Publish in Perspectives - Wednesday, March 2, 2016
José Antonio González, who halved the deficit at Mexico’s social security institute IMSS, has been charged with turning around the worsening finances at state oil producer Pemex.(Photo: IMSS)
Will Pemex soar or sputter under González Anaya?
BY ENERGY ADVISOR
Mexican President Enrique Peña Nieto on February 8, 2016 named José Antonio González Anaya as the new chief executive of state-run oil company Pemex, replacing Emilio Lozoya Austin, who had headed the company since December 2012. The move was part of a larger administrative shuffle as the oil company struggles with the effects of low global oil prices. What plans does González Anaya have for the oil giant? How will they be received by Pemex’s unions and other key stakeholders? Does González Anaya have the background and clout needed to turn the struggling oil company around?
Eduardo Canales, global energy transactions associate at Akin Gump Strauss Hauer & Feld in Houston: The appointment of José Antonio González Anaya as new CEO of Pemex occurs at one of the most challenging times for the Mexican state-owned company. Almost two years ago, the energy reform was enacted to give Pemex the necessary tools to turn into a state-productive enterprise and develop a leaner, meaner business model that could lead Mexico’s energy renaissance. Pemex’s efforts, however, have been partially diverted over the past 18 months to deal with the slump in global crude prices and ensuing financial volatility. The average price of the Mexican crude mix has plummeted between January 2014 and January 2016, leaving a $3 billion gap in Mexico’s estimated income, despite the hedges acquired by the government. Consequently, Pemex has increasingly relied on net indebtedness to finance its capex, going from 38 percent in 2013 to almost 80 percent in 2015. This new global energy industry reality has required Mexico to make fundamental changes to address Pemex’s most pressing needs. Even though Emilio Lozoya Austin did a great job in setting up the legal basis for Pemex’s turnaround, the new status quo demanded an economic and financial expert to lead Pemex through an efficiency- and utility-maximizing exercise to take full advantage of the new regulatory framework. The answer was González Anaya, a Mexican economist educated at MIT and Harvard. Dr. González has held several government positions in Mexico’s Finance Ministry, where he was able to demonstrate his technical and quantitative skills through different projects. Most recently, González successfully spearheaded the turnaround of the Instituto Mexicano del Seguro Social (IMSS), a Mexican welfare cornerstone that faced a dire economic future only a few years ago. His methodical approach to analyze and dissect economic inefficiencies and his effectiveness in implementing pragmatic solutions to a seemingly collapsing social security system were his strongest credentials to take over Pemex’s reins. The Mexican government’s appointment of González looked past some of the flashier, albeit cyclical, headlines that dominate the energy markets today, and focused on addressing Pemex’s current microeconomic woes and pursuing Pemex’s long-term success.
Jeremy M. Martin, member of the Energy Advisor board and director of the energy program at the Institute of the Americas: At the mid-point of a president’s term, he replaces the CEO of the struggling national oil company with a brilliant, U.S.-educated economist. The marching orders are clear: crack the fiscal whip, boost efficiencies, recover oil production, and reset the relationship with the company’s ever-intransigent union. And so it went in September 2009 as Felipe Calderón turned to Juan José Suárez Coppel to right the ship at Pemex. There was no souped-up DeLorean involved, but the change at the top of Pemex this month does have a bit of Back to the Future flavor.
President Enrique Peña Nieto turned to a highly regarded U.S.-trained economist with an important understanding of Pemex’s relationship with the federal treasury and much clout among the country’s financial cognoscenti. During González Anaya’s tenure at the helm of Mexico’s social security institute, he halved the deficit and dealt with pension issues. But, alas, all the financial chops in the world do nothing to immediately alter Pemex’s dire straits derived from its lack of fiscal flexibility and massive debt; an obdurate middle management and union; and, falling oil production. Fortunately, González Anaya has more tools at his disposal than did Suárez Coppel in 2009.
The energy reforms have afforded Pemex important opportunities to bring in outside capital. Indeed, the long-awaited farm-outs and joint ventures should form a near-term priority of his management of the company; austere budget cuts offer little alternative. González Anaya’s immediate predecessor was touted as a turn-around specialist, but for his tenure, simply arresting Pemex’s horrific slide would be a grand victory for the time left in Peña Nieto’s sexenio.
Kirk Sherr, member of the Energy Advisor board and president of Clearview Strategy Group, LLC: José Antonio González Anaya joins the wave of economists/bankers to take over major Latin American state oil companies. Aldemir Bendine (banker) took the reins at Petrobras in February 2015 and Juan Carlos Echeverry (economist and ex-Finance Minister) assumed the top spot at Ecopetrol in March 2015. They all come to the job with green eye shades and a mandate to improve effi ciency, lower costs and re-align cash fl ows and balance sheets to cope with lower crude prices. It seems like only yesterday that Pemex was poised to turn things around via participation (in Round ‘0’) in the bid round process that dramatically restructured the Mexican upstream. Now, just 18 months later, a date for added bid rounds is uncertain, along with Pemex’s capacity to invest in what it kept. Meanwhile, Pemex crude output continues to decline and current production is lower by several hundred thousand barrels compared to when the energy sector restructuring law was passed in August 2014. Plus, the full impact of upstream investment and job cuts still hasn’t kicked in. González will have his hands full keeping personnel and union politics from overwhelming him as he slashes more jobs. For this stage in the Pemex trajectory, a background running Mexico’s pension system counts for more than oil experience, as the company’s pension obligations of some $100 billion must be lowered. But, if oil prices remain in the $30 per barrel range throughout the remainder of 2016, pension ‘adjustments’ and personnel cuts will be just the beginning of far-reaching internal changes at Pemex.
Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars: The recent changes at Pemex highlight the growing sense of crisis at the company and the fact that the outgoing leadership had not been able to alter the fundamental reality of a company that is still ill-equipped to compete in an open, market-oriented oil and gas sector.
The new CEO, José Antonio González Anaya, is a well-respected and effective administrator who has many years of experience in Mexican government leadership roles. His closest ties are with the Finance Ministry, which suggests that there will be a heavy focus on fixing the finances of the company and also that there will be closer collaboration/coordination with the ministry. This may be positive, as it should facilitate both the adjustments that need to be made in Pemex’s balance sheet and the inevitable injection of capital that the company needs.
A major challenge for the new CEO will be improving relations between the leadership and long-term Pemex employees, who have shown that they are skeptical of politically appointed leaders, and that they are willing to resist the new business model for the company. This will become even more difficult when González begins to make large-scale layoffs, as he must.