its productivity in the country’s benefit,” he said. As this may have applied twenty-one years ago, its validity, according to Ruiz Alarcón, has extinguished with the organic development of the industry. “Two years and five months later after discussing the NOC’s current structure – as it was done in August of 2010 – I’m even more convinced that the model has worn out.”
The main idea behind the plan to restructure the NOC is to adapt to the modern challenges that currently surround the national oil industry. But this change might come as a surprise, since the last time the issue came up, the board voted against it, almost unanimously – the results only included two votes in favor: those of Rogelio Gasca Neri and Ruiz Alarcón himself. The Professional Board Member continued to explain that having four different organisms hasn’t helped in generating the optimal conditions for the execution of the whole value chain. He mentioned that it has also hindered the possibility to improve the process of information sharing and transference of human, technological, and material resources. In retrospective, it might seem that the creation of the four subsidiaries hindered the creation of a collective identity, both in terms of operations and in building a single company philosophy.
The proposed restructure, to which Emilio Lozoya, Pemex’s new CEO, will have to respond to in February, might benefit the company in some specific ways. The first benefit that could come from it is the creation of a more solid identity. This might actually be the first building block towards letting Pemex work as a business-oriented company. Having one philosophy, one idea, and one structure comprises all the operations into one mission with one set of objectives. Big private companies, such as Unilever and Procter & Gamble, have recently followed this trend in order to build stronger companies, with bigger leadership and stronger collectiveness.
The concept of solidifying the whole structure into one big company again will also facilitate information sharing, eliminating the bureaucracy of having several subsidiaries. Information will flow easily among the different segments of the value chain, allowing the NOC to respond quicker to the market’s challenges and issues. This would not only allow the NOC to be faster in addressing the possible issues in the market, but also to anticipate what it is demanding in benefit of the country’s energy independence.
Another benefit that this restructure would bring to Pemex is the elimination of the so-called “internal sales.” With Pemex divided as it is, the transfer of one subsidiary’s final product to another had to be accounted for as an individual transaction, even if the product remained within the NOC. After the change, the internal transactions would not have to be accounted for, since it is just the transfer of resources from one area within the company to the other. This could help in terms of the speed at which the resources are shared and, at a management level, to reduce the charge of transactions within the company. Accounting would be done just for transactions outside of the company, reducing the amount of unnecessary registers that would have to be made.
Private companies that provide services to Pemex will also have an easier time in dealing with the NOC. They would just have to go through one company, instead of having to deal with different independent organizations that ended up being part of the same parent company. Bureaucracy could also be diminished in the way contracting processes are approved, reducing the number of approval instances from four to two, and helping Pemex to achieve its contracting targets faster and with fewer obstacles.
On the other side, planning might be affected with the reorganization of Pemex. Priorities within the budget might shift, since there would be one integrated budget instead of one for each subsidiary. The activities that the NOC might follow would respond to different interests, in which refining and petrochemicals might suffer the most, since they were the less profitable subsidiaries.
In the end, only time will tell us if Pemex is making the right choice at proposing this structural change. What definitely raises eyebrows is the fact that the NOC is attempting to return to a model that was changed 21 years ago to better approach the market, admitting that the change did not accomplished its main targets. What do you think about Pemex reunification into one single company?
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