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Pemex in race against time

Mexican NOC faces near-impossible task of hitting ambitious upstream targets while maintaining capital discipline

On the campaign trail in 2018, Mexican president Andres Lopez Obrador promised to bring radical change to the energy sector. He looks set to achieve this—but not necessarily in a positive direction with production languishing and global oil prices spiralling lower.

After winning the election, he promptly cancelled future bidding rounds and vowed to resurrect sinking domestic oil production through greater domestic involvement. His commitment was demonstrated by a 13.6pc increase to the E&P capex of Pemex, the state-owned oil company.

But the NOC’s full-year performance for 2019 shows the strategy is at risk of failing, even if some of the capex will start paying off in future quarters. Production again declined, despite the government claiming it had stabilised volumes. Crude output for the year fell to 1.68mn bl/d, an alarming 7.4pc drop year-on-year. 

“The government needs to reactivate auctions of oil and gas fields, as well as Pemex’s farm-outs” Rodriguez, BBVA

Operational problems and bad weather were partly blamed for the setback. The Mexican government had prioritised the ramp-up or startup of nine of its 20 new priority fields. In the fourth quarter, Pemex succeeded in bringing online just five fields: Xikin, Ixachi, Cibix, Chocol and Valeriana.

Further progress was pushed into 2020. “Development wells on the shallow water fields will start production in February and March,” said Francisco Flamenco, Pemex’s acting general director for E&P, on a conference call in February. “Hok starts producing in mid-February, Tlacame is expected in February and Mulache will start in early March. In 2020, more than 60 wells are scheduled to drill for the new developments.”

Trouble and strife

The arrival of delayed oil production in the first quarter of 2020 will help the government move towards its 2024 target of 2.7mn bl/d. Pemex already started to see an increase in the fourth quarter of 2019, and in January improved output to 1.72mn bl/d.

The Covid-19 outbreak, and now the collapse of the Opec+ alliance, will compound Pemex’s financial woes and raise doubts about its ability to fund a recovery. In 2019, the Mexican NOC posted a net loss of MXN$346.1bn ($18bn)—almost double the level recorded in 2018 and its worst financial performance in four years.

$18bn Net income loss in 2019

Both crude exports and domestic sales were weak. The average price of Mexican oil exports in 2019 sunk to $55.63/bl, a 9.3pc drop year-on-year. “As Pemex struggles to be profitable and the subpar economic performance continues in Mexico, the risk of a credit rating downgrade increases for both Pemex and the federal government,” says Arnulfo Rodriguez, principal economist at Spanish bank BBVA.

Balance the books

One success was the government’s ability to pay down Pemex’s net debt. The overall level was reduced by 4.9pc to $105.2bn during 2019.

Ambitions of reducing the level further this year will likely be limited by an increasingly volatile market and the financial burden of funding the upstream recovery in the absence of further bidding rounds.

Before the global oil price shock, the government promised to increase Pemex’s E&P spending to $12.87bn for 2020, an enormous 48pc rise. With the value of Mexican crude now substantially lower and Pemex already struggling to make a profit, the government may rethink its strategy.

Source: Pemex

“To boost crude oil production in a profitable way, the government needs to reactivate auctions of oil and gas fields, as well as Pemex’s farm-outs,” says Rodriguez.

Lopez Obrador has to-date shown no interest in resuming the country’s bidding rounds, despite Mexico’s financial vulnerability. In February, Pemex also claimed operatorship of the offshore Zama field, despite an independent assessment confirming 60pc of the field is buried beneath block seven, which is controlled by a consortium of US independent Talos Energy (operator with a 35pc share), Germany’s Wintershall Dea (40pc) and UK company Premier Oil (25pc).

The government had promised to respect bidding round results and signed contracts. But the efforts to seize operatorship of Zama have again raised concerns about the risks of operating in the country while a Lopez Obrador government remains in power.

 

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