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May 9, 2001, 11:21PM

New Pemex head finds barrels of problems

Reuters News Service

MEXICO CITY -- When Raul Munoz left the private sector to take the helm of Mexican state oil monopoly Petróleos Mexicanos, he signed himself up for more than the average corporate overhaul.

Since Munoz, a longtime executive from U.S. chemicals giant DuPont Co., moved into Pemex's 50-story tower in Mexico City in December, he found the company he leads is short $3 billion this year to meet its basic costs and still expand.

And, on top of that, Munoz has discovered that Pemex, one of the world's five largest oil companies with $48 billion in revenues last year, is ensnarled by a vast web of red tape.

"Bureaucracy is incurring costs calculated at more than $1 billion a year," Munoz said recently.

This and other massive pressures on Pemex, created after Mexico nationalized the oil industry in 1938, are part of a laundry list of challenges facing a company seen by many as one of the country's most wasteful and bloated bureaucracies.

And overcoming them is precisely what President Vicente Fox and a squadron of energy officials have vowed to do.

Among other goals, the team wants to improve Pemex's ability to face private sector competition, reverse sliding oil reserves, lift lagging natural gas production and trim $3 billion in costs.

But 150 days into the government's planned shake-up at Pemex, analysts say the state firm is as mired in stagnation as it was before Fox took power in December.

"If Fox is going to meet his goal of 7 percent growth annually, he has to have an energy sector that is well-managed," one Mexico-based energy consultant said.

"Reserves are still declining, we're not dealing with the natural gas situation, there are serious issues ... what you see is basically a lack of action, a vacuum."

Thanks to vast pools of oil and gas and a strategic location on the U.S. southern border, Mexico has long been a key player on the global energy stage. It ranks as the world's No. 7 producer and one of the United States' top three crude suppliers.

Three years ago, Mexico heightened its profile even more by co-authoring an agreement with OPEC and other independent producers to rein in production and lift sagging oil prices. Mexico, though not a member of the cartel, is still largely cooperating with OPEC cuts and increases.

The global effort to keep oil prices lofty has erased most of Mexico's concerns about a repeat of a 1998 budgetary debacle. Because the government relies on Pemex for a third of its income, oil prices near the $10 a barrel mark forced three separate spending cuts during that year.

But while prices no longer figure high among Mexico's worries, analysts say events at home are strangling the oil powerhouse, particularly Fox's failure to push through Congress a much-heralded overhaul of fiscal structures, which would extend a 15 percent sales tax to food and medicine.

The fiscal reform is aimed at lifting paltry tax collection rates in order to fuel economic growth and raise money for education, infrastructure and health spending.

For Pemex, the improved tax collection is especially critical because it would translate into less government dependence on oil revenues, enabling the company to invest a greater chunk of its revenues. Last year, for example, Pemex earned $48 billion but after taxes posted a loss of nearly $200 million.

But Congress went into recess last week without approving key elements of the plan, as many legislators oppose the fiscal reform's plan to extend taxes to food and medicine on the grounds it would further punish the poor.

This impasse leaves Pemex dangling as the government's cash cow indefinitely, with a budget insufficient to fund the massive costs of exploration and production needed in oil, and more desperately, natural gas, analysts said.

In addition to the stalled fiscal reform, Pemex suffered another political defeat last week. In an apparent concession to the heavily divided Congress that has stalled the fiscal reform, Fox sacked the board of directors he had filled with high-profile business titans in an efficiency drive.

The board, which had included telephone giant Teléfonos de Mexico chairman Carlos Slim and other billionaires, named four government officials to replace the departing business magnates. The four executives were expected to move to a nonvoting advisory committee.

Analysts said Fox mishandled the changes by trying to create a modern, private-style board without making the required internal statute changes.

As a result, Pemex has been unable to move forward with any of the planned streamlining, which is almost sure to include a paring down of the oil giant's 130,000-person labor force, analysts said.

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