By Juan Montes 

MEXICO CITY--State-owned Petróleos Mexicanos is in advanced talks with Mexico's powerful oil workers union to lower labor costs via a pension overhaul and for more flexible work rules to secure its future in a newly competitive environment, according to people familiar with the negotiations.

Success in renegotiating the collective bargaining agreement at Mexico's biggest company by sales and staff could determine how well Pemex performs now that oil prices are low and the former energy monopoly faces private-sector competition for the first time, analysts say.

Moreover, the Mexican government has said it would assume a significant portion of Pemex's $100 billion in unfunded pension liabilities if the current system is successfully changed.

"If they finally agree on these changes, it would be the most important step Pemex can take to guarantee it remains a dominant and competitive player in the long run," said Leo Zuckermann, political analyst at the CIDE university.

Pensions have become a financial headache for Pemex. Heavy pension-related debt, almost equal to the company's sales of $108 billion last year, has raised concern among ratings firms because it could hamper Pemex's ability to obtain financing at low rates for investment.

The goal is to strengthen Pemex as it prepares to compete with private companies for Mexican oil blocks being tendered under new energy laws passed last year and to guarantee it can develop blocks already assigned to it. Pemex could lose existing blocks if it doesn't have enough resources to develop them.

While Pemex's crude oil production has fallen 12% since 2010, its staffing has increased 4%, denting productivity. Last year, Pemex produced 16 barrels of crude oil per worker a day, compared with 33 barrels at Brazilian state company Petrobras and 25 at BP PLC.

The oil company and the union are nearing agreement to gradually increase the retirement age for oil workers to 65 years from the current 55, according to two officials from Pemex and the oil workers union with knowledge of the talks. Some disagreement remains over the pace of the adjustments, the people said, but added they were optimistic a deal will be struck.

Negotiations are expected to conclude in late July, with the new contract coming into force on Aug. 1.

Discussions include lowering the amount retirees would receive. Currently, a retired worker receives at least 80% of the average salary during the past year worked. Workers who have already retired wouldn't be affected, the people said.

Individual pension accounts under a defined contribution plan for new employees would be created, instead of the current system in which Pemex pays the pensions, the people said. Benefits to surviving dependents of retired workers when they die will also be limited, the people said.

"We're optimistic that a reasonable deal can be reached," said a senior Energy Ministry official who asked not to be named. "With oil prices so low, the current collective agreement is not sustainable and the union knows it."

A Pemex spokesman said negotiations are entering a decisive stage and that the company is confident of reaching a "good deal." A spokesman for the oil workers union didn't return calls seeking comment.

In a bid to force a deal, Mexico's Congress passed a law last year under which the government would assume a portion of Pemex's pension-related debt equivalent to the savings the company and the union agree on in the new contract.

Discussions also include early retirement with compensation for "several thousand workers," the people said. One person said negotiators have discussed layoffs in some administrative areas, but a spokesman for Pemex said layoffs aren't foreseen.

Pemex aims to gradually lower the number of employees to around 100,000 in coming years from the current 153,000, the people said. Around 122,000 current workers are unionized.

Labor flexibility is also on the table to ease the complicated and slow process for relocating staff. At the moment, any such decision requires agreement with the union.

Since Pemex was founded in 1938, oil workers and their union leaders have been accumulating labor benefits that most Mexican workers don't have, in exchange for ensuring labor peace. To date, the oil workers union hasn't gone on strike.

Pemex's unionized workers with more than 10 years in service have 30 days of paid holidays a year, and receive almost triple pay for those days as a vacation bonus. The firm also has to make workers loans at preferential interest rates to buy a home, with up to two loans per worker. Health coverage includes cosmetic surgery for employees and their relatives, among other benefits.

Write to Juan Montes at juan.montes@wsj.com

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