How Lack of Skills Can Derail Mexico’s Energy Reform

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Firms across Latin America are complaining about the difficulties of recruiting workers with the technical skills their business demands. The existence of significant (and growing) skills gaps is a recurrent theme in a range of surveys and reports. Lack of adequate skills is becoming a bottleneck for growth in technologically complex industries, harming efforts by governments to increase investment in strategic sectors of their economies. The energy sector is a case in point.

Mexico’s government has launched a major energy reform liberalizing the country’s hydrocarbons sector and ending state oil company Pemex’s 76-year monopoly, with the states aim of boosting economic growth and reducing poverty. Yet the woeful state of Mexico’s education system – and, more specifically, the lack of enough university programs producing petroleum engineers and other specialized workers – threatens the reform’s eventual success.

The sudden need in Mexico for new skilled workers is not unprecedented – indeed Brazil, which has seen its own oil sector grow substantially with development of the country’s huge offshore presalt fields, went through similar growing pains in recent years. In Brazil’s case, the shortage of skilled workers – as well as related supply bottlenecks for drilling rigs and other equipment – led the government to freeze oil auctions for a couple of years while the industry beefed itself up. But Mexico’s position is arguably more difficult than Brazil’s was.

The looming need for new skilled oil specialists in Mexico is huge. Pemex is currently estimated to have about 150,000 employees – and the company has said that as many as half its employees will be at or near retirement age within a decade. The problem is seen as most acute in top management, where the staff is older. In the top three executive levels in Pemex’s exploration and production division, estimates are that as many as 80% of employees may be at retirement age within the next decade.

Add in the new oil companies that are expected to enter Mexico and compete for talent, plus service providers and new and expanded government agencies, and the number of engineers needed is expected to be in the tens of thousands. The CNH, Mexico’s national oil regulator, will alone need to boost its staff from the 50-60 engineers it currently has to somewhere around 600, as it moves from supervising just Pemex to a much larger number of operators.

The problem, however, is that Mexican universities don’t produce the petroleum engineers, geoscientists, and other qualified labor that the industry will imminently need. Renan Baez, a professor at the Universidad Politécnica del Golfo de México in Paraíso, Tabasco, estimates that there are only a couple of dozen schools in Mexico imparting the curriculum, of which the vast majority are small and have only a few hundred students. The largest number of graduates come from two large public universities, UNAM and the Instituto Politécnico Nacional, both in Mexico City. Sources within the oil sector estimate that Mexico produces no more than a couple of hundred new petroleum engineers each year.

Even those programs that do exist don’t generally have the resources needed to educate their students sufficiently. The classes offered by such programs tend to be heavily academic in nature, and students often lack the opportunity to gain practical knowledge via laboratory work because the schools lack the funds and specialized software programs. Meanwhile, institutional links between the universities and Pemex are insufficient, as the state oil company has not seen much of a need for coordination with the academic sector.

To combat these problems, Baez and other professors this year incorporated the Red Nacional de Escuelas de Ingeniería Petrolera, a group of petroleum-engineering schools dedicated to building links between the academic world and the oil sector. The network is seeking the support of companies in the industry – including the large international oil-services firms currently operating in Mexico – to ensure that the schools provide the practical skills that employers need. As an example of where he’d like to see Mexico headed, Baez cites Texas A&M and its strong links to companies in the oil sector.

Above and beyond the oil sector’s particular challenges, Mexico also faces numerous educational problems at a more basic level. In the most recent PISA test, which dates from 2012, Mexico had the third-lowest educational coverage of all the countries participating – only above Albania and Vietnam. And for those Mexican children who did attend school, more than half failed to achieve basic competency levels in math – compared to an OECD average of just 23%. Furthermore, fewer than 1% of Mexican students reached the top levels – 5 or 6 – in math achievement, compared to an average of 13% for students from all OECD countries. For science, the story was much the same – 47% of Mexican students failed to reach basic competency, and fewer than 1% ranked at the top levels.

Fixing these issues – both the general ones and those that are sector-specific – will take years. Yet Mexico’s oil sector lacks the luxury of time. Congress is currently working to pass the laws needed to fully implement the reform, and the government hopes to hold its first competitive oil auction under the new system next year. The need for new oil specialists is already here, and over the next few years – as Mexico beefs up its regulatory apparatus and new companies enter the country for the first time to compete with Pemex – demand for skilled engineers is likely to be intense.

To fill the short-term gaps, Mexico will need to turn to foreign skilled labor. Indeed, this is already happening – currently, estimates are that several thousand Venezuelan oil workers are already employed in Mexico, mostly by service providers. But foreigners alone will not suffice. Many of the Venezuelan workers are mid-level professionals, but Pemex – whose employees generally start at the bottom and then rise through the ranks – will need large numbers of entry-level specialists in the coming years. Furthermore, the entry of international oil companies in Mexico is widely expected to boost salary levels throughout the sector, and Pemex may not be able to offer salaries that are competitive for the top talent.

*Jason Fargo is Latin America Team Leader for Energy Intelligence Group.