Corruption and Waste Bleed Mexico's Oil Lifeline

www.nytimes.com By TIM WEINER

CADEREYTA, Mexico — 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. Advertisement

"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 a huge restructuring, tens of billions of dollars in foreign investment, or a huge budget increase, 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.