Pemex’s Losses Deepen Mexico’s Financial Woes

Pemex’s Losses Deepen Mexico’s Financial Woes
Source: https://stratfor.com/article/pemex-s-losses-deepen-mexico-s-financial-woes . Accessed September 8, 2020

Mexican President Andres Manuel Lopez Obrador’s failure to strengthen Pemex’s finances and shore up domestic oil production will exacerbate Mexico’s public finance woes from COVID-19 . On Aug. 24, Mexico’s state-owned energy giant Pemex reported its lowest level of monthly crude oil production since 1979, with the company’s July output totaling only 1.6 million barrels per day (bpd) — marking a 0.6 percent decline from June and a 4.5 percent decline from July 2019. Pemex was already struggling before the current COVID-19 crisis, seeing record losses during 2019 and the first half of 2020.

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Lopez Obrador’s attempts to strengthen Pemex’s bottom line and increase domestic oil production will continue to fail without new private investment to help increase long-term production, as well as a business plan that forces Pemex to focus on the most profitable areas.

· Mexico’s current oil fields in the Gulf, such as Cantarell and Ku-Maloob-Zaap, are nearing the end of their productive life. Any substantive increase in production thus needs to come from new developments in either deep-water fields or the unconventional fields in northeastern Mexico, which Pemex does not have the resources or expertise to develop alone.

· Other national oil companies, such as Brazil’s Petrobras or Colombia’s Ecopetrol, have engaged in strategies to get rid of unproductive assets and focus on their resources on most productive areas. These strategies have helped prevent both Petrobras and Ecopetrol’s credit rating from being downgraded in recent years. Pemex’s debt, meanwhile, was downgraded this year and last.

· Lopez Obrador has relied on Pemex’s revenue and resources to boost government spending, which has spread the company’s already scarce resources thin by forcing its involvement in unprofitable activities. This has included placing Pemex in charge of building a new refinery in southeast Mexico and modernizing various other refineries.

· Lopez Obrador’s administration has also barred Pemex from partnering with private firms on long-term exploration projects, further accelerating the deterioration of the company’s finances and profitability prospects.

Pemex will increasingly become a drag on Mexico’s already stressed public finances, which will impede Lopez Obrador’s ability to mitigate the fallout from COVID-19 ahead of 2021 midterm elections by robbing his government of a key revenue source. Amid the fallout from the pandemic, Lopez Obrador is facing mounting pressure to revive the Mexican economy, which was in a recession even before the onset of the global health crisis. But this time, the Mexican government won’t be able to rely on Pemex to shore up spending, especially in the absence of any tax reform that would enable the company to diversify revenues, and may be forced to redirect its scarce resources to keep Pemex afloat.

· Pemex has long been a key financing source for the Mexican government, which is one of the main causes of the company’s chronic underinvestment. Pemex’s revenues currently make up around 10 percent of the federal government’s total revenues.

· The Lopez Obrador administration has provided Pemex with debt relief and even some subsidies in the hopes of giving the oil company some room to make more productive investments. But given the magnitude of Pemex’s cashflow erosion, that money has instead been used to cover the company’s current expenditures.

· In response to the COVID-19 crisis, Lopez Obrador’s administration has also not passed any meaningful fiscal stimulus packages , and has instead continued to fund its pet infrastructure projects that are already underway, including the $8 billion Dos Bocas refinery.

Questions: For the questions this week you are going to have to do some outside research. This is an important topic because Mexico is a member of the USMCA, is the United States Southern neighbor and will be key player in any Latin America treaties (the United States has a goal of developing a Pan American treaty which will encompass both North and South America.)

1. Why is Pemex so important to Mexico and what has been Pemex’s history?

2. What has been the historical Pemex has not been able to compete on a worldwide basis. You need to support your answer with facts.

3. What actions has President Lopez Obrador’s administration which 1) has been intended to help Pemex and 2) has harmed Pemex?

4. In your team’s opinion what is the long-term likelihood of success for Pemex? Again, support your opinion with facts.

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