Oil September 8, 2009, 5:51PM EST

Mexico's Pemex Appoints New CEO

Will new CEO Juan José Suárez Coppel turn the company's dwindling fortunes—and reserves—around?

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It's a classic formula: When a company is underperforming, the CEO gets the boot and a younger, fresher face is brought in to shake things up. That's what happened Sept. 7 at Pemex, Mexico's state-owned oil company, when top executive Jesús Reyes Heroles was shown the door and was replaced with Juan José Suárez Coppel.

However, unless Suárez Coppel obtained an iron-clad promise from President Felipe Calderón that he can work without interference, there's little reason to believe he'll enjoy any more success than his predecessor, experts say. In his annual State of the Union address last week, Calderón pledged to push through a fresh set of reforms aimed at strengthening Pemex, the government's largest single source of tax revenue. "We must take profound [reforms] and move quickly," he said.

Reyes Heroles, 57, a politically savvy economist who served as ambassador to the U.S. in the late 1990s, officially "resigned" to make way for Suárez Coppel, 50, a University of Chicago-trained economist. He is expected to take dramatic steps in an effort to stem losses at Petroleos Mexicanos, where production dropped 7.3% in the first half of the year and revenues plummeted 30%. On Sept. 7, Calderon praised Reyes Heroles for helping to win passage of the "historic" reforms Congress approved in 2008, measures which the President said would put Pemex "on the path to once again becoming … one of the most important oil companies in the world." He also said that Suárez Coppel's task would be to "transform Pemex profoundly, to its roots."

Having served as Pemex's chief financial officer from 2001 to 2006, Suárez Coppel knows the company's numbers well. But he also knows that his ability to turn Pemex's fortunes around will be limited by the fact that the company doesn't operate autonomously; it is subject to budgetary and spending decisions dictated by the finance and energy ministries and by Congress. Even Pemex's divisional chiefs of exploration and refining are named not by the CEO, but by President Calderón, notes George Baker, an energy analyst in Houston. "The head of Pemex really has very little authority, so it's not clear how much this change in CEOs will mean," Baker says.

To David Shields, a Mexico City-based expert on Pemex, Suárez Coppel's appointment means that Mexico's powerful Finance Secretariat will exercise even more control over the state-run oil company than it already does. "Pemex is only allowed to keep a profit when the finance secretariat doesn't need the money," says Shields. "And the Treasury needs more revenues now."

Pemex, which had $98 billion in revenues in 2008, posted an $8.3 billion loss after paying $57 billion in taxes and royalties to the national treasury. It hasn't posted a profit since 2006. The government relies on Pemex for nearly 40% of its total tax take.

BP's Gulf Discovery Highlights Deficiencies

Lower world oil prices aren't the only thing hitting Pemex and the Mexican treasury: A precipitous drop in oil output is just as worrisome. A year ago, Mexico was producing some 2.78 million barrels of oil a day; in July, production totaled just 2.56 million barrels a day. And exports, which totaled 1.31 million barrels in July, were down some 5% year over year. Government officials said recently that the drop in oil production last year, at a time when world oil prices were at a record high, cost the country some $20 billion in lost oil sales. That revenue is sorely missed, as Mexico's economy is set to shrink nearly 8% this year, hurting corporate profits and cutting the government's tax collections. Mexico faces a 300 billion-peso budget deficit—around $22 billion—and already has carried out two big rounds of spending cuts.