A RACE AGAINST TIME

Mexico 2020 | ENERGY | FOCUS

Alternative energy efforts in Mexico are taking a hit as President López Obrador halts planned auctions and seemingly focuses on revitalizing Pemex.

For the last 15 years, Mexico's state-owned oil giant Petróleos Mexicanos (Pemex), the second-largest company in Latin America, has suffered a continued decline in oil production. Pemex's 2019 crude production averaged 1.68 million barrels per day (mbpd), less than half the 3.4mbpd the company pumped in 2004, when it was Latin America's biggest company, and down by about 7% compared to 2018 levels. On top of this, the COVID-19 epidemic, unprecedented low oil prices, and reduced demand have made a terrible situation for the country's oil industry even worse.

In April 2020, Pemex reported a quarterly loss of USD23 billion, with neither its upstream nor its downstream business generating profits at current oil prices. But this was more or less expected. Annual losses already doubled to USD18 billion by the end of 2019, and as the world's most indebted major oil company, Pemex has accumulated USD105 billion in debt along with unfunded pension liabilities of USD77 billion.
Soon after Pemex reported its 1Q2020 results, the group's bonds tumbled into junk status as major ratings agencies, including Moody's, downgraded its rating. This was a huge setback for President Andrés Manuel López Obrador, who rose to power in 2018 on the back of promises to make Pemex's recovery and Mexico's energy self-sufficiency one of the pillars of his government.
For President López Obrador, who grew up in the oil-producing Tabasco state, Pemex is as much a part of Mexico's identity as the ancient Mayan pyramids. After all, Mexico honors its oil company with an annual holiday.
President López Obrador's determination to turn Pemex into a cash cow again is evident from how he rebranded the company's eagle and oil drop logo with the phrase “rescuing sovereignty." Even at a time when the global demand for oil is low due to widespread lockdowns, the president is funneling his efforts and taxpayers' money into oil production projects, including a new USD8-billion refinery, while six loss-making plants are running at less than 30% of capacity. This has led to a hot debate because Pemex has incurred significant losses in refining, and buying the same refining capacity in the US would cost a fraction of the planned investment.
Moreover, in May 2020, the president put on hold for three days a historic OPEC+ oil output cut deal because he didn't agree with the proposed 23% reduction by each member of the group, which would have amounted to 400,000bpd for Mexico. He finally managed to convince the Saudi-led alliance of oil exporters, with the help of none other than Donald Trump, to let Mexico cut its production by only 100,000bpd. Surprisingly, the US government agreed to reduce its output by an additional 250,000bpd to compensate for Mexico.
One of Pemex's main problems is that it has exhausted the giant oil fields that were once easy to drill, such as Cantarell. For a time, it even became the second highest-producing field in the world. Mexico still has oil, but it is believed to be in deep water, which requires more sophisticated technology and are more expensive to develop. The current administration has pledged to discover and develop 20 new oil and gas fields each year, but according to experts and analysists, those targets are extremely optimistic for Pemex, which is squeezed for cash. Only three of the 20 priority projects selected in 2019 reported crude production as of December, according to data from Mexican oil regulator CNH.
It is crystal clear to most that Pemex is in dire need of private investment, but the current administration is blindly pursuing a state-centric energy model and has pushed back against proposals from business groups to boost production via oil auctions and joint ventures that were championed by the previous government. In its place, the administration has announced a tax cut to reduce Pemex's tax burden by USD7.1 billion over the next two years and a plan to pursue service contracts, which had minimal effect on investment and production in the past.
With demand in Mexico more than halved because of coronavirus containment measures, Pemex is facing a mounting fuel crisis. Many are hoping that this time of crisis will turn into an excellent opportunity for President López Obrador to reconsider his position on the future of Pemex and Mexico's energy sector.