Carlos Romero Deschamps, head of the 124,000-member oil workers union, said the time has come to tackle problems that have run up Pemex´s debt, resulted in imports of natural gas and gasoline and caused crude reserves and production to decline. In the coming weeks, the union and Pemex will begin talks to renew the current two-year contract, which expires on Aug. 1, he said.

"We need to define now what kind of Petroleos Mexicanos we want and act accordingly," Romero said in a speech Sunday to mark the anniversary of state-owned Pemex´s creation in 1938. "We´re certain that at the end of negotiations, we will have discovered formulas to strengthen Pemex´s performance and development."

Pemex is seeking to control growing unfunded pension debt, which rose 16 percent in 2006 to 454 billion pesos (US$41.7 billion) from the previous year. Pemex management also wants the union to give the company more flexibility about transferring workers and shutting unprofitable plants.

In one example, a Pemex petrochemical factory near the city of Camargo, Chihuahua, didn´t operate last year and 264 workers are still on the plant´s payroll, according to a Pemex document.

Romero praised Jesús Reyes Heroles, who was appointed chief executive officer of Mexico´s state-owned oil monopoly in December, as someone the union can work with.

"The union is making all the right noises about wanting to be helpful to Pemex management," said George Baker, a Houston- based energy consultant who publishes the newsletter Mexico Energy Intelligence.

In the last contract revision, the union accepted an annual worker pay increase of 4.1 percent for 2005 and 2006. Contract talks haven´t always been smooth.

The union and former Pemex CEO Raúl Muñoz came under fire following the 2003 contract revision because of an agreement to pay the union a bonus of 8 billion pesos for housing and other projects. In 2000, the union was accused of funneling more than US$100 million to the presidential campaign of Francisco Labastida of the Institutional Revolutionary Party from money it obtained in a loan from Pemex.

Pemex´s union has 97,000 full-time workers, 27,000 temporary workers and 50,000 retired members, according to a union document. The union has five seats on Pemex´s 11-member board of directors.

Former President Lázaro Cárdenas created Pemex on March 18, 1938, from the expropriated assets of U.S. and U.K. oil companies. Mexico´s constitution reserves the ownership of oil and gas deposits for the state and bars private companies from extracting the hydrocarbons.

Relations with union workers are "of major relevancy for the company," said Reyes Heroles, who wants more decision- making power for Pemex management and to enter technology and "strategic" alliances with other companies. Pemex is in a "critical" situation because of lack of investment and large debt, he said.

Pemex´s debt, not counting pension liabilities, was US$52 billion at the end of December. Daily crude production has dropped to 3.26 million barrels last year from a peak of 3.38 million in 2004 as the company´s largest offshore oil field Cantarell begins to decline.

"We´re conscious of Pemex´s delicate situation and share the spirit of solving together the challenges we´re faced with," Reyes Heroles said.

Romero reiterated the union´s concern over Pemex contracting out jobs to private companies.

He also urged the government to increase investment to strengthen Pemex as an integrated oil company with operations from exploration and production of crude to the production, transportation and retail of oil-derivative products.