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Pemex showing signs of life

Austerity and higher prices have helped put the state firm back in the black. Deeper reforms are still needed

"When the president honoured me with heading Pemex a year ago, he gave me two instructions," José Antonio González Anaya, the Mexican national oil company's chief executive, explained earlier this month. "One was to get Pemex's finances in order. The second one was to harvest the historic opportunity of accelerating the energy reform." It's fair to say that González didn't fully grasp the scale of the job. "At that time, I didn't quite understand exactly all the work that we needed to do to get these two challenges done."

How is he doing a year later? It has been far from smooth sailing for González and Pemex, but they've notched up some hits. Whipping Pemex's shabby finances into shape was González's priority. Oil prices have surged and slid over the years, but one constant has been Pemex's losses. So, the company's new management team took a deserved victory lap in May when the company reported its second profitable quarter in a row—a first for Pemex since 2011.

Tailwinds helped. Oil prices rose and the government lifted fuel-price restrictions, which improved cash flow. But austerity measures and cost-cutting reduced operating expenses by 14%. It led to a MXN88bn ($4.58bn) profit in the first three months of the year, adding to MXN73bn in the fourth quarter of last year, Pemex's best six months in years. "Today we can say Pemex has stable finances—improvable, but stable. We couldn't say that last year," said González.

But for things to get rosier yet, Pemex must stop shedding oil output. The company produced 2.018m barrels a day in the first quarter of 2017, down nearly 10% from the same time a year ago. González hopes 2017 will be the low-water mark for the company's oil output, which has been falling since the early 2000s, when the supergiant Cantarrell shallow-water field began its steep decline. The company projects average output of 1.944m b/d this year, bouncing back to just above 2m b/d in 2018 and rising to 2.2m b/d by 2022. González, not an oilman by trade, will be relying on his upstream unit to follow through.

Trouble downstream

Pemex also needs to fix its troubled downstream business. "We lose a lot of money on refining, which is interesting because people don't lose money in refining," González lamented. Indeed, people look to the refining business for its reliable, if unspectacular, returns. Pemex's downstream facilities, though, have been beset by breakdowns and deadly accidents. In addition to the human toll, these accidents have interrupted the nation's fuel supply and led to higher imports from US refiners. The company's Mexican refineries have spent more than 10% of the past six years out of action for unplanned fixes and maintenance. The industry standard is about 3%. González blames the company's unreliable supply of hydrogen, which it supplies itself onsite, for much of the downtime. He hopes a recent 20-year hydrogen supply deal with France's Air Liquide will help bring the company's unplanned downtime to heal. But the refining segment really ails. González just wants to bring it up to scratch, and get the downstream "doing business the way everyone else does it".

MXN88bn - Pemex's first quarter profit

As for the country's energy reforms, a long road lies ahead for Pemex. Key to the liberalisation will be Pemex bringing in new partners—and investment—to oilfields, part of the urgent plan to boost output. Progress has been far slower than imagined. Still, the company made a breakthrough in March when it signed a deal with BHP Billiton to develop the deep-water Gulf of Mexico Trion discovery. González said that it will save the company $11bn in investment, a sum that was too large for Pemex and probably would have stopped it from developing the field. The deal will also bring deep-water technology into the country. More sales of stakes, González says, are coming. The company is casting around for interest in the smaller Ayin-Batsil shallow-water field, and the onshore Cardenas-Mora and Ogarrio fields. "The signal we want to send is that we are looking for partners in all areas," González said.

With 2018's general elections looming over the broader energy reforms, many have begun to question the durability of the whole enterprise. Andrés Manuel López Obrador, a leftist leader rising in the polls, for instance, has promised to dismantle the industry's liberalisation if elected. Public support for the reforms has wavered. González makes a compelling case that the reforms are here to stay. For one, he argued, president Enrique Peña Nieto pulled together a broad and overwhelming majority to push through constitutional changes that won't be easy to overturn. Second, Mexico's oil industry, a key source of government financing and foreign earnings, simply needs the cash. "The way I see it," Gonzalez said, "if my successor doesn't believe in these things, he better have $11bn to develop one of these fields, otherwise he isn't going to be able to do it."

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