On February 15 President Andrés Manuel López Obrador (AMLO) announced the launch of Pemex’s Strengthening Programme, a six-year plan designed to improve the company’s financial position through the liquidation of assets, a reduction in tax payments and improved efficiency.
It includes the monetisation of promissory notes worth MXN35bn ($1.8bn), a pledge to crackdown on corruption and fuel theft, expected to save MXN32bn ($1.7bn), and tax relief amounting to MXN90bn ($4.7bn) through to the end of 2024.
The reforms are set to see investment in Pemex increase from last year’s MXN204bn ($10.5bn) to MXN288bn ($14.9bn) this year, according to by Alberto Velázquez García, the company’s CFO, some 5.5 percent more than originally estimated.
Reforms to boost exploration and production activity
This projected fiscal improvement is one of the key factors, along with investments in new technologies and public-private collaborations, that is expected to increase Pemex’s oil production.
After reaching peak crude output of 3.4m barrels per day (bpd) in 2004, the company has seen production fall to current levels of around 1.8m bpd, with the government aiming to lift this to 2.5m bpd by 2024.
To boost production in the short and medium term the Strengthening Programme foresees the development of 20 new fields: 16 shallow water deposits and four onshore finds.
Although proven oil reserves have dropped from 47.8bn barrels in 1997 to 7.2bn at the end of 2017, according to BP’s “Statistical Review of World Energy” report released in June last year, industry figures are nonetheless supportive of the planned expansion.
“The activities of Pemex are key to the national economy and there is a lot of potential in the exploration of mature fields in Mexico,” Fernando Barbosa Sahagún, chairman of Petroindustrias Globales, an energy sector technology provider, told OBG.
However, in order to meet government production targets and to secure long-term sustainability, analysts have encouraged Pemex to team up with private sector players to help fund the exploration of the country’s deepwater assets, with some 60bn barrels of oil estimated to lie beneath the Gulf of Mexico. Related: What’s Keeping Oil From Rallying To $75?
Indeed, in January ratings agency Fitch noted that the company could improve its financial situation and successfully expand its operations through the authorisation of new joint partnerships with private oil companies.
This comes amid concerns over the issuance of exploration licences under AMLO’s government, which came to power on December 1 last year, after it requested in December that the sector regulator cancel two upstream auctions rounds and postpone the awarding of seven onshore clusters from February to October this year, citing a wish to evaluate the contract-awarding process.
Private sector uncertainty, which these postponements increased, is fuelled by AMLO’s plans to give Pemex a more substantial role in the country’s energy industry. The president was a staunch critic of 2013 reforms that aimed to open the sector up to greater private investment and end the state’s 75-year monopoly over energy exploration and production.
Nevertheless, as the new administration’s energy reforms are only in their initial stages, it is unclear how the relationship between Pemex and the private sector will unfold throughout the rest of AMLO’s presidency.
Debt remains a concern despite positive reforms
The government’s plan to revamp the energy sector has been received positively by industry players, with major figures, including the Business Coordinating Council – which represents the interests of the country’s private sector – telling local media that it constituted a move in the right direction.
Supporting this view, Alejandro Villarreal, the executive director of oilfield services provider Cotemar, told OBG, “Mexico and the oil and gas industry need a solid, reliable and efficient Pemex. The new administration is making progress in this regard.”
Nevertheless, with debts of $106bn making Pemex the most indebted oil company in the world, according to Bloomberg, analysts have argued that the tax breaks do not go far enough. Related: What Norway’s Decision To Divest Means For US Shale
Both Fitch and representatives from asset management firm Bluebay said they believed the company needed fiscal relief of between $9bn and $15bn annually over the medium term to strengthen the firm, with funding required to upgrade infrastructure, invest in new exploration and production activities, and boost existing output.
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The impact of the high level of indebtedness was highlighted on January 29 when Fitch downgraded Pemex’s debt rating two notches to “BBB-”.
AMLO questioned the decision, highlighting that many of the challenges affecting the company – such as liquidity, corruption and waste – are being addressed, and that the reforms would see Pemex avoid subscribing debt this year, for the first time in 10 years.
However, the ratings agency reaffirmed the downgrade, stating that the recently announced support package, while a step in the right direction, was not enough to adequately boost exploration and production activities.
Furthermore, following the government announcement of the Strengthening Programme on February 15, the price of Pemex bonds with an expiration date of 2027 fell 0.9 percent to $97.39. This asset price fall can be taken as an indication that the market was not fully convinced that the tax breaks will prove sufficient to improve the company’s fortunes.
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