Global Policy Forum

By Tim Weiner

Tony Cantu grew up with the giant oil refinery that Pemex, Mexico's state-owned oil company, runs here in his hometown. He helped build it and operate it, rising from construction worker to computer programmer to chemical engineer. Mr. Cantu gave Pemex a decade of his working life. But he will never work there again. He can explain why in one word.

"Corruption," he said, gazing at the refinery, 20 miles outside Monterrey in northern Mexico. "People being stepped on, forced to be corrupt — I hated that. There were a lot of things you had to shut up about. The bosses would kill to protect themselves. People were subjugated by fear."

For more than 60 years, Pemex, the world's fifth-largest oil company, has been Mexico's economic lifeblood. A $50 billion-a-year enterprise, it controls every gas pump in Mexico, and it sells nearly as much oil to the United States as Saudi Arabia does.

Today, with some oil producers like Iraq and Venezuela facing nation-shaking crises, Mexico looks like a sure and steady source of oil. The United States may be tempted to rely on it even more.

But Pemex is in danger of breaking down. "Financially, we are falling," its director, Raúl Muñoz Leos, said in an interview. Nearly every peso of Pemex's profits goes to run the government of Mexico. The company, after paying taxes and royalties, actually lost $3.5 billion in in 2001. Without major restructuring or tens of billions of dollars in foreign investment, Mr. Muñoz Leos warned recently, "We would face, in the short term, a collapse."

One reason is a rottenness at Pemex's core. The company loses at least $1 billion a year to corruption, its executives say, in a continuous corrosion of the machine that keeps Mexico solvent.

Fixing Pemex is as crucial to Mexico's future as it is to American oil supplies. When Vicente Fox became president two years ago after defeating the political machine that ran Mexico for 71 years — the Institutional Revolutionary Party, or PRI — he vowed to make his country more open and democratic and to make Pemex run like a 21st-century corporation.

To change Mexico, Mr. Fox must first change Pemex. It has been a cash machine for the government, a slush fund for politicians and a patronage mill for party loyalists since the party created Petróleos Mexicanos, or Pemex, in 1938.

After nationalizing American and British oil interests, the party promptly changed the Constitution to bar foreign investment in underground oil and gas. It was a declaration of independence: "Expropriation Day" is still celebrated each year.

Even today, the PRI, which still holds a plurality in Congress, is fighting changes to the Constitution and at the oil giant it created, in part on grounds of patriotism. President Fox's attempts at reform have been hamstrung by PRI resistance — and Pemex's history of corruption.

Pemex's last director, Rogelio Montemayor, a former PRI governor, and its union boss, Carlos Romero Deschamps, a PRI senator, each stand accused of stealing tens of millions of dollars from Pemex for the PRI's 2000 presidential campaign against Mr. Fox.

Both men deny the charges. Mr. Romero Deschamps is battling an attempt in Congress to strip him of the legal immunity he enjoys as a sitting senator. Mr. Montemayor fled Mexico last year and is fighting extradition from Houston. The PRI, struggling to defend them — and itself, is also resisting every effort to transform Pemex.

"The political will needed to reform Pemex has just not coalesced," said Eduardo Cepeda, the head of J. P. Morgan Chase's Mexico office.

Edward L. Morse, executive adviser at Hess Energy Trading Co. and former publisher of Petroleum Intelligence Weekly, said by telephone from New York that "the effort to reform the beast" had failed. President Fox, he said, does not "understand how thoroughly ingrained in the national political culture the monopoly of Pemex is."

Pemex remains one of the world's few national oil companies with no competition from within or without. Its resulting inefficiencies are stark.

Othón Canales Treviño is Pemex's director for competitiveness and innovation — the man in charge of creating the "new" Pemex. He once ran a company that supplied Pemex with chemicals, and he was often solicited for bribes, he said. Today he sits on a commission on corruption at Pemex, composed of 14 directors.

"There is corruption," he said. "But I think the inefficiency is worse. There is brutal inefficiency."

For example, Mr. Canales said, he recently asked how much Pemex paid each year for goods and services — everything for ice packs to helicopters rented to fly engineers to offshore rigs.

No one knew. It took four months to come up with the answer — $7 billion.

"We want to act like a company," he said. "Pemex isn't a company. It isn't Pemex Inc. We're not a government ministry either. We are — something weird. Our behavior changes depending on whom we are dealing with. To the Finance Ministry, we're their biggest taxpayer. To Congress, we're something else. To our customers, sometimes we're an opportunity and sometimes we're a threat."

Pemex had sales of $46.5 billion in 2001 and paid $28.8 billion in taxes — almost 40 percent of all government revenues. With the government taking such a large share of revenue, not enough is left to pay for exploring new sources of oil, repairing aging refineries or tapping vast pockets of natural gas.

If Mr. Fox could free the government of its addiction to Pemex's money — by collecting taxes from millions of people who evade them, for example — then Pemex could invest in producing more oil and gas, and in time generate more revenue.

