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Pemex: Govt Aid Temporary Fix
Mexico’s heavily-indebted state oil company needs real reforms, experts warn.
BY ENERGY ADVISOR
Inter-American Dialogue
Mexican state-owned oil company Pemex on Jan. 31 issued a 10-year bond worth at least $1.5 billion to refinance part of its debt. Mexican President Andrés Manuel López Obrador has vowed to “rescue” the state oil company and has sought to bolster it with billions of dollars’ worth of tax breaks and other support to help it manage its more than $100 billion in debt. Why is the state oil company so indebted? Will the measures implemented by López Obrador be enough for Pemex to refinance its debt? What else can be done?
Fluvio Ruíz Alarcón, Mexico-based oil and gas analyst: After exhausting the agro-export model of economic development in the 1970s, the state transformed Pemex into a resource accumulator. From being a fundamentally secure energy supplier, Pemex became the country’s main source of tax revenue. Thus, the economic resources generated by the oil company have been used for decades as a substitute for a progressive fiscal reform, and Pemex ended up becoming a kind of indirect mechanism through which to appropriate oil income by big capital. Pemex’s role as the main source of tax revenue has been exacerbated since the economic crisis of 1982. Its tax burden has surpassed, year after year, 100 percent of its operating performance.
Pemex has had to borrow just to pay off taxes and duties to the ministry of finance. In fact, until 2014, Pemex was obliged to pay the treasury a daily, weekly as well as monthly amount. In addition, Pemex plays a role in adjusting national accounts, so it cannot necessarily freely dispose of the resources it generates. More than just short-term measures, what is needed is a thorough review of Pemex’s tax regime, outlined in the Hydrocarbons Revenue Law. This will only be feasible within the framework of an extensive and redistributive fiscal reform, which provides Mexico with the necessary resources to promote the country’s sustainable and equitable development.
Arantza Alonso, senior analyst for the Americas at Verisk Maplecroft: Pemex’s position as the most indebted oil company in the world is the result of multiple factors. For the past 30 years, Pemex has financed up to 36 percent of the government’s spending, losing at times around 130 percent of its revenue. Its production has nearly halved since peaking in 2004, almost two decades ago. The company has also made poor investment decisions, including pouring billions into building the Dos Bocas refinery while its six refineries are not operating at maximum capacity. Corruption and systemic abuse and misuse of Pemex’s resources have also led the company to its current state. The measures implemented by President López Obrador will relieve financial pressure from Pemex, particularly during this year’s first quarter. However, they are unlikely to be enough for the company to refinance its debt. Indeed, the next administration will have to continue supporting Pemex.
The company could improve its rentability by prioritizing its most profitable business areas and cutting spending in areas that represent a constant drain on revenue, such as refining and the fertilizer business. It could also improve its internal transparency and accountability controls to maximize the use of its resources. However, without a fiscal reform, the government will continue to use Pemex to make up for its limited tax collection base. Thus, despite extraction remaining extremely profitable in Mexico, the government’s dependence on Pemex will undermine any efforts to significantly improve the oil company’s fiscal position.
David Shields, independent energy analyst: Pemex is heavily indebted because for decades it was a cash cow for the government, which would tax it excessively and export as much crude oil as possible to cover short-term expenditures. Indeed, many of us have long looked at Pemex as a ticking time-bomb waiting to explode, yet successive federal administrations have been ready to ‘rescue’ the company by paying debt coming due. Now it is AMLO’s turn to rescue Pemex, even though he claims—more in discourse than in practice—that he is changing the company model away from exports and toward self-sufficiency. But oil output is still falling, and Pemex refineries still suffer major losses. The bomb could still explode if a further drop in oil production, or greater financial losses or a run on the Mexican peso were at some point to tip the scale into insolvency for Pemex, causing a macroeconomic shock for the Mexican economy. The solution could lie in divesting Pemex from the government in some way, selling unprofitable assets, improving the business plan and perhaps following Brazil’s resilient Petrobras model, which placed company stock on global markets, sought joint ventures and private investment, and is now increasing oil output notably as a result. Sadly, nationalist policies have meant that no one in Mexico is seriously proposing reforms at this time.
Larry B. Pascal and Carlos Alva, members of the International Practice Group at Haynes and Boone: Pemex’s long-term indebtedness is a product of a variety of factors, including declining production in legacy fields such as Cantarell, the inability to bring online comparably productive new fields, the lack of maintenance in its refineries and the unwillingness of the state to allow Pemex to retain sufficient earnings to reinvest in its operations. The administration has sought to support Pemex in various ways, including but not limited to, the development of the large new refining facility ‘Olmeca’ located in Dos Bocas, Tabasco. Recently, the ministry of energy announced that Pemex will commence refining there on July 1, 2023, with a goal to reach an estimated 340,000 barrels per day by the third quarter this year. In addition, Pemex is seeking to develop Lakach Field’s deep-water natural gas reserves with the announcement of a new project in Nov. 2022, with New Fortress Energy (NFE). Pemex has reported that the project represents a reserve of 900 billion cubic feet, and it estimates an average daily production of 300 million cubic feet per day (MMcb/d) over a 10-year horizon. Under the agreement, Pemex will sell 190 MMcf/d of gas to NFE, and the remaining 110 MMcf/d will be allocated for domestic consumption. Pemex expects that production will start in the first quarter of 2024.
Notwithstanding these efforts, it remains to be seen whether these measures are sufficient, without more comprehensive reform, including entering in more upstream partnerships with third party companies.
Republished with permission from the Inter-American Dialogue's weekly Energy Advisor
