Truth is Stranger than Fiction, Mexico Edition

and I’m not actually talking about El Chapo’s (second) escape from a “high-security” prison in Mexico.  No, this time it’s Pemex that is providing the hilarious incompetence via an article called “12 Ridiculous Things We Learned About PEMEX’s Insanely Expensive Safety Videos.”

Let’s start with the fact that Pemex has a terrible safety record.  According to the article (and the Reuters investigation upon which it is based), “Mexico has the worst injury rate of all major oil-producing countries.”

Instead of fixing the situation through better worker training, management instead decided to “spend over $40 million to make cheesy safety videos filled with bikini-clad telenovela stars and low-budget special effects.”  Wow, what a great idea for a company that supposedly is trying to get its act together.  Management decided this was a better use of money than actually providing more safety training and apparently a lot more fun for the workers (according to one safety official, “If a woman comes out in a bikini, it is like salt and pepper for the oil workers.”)  Alrightly then.

And how do you manage to spend $40 million on safety videos.  Excellent question.  The article notes that:

“At least part of the budget went toward hiring nine pre-production staffers, 10 stunt doubles, four drivers, two areal cameramen, 37 miscellaneous crew members, actors and extras and mediocre green screen technology. It is not entirely clear where the rest of the money went.”

That last line is classic Mexico.

The Perks of Pemex

I’ve written before on some of the problems of Pemex (see, for instance, “Not everything is perfect, perfect, perfect“).  A recent WSJ article about the company’s attempts to renegotiate terms with the union help to explain some of these issues.

Under the current contract, union workers:

1. Retire at age 55 with “at least 80% of the average salary during the past year worked.”  Pretty sweet deal.

2.  Get 30 vacation days annually and those days aren’t merely a paid holiday; they receive three times their pay for those vacation days! (if they have worked at Pemex for at least 10 years)

3. Receive low interest rate mortgages if they want to purchase a house

4.  Enjoy extensive health insurance benefits, including “cosmetic surgery for employees and their relatives.”  Their relatives too?  Wow, was there any actual contract negotiation going on by Pemex management before now? Did they even try?

“Not everything is perfect, perfect, perfect.”

A couple of years ago I created a series of videos for Marginal Revolution University on Mexican Economic Development.  I learned a lot about the unbelievable problems of the national oil industry in Mexico (Pemex) while doing so and created three videos on the topic (The Problems of PemexAn Overview of Pemex, and Pemex’s Poor Performance).  But even I was surprised to read about the scope of corruption and fraud in Pemex in a recent article by Reuters called “Mexico looks the other way as contractors fleece oil giant Pemex.”

The article is amazing and I recommend you read the whole thing to really get an idea of what has been going on.  Here are some of the gems though:

1. “Pemex paid $9 million in 2011 to have an oil rig towed halfway round the world, from the United Arab Emirates to the Gulf of Mexico. The rig had the wrong equipment for the assignment, according to a report by Mexican congressional auditors. And the tow job itself was a fiction: The rig didn’t need to be moved. It was already in the Gulf of Mexico.”  I love how the audit buries the lede by talking about the wrong equipment first, and then getting to the fact that there was no actual towing.

2. “Reuters identified more than 100 Pemex contracts signed between 2003 and 2012, worth $11.7 billion, that were cited as having serious problems by the Federal Audit Office of the lower house of the Mexican Congress. The allegations ranged from overcharging for shoddy work to outright fraud. Pemex almost always disregards these warnings. From 2008 to 2012, the most recent year of available data, the congressional auditors issued 274 recommendations that Pemex take serious action over contract irregularities – either press criminal charges, discipline employees or claw back money. The company issued responses to 268 of the cases. In only three of them was action taken. The result: A handful of employees received suspensions. Pemex’s internal control office dismissed 157 of the cases. As of last month, 108 were unresolved.”

3. “The SFP investigators at Pemex, meanwhile, are reluctant to pursue cases against the officials they are supposed to regulate. These internal investigators technically are independent of Pemex, as employees of a separate federal agency. But the federal agents – mainly lawyers and accountants – are effectively part of the oil giant. They are paid by Pemex and work in Pemex offices.”  How to fail at Anti-Corruption 101.

The title of this blog post comes from one Manuel Sanchez, a Pemex official who approved selling a Brazilian company Unigel a chemical at a very discounted rate for many years, so discounted that it is estimated that Pemex lost “$24.2 million from 2009 to 2011.”  And what does Mr. Sanchez, who is now the chief of Pemex Petrochemicals, have to say for himself: “Not everything is perfect, perfect, perfect. We realized that there are things to improve.”  So true but so unlikely to happen, especially with Sanchez at the helm.

Mexico’s “functioning democracy”

The Washington Post has an article congratulating Mexico on its just-passed energy reform.  Given that Pemex has desperately needed reform for decades, and little to no action has been taken during that time, I agree that it is both impressive and promising that EPN got his energy reforms through Congress.  The WP goes a bit overboard though in arguing that “While [the US] Congress was congratulating itself on reaching a minimalist bipartisan deal on the budget, Mexico demonstrated how a more functional democracy can tackle a nation’s biggest and most sensitive problems.” 

This WP headline was in my Google Alert this morning right next to the following article, “Mexico Lawmaker Strips in Congress to Protest Energy Bill.”  It made for a funny juxtaposition.  Apparently, a left-wing MP named Antonio Garcia Conejo stripped down to his skivvies to protest what he called “the stripping of the nation.”  Here is Mexico’s functioning democracy in all its stripped down glory!

antonio_conejo

Mexico’s biggest boom in a century?

Forbes has a breathless article on Mexico called “How Oil Reforms Could Trigger Mexico’s Biggest Economic Boom In A Century.”

It is still far from certain that EPN can get serious oil reform through the Congress, but if he does, then it’s true that Mexico’s fortunes will change for the better.  Still, I’m skeptical of the following claim:

“Not only will it be bigger than the revolution in shale drilling and fracking has been in the United States,” says Duncan Wood, director of the Mexico Institute at the Woodrow Wilson Center, “This will be the most significant change in Mexico’s economic policy in 100 years.”

What is fascinating though is EPN’s genius spin on these reforms.  President Lazaro Cardenas is still hailed as a hero for taking over Pemex in 1938. Nationalization was so popular that the day is still commemorated in a national holiday. What is less known that in 1940, Cardenas changed the laws to allow Pemex “to enter into production-sharing and profit-sharing contracts with private, Mexican-owned companies.”

It was President Ruiz Cortines in 1958 who modified the law to essentially eliminate the possibilities of such contracts.  So Peña Nieto has positioned himself as a latter day Cardenas, or at least a man intent on restoring Cardenas’ original intent with respect to oil.  Duncan Wood has a great quote where he “likens Peña Nieto’s political performance to Jesus Christ’s miracle of raising Lazarus (or Lazaro) from the dead.” As he concludes, “They know how to put on a show.” That they do.

oil_nationalization

Mural of Cardenas signing into law oil and agrarian reforms.