But today, with foreign investment banned, and corruption and inefficiency sapping its cash flow, Pemex's ability to produce energy is bound to decrease, Pemex executives and industry experts say.

Pemex is in "a very complex fix," said Mr. Muñoz Leos, the director and a former chief of DuPont's Mexican operations.

But unless President Fox finds a way to clean up Pemex's operations and, above all, change the Constitution to permit foreign investment — a path the PRI has blocked — the company's production will start to plunge.

Mexico's ability to produce oil will peak by 2010, according to Pemex officials and the International Energy Agency, a coalition of 24 oil-producing nations. Then it will decline, they forecast.

By 2030, perhaps sooner, Mexico will have to import oil. It will not be able to sell a single barrel to the United States.

"If we're going to export oil in the future, we need more investment now," said José Herlindo í?lvarez, a chemical engineer for 26 years at Pemex's Tula refinery, 60 miles north of Mexico City.

Pemex has six oil refineries working nearly at capacity in Mexico. But they cannot now meet the nation's needs. Mexico, sitting on huge pools of untapped oil, has to import nearly a quarter of its gasoline from the United States.

It has not built a new refinery since the late 1970's. One reason, said several oil industry analysts, is that to authorize a billion-dollar project at Pemex is to invite grand theft.

That corruption is something Tony Cantu said he had witnessed first hand — what he described as organized crime, systematic shakedowns and needless deaths due to mismanagement. He wept briefly as he talked, during a return visit to the Cadereyta refinery in December.

"It's sickening to see how something that could be so beautiful is such a mess," he said. "To advance at Pemex, it didn't matter how good you were, your knowledge or intentions, but whether you participated in the good-old-boys' system."

Pemex's chief back then, Jorge Dí­az Serrano, later served five years in prison for embezzling $34 million. Its longtime union boss, Joaquin Hernández Galicia, was released from prison in 1999 after serving seven years for amassing enough weapons to run a private army. Ten years before, Carlos Salinas, then president of Mexico, had sent government troops to arrest him in a political confrontation over the union's power — which remains vast today.

Even now, Pemex loses more than $1 billion a year to fraud, theft, tax-evasion schemes and clandestine fuel sales by its workers and distributors, according to two senior Pemex directors.

The plunder includes thousands of gallons of jet fuel sold under the table to drug dealers for flights of cocaine into the United States. Those thefts, which create small fortunes for Pemex managers and union officials, continue apace despite a crackdown.

So do no-show jobs, a staple of Pemex operations for decades. "People who didn't work at the refinery still came in to pick up their money every two weeks," Mr. Cantu said. "You had to give a cut to the union boss — 30 percent. I saw this with my own eyes."

Though the union does not acknowledge it, no-show jobs still exist, according to Pemex officials, and those who hold them are known as "aviators" or "parachute artists." Pemex's work force has grown to 139,000, compared with 121,000 in 1996. More than 90,000 are union members.

Mr. Cantu said he had seen six untrained workers die building the Cadereyta refinery. They were sons and brothers of union workers, hired despite having no experience.

Pemex's safety record down the years has been grim. Two major explosions, in 1984 and 1992, killed at least 800 people in residential neighborhoods in Mexico City and Guadalajara. Industrial accidents have killed hundreds more.

After nine years of working for Pemex, and after earning his degree as a chemical engineer, Mr. Cantu had had enough. He moved to Houston and started his own company and a new life.

But in 2000, he agreed to return to work at Pemex on two projects, one to upgrade Cadereyta's emergency-control room, another for natural gas processing plants in Villahermosa.

He said the Pemex engineer in charge of the Villahermosa project had "a private bank account" that he expected outside contractors to fill. On the Cadereyta project, he said, Pemex engineers never showed up to approve his work.

Mr. Muñoz Leos said a recent $1.3 billion remodeling at the Cadereyta refinery was botched, and efforts to fix it were costing Pemex $15 million a month.

"I thought things might have changed" after Mr. Fox's election in 2000, Mr. Cantu said. "But Pemex hasn't changed. You cannot change so deeply embedded a mentality in a few years."

One of the strongest forces for change may be dissident union workers, who see their task as no less than rescuing the union from its own leaders.

"People inside the union hate this situation — the embezzlement of millions, not only from the oil revenues, but from the union itself," said í“scar Edgar Hernández Garcí­a, president of the group, the Oil Workers' Coalition. "We know what's going on, but we can only fight from within," he said. "We have to end the cushy no-show jobs, to end the coziness with the PRI, to protect our workers from harm, and to improve Pemex's productivity."

The struggle to change Pemex from the top, by managers like Mr. Canales, and from within the union, by workers like Mr. Hernández Garcí­a, may save the oil giant from the slow decline that many foresee.

But Mr. Cantu predicts an end to the power and pride of Pemex only on the day when the machine collapses.

"Then they would be forced to let Shell, Conoco and Exxon come in," he said. "But who would want to come in now? If Shell had a billion to invest, would they invest it in a system that is rotten to the bone?"

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