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Pemex debt strategy at risk of unravelling

The Mexican firm had made some progress arresting its hefty debt pile, but the economic downturn and government obsession with upstream targets has started to take its toll

When President Andres Lopez Obrador romped to victory in Mexico’s 2018 election, one of his key pledges was to tackle state oil firm Pemex’s chronic debt problem. Total company debt had ballooned to over $100bn, rising at an annual rate of almost 14pc, while failing to halt rapidly declining crude production.

At first, everything seemed to go according to plan. In 2019, Pemex managed to reduce its debt balance for the first time in 12 years, despite the government cancelling all bidding rounds, shunning foreign investment and saddling the NOC with the country’s upstream recovery programme. Pemex has until 2024 to revive national crude production to 2.4mn bl/d, mainly through the startup of 20 new oil fields.

But the economic crisis this year has showcased the risks of overloading an already strained company. In the first half of the year, Pemex increased its net debt by 26.1pc, to $105.5bn, while posting a $26.4bn net income loss. Currency devaluation and the effects of the Covid-19 pandemic on global energy demand combined to wreak havoc on company profits. Mexican crude prices slumped by 45.2pc year-on-year over the first half of 2020.

No turning back

Oil producers globally slashed capex in the first half of 2020 to protect their balance sheets. But outlier Pemex has instead forged ahead with its original plan to fund the upstream recovery, budgeting c.$8bn in capex—its highest since 2016—despite oil price volatility and the risks of undoing much of the government’s progress in paying down the hefty company debt.   

“[Pemex] would need current oil fields to increase production or develop new fields” Cruz Borges, BBVA

But even with an increased spending commitment, the prospect of achieving 2.4mn bl/d by 2024 looks dubious. “It seems developments will not be enough and [Pemex] would need current oil fields to increase production or develop new fields,” says Edgar Cruz Borges, head of credit research at Spanish bank BBVA. “[They] mentioned that current output from the new oil fields is c. 82,900bl/d, but it seems that production will not go above 2mn bl/d in the short-term.”

Pemex’s oil production began to decline in March after economic lockdowns slashed global energy demand and Mexico complied with Opec’s call to remove 100,000bl/d from the market. By June, total output had fallen to 1.64mn bl/d, the lowest level since January 2019, when the Lopez Obrador administration first took the reins at Pemex.

The ramping up of 20 new oil fields was supposed to drive the government’s upstream goal. All but one of the fields achieved startup last year, while in the second half of 2020 new drilled wells are projected to add another 95,300bld/d to company production.

But even factoring in these additions and with the potential for more shut-ins due to the economic downturn, Pemex is a considerable distance from the 2.4mn bl/d target. Production for the month prior to the Opec+ agreement plus the expected year-end additions would reach only 1.84mn bl/d, a level last recorded in June 2018 but still 560,000bl/d short of 2.4mn bl/d.

High priority

The disparity between Pemex’s current crude output and the government’s aims will make the disputed offshore Zama discovery even more crucial to the company’s plans. The oil field is projected to hold between 670mn and 1bn bl oe—which would make it one of the world’s largest shallow-water discoveries. “The incorporation of reserves could be similar to a year of Pemex production if those reserves are developed and have a sound successful ratio to convert them from 3P reserves to 1P reserves,” says Cruz Borges.

2.4mn bl/d – Upstream goal 2024

But a third-party assessment of the field judged that a majority share fell within block 7, controlled by a consortium including US operator Talos Energy (35pc stake), Germany’s Wintershall Dea (40pc) and UK company Premier Oil (25pc), with Pemex instead holding a minority stake in its adjacent block. Pemex rejected the survey and demanded to be operator despite giving no evidence to support its claim.

In early July, Mexico’s ministry of energy (Sener) gave both parties 120 days to reach a unitisation agreement on the field. But if the factions fail to do so by the deadline, Sener will make the ultimate decision. And despite the October denial from Lopez Obrador that the government wants to appropriate the whole field, there will be fears that Sener will side with Pemex if the unitisation deal falls through.

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