Pemex squeezing suppliers for $3 billion as staff jobs protected

Pemex squeezing suppliers for $3 billion as staff jobs protected

CARLOS MANUEL RODRIGUEZ and ANDREA NAVARRO

MEXICO CITY (Bloomberg) -- Petroleos Mexicanos is joining oil producers worldwide in the race to lower costs as prices plunge, with one difference - no staff cuts.

Pemex, which is preparing to end its Mexican oil monopoly, is looking to save $2 billion to $3 billion this year on purchases and through reducing rates with contractors, CEO Emilio Lozoya said in an interview Friday. The company plans to disclose that it cut procurement expenses by 21 billion pesos ($1.44 billion) in 2014, he said. Pemex is one of the country’s top employers, with about 153,000 full-time staff.

“We still have important areas of opportunity to generate savings,” Lozoya said from Pemex headquarters in Mexico City. “Job cutting is not an area where we’re looking for possible savings.”

If oil prices don’t recover, global exploration and production spending could fall more than 30% this year, the biggest drop since 1986, according to forecasts from Cowen & Co., a New York-based investment bank. Schlumberger Ltd. is firing about 9,000 people, Royal Dutch Shell Plc is canceling a $6.5 billion project in Qatar and Statoil ASA is scrapping exploration in Greenland. While Pemex cut drilling activity by 24% to 491 wells as of November, Lozoya is confident of meeting a daily output goal of 2.4 MMbopd in 2015, about where it was last year.

“Any budget cuts will affect spending first, and if it’s needed, investment will be last,” he said.

The 40-year-old Harvard University-educated executive took Pemex’s helm in 2012 and has been readying the world’s seventh-largest crude producer for an historic industry overhaul that aims to turn around slumping output.

Idle Workers

“There are many ways Pemex can cut costs without cutting jobs,” Alejandra Leon, an analyst with IHS Energy, said by telephone. “Centralizing purchasing processes is one. Moving idle workers where their skills and time are actually beneficial is another.”

Mexico is pressing ahead with plans to start offering licenses to private companies for the first time in seven decades as the prospect of low production costs keeps would-be bidders interested, Lozoya said.

The government is committed to run tenders on schedule, and Pemex will do the same for fields where it’s seeking partners, he said. Pemex plans to bid as a minority partner in five blocks to be awarded in July.

The new projects for Pemex may not come soon enough for contractors in the Gulf of Mexico’s Bay of Campeche, where much of the country’s offshore drilling takes place. An internal Pemex memo issued Jan. 2 and obtained by the Mexico City-based El Financiero newspaper called for the termination of all outsourcing and technical personnel because of cost cuts.

Number Discord

Local businesses and Pemex disagree on the scope of those cuts. Pemex estimates no more than 1,500 outsourcing jobs were affected. The Ciudad del Carmen Economic Development Chamber in Campeche state, estimates that about 8,000 oil-industry service contractors have lost their jobs, according to the group’s head, Gonzalo Hernandez.

Those numbers are “totally outside reality,” Lozoya said.

At a March 2014 rally, President Enrique Pena Nieto told Pemex workers that none of them would lose their jobs. Mexico’s Energy Ministry predicts the industry will create as many as 1.5 million jobs by 2018.

One area where Pemex is targeting multi-million-dollar savings is with its $127 billion pension liabilities. Lozoya says he’s “very optimistic” of reaching an agreement by August with the union to change the retirement system into individual accounts for new employees.

Cost Allure

Service fees including rig rates are also in Lozoya’s sights. Pemex began discussions with suppliers this month to reduce rates after Brent crude lost more than 50%, CFO Mario Beauregard said by telephone Jan. 15.

Spending is poised to fall regardless of the oil slump because a government-approved plan for Pemex this year includes areas now being tendered to private companies, IHS’s Leon said.

“It didn’t make sense,” she said. “The budget had to be cut to represent the difference.”

Lozoya said the interest from private companies in Mexican fields is “palpable” because of lower costs. “Despite the depressed oil prices, Mexico’s costs continue to be attractive,” he said.

Pemex’s costs to produce a barrel of oil are $23 on average, company records show. New York oil futures for February delivery increased $2.44 to $48.69/bbl on Friday. The contract dropped to $44.20 on Jan. 13, the lowest level since April 2009.

“Current prices don’t coincide with the fundamentals,” Lozoya said. “It’s clear to us that there are a lot of marginal barrels that will be exiting the market as long as this range of prices continues.”