CEESP: Legal Limitations Reduce Pemex's MSC Profitability

Mexico's state oil company Pemex's multiple service contract (MSC) scheme has not been as successful and profitable as it could be due to capital investment limitations on private firms, the Mexican business council's center for economic studies of the private sector (CEESP) said in a report.

In 2005, Pemex accounted for 6% of Mexico's total GDP, while its sales registered an increase of 26% compared to the previous year. However, the state company is not allowed to transform earnings into productive investments due to a heavy tax burden and inflexible schemes for private investor participation in the energy sector, CEESP reported.

Pemex will face development and competitiveness problems in the short term if the company is not given autonomous corporate governance, according to the report. Pemex's profits are considered financial resources for the government rather than for the company, which is damaging not only the company's operations but also Mexico's economic development, CEESP said. The report said that Pemex is managed according to political criteria while other large international oil companies, including state owned firms like Brazil's Petrobras (NYSE: PBR) or Norway's Statoil (NYSE: STO), are managed to maximize their long term production and financial benefits for their respective countries' development.

Although Pemex earned US$11.63 a barrel more from crude oil exports in 2005 compared to the previous year, the state company has the largest debt of all the other oil companies in the world, CEESP said. In 1999 Pemex had an accumulated debt of 165bn pesos, which had increased to 518bn pesos by end-September 2005 (currently US$49.3bn), according to CEESP's report. In the same period, the net worth of Pemex's assets fell from 167bn pesos to 58bn pesos due to lack of investment in new technology and the deterioration of existing facilities, CEESP said.

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