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Pemex shoulders upstream burden

Suspension of private investment opportunities ramps up pressure on the Mexican state firm

Before last year's election, investors raised concerns that Andrés Manuel López Obrador's win would trigger the scale-back of Mexico's energy reforms. Less than five months later, those fears have been realised: López Obrador has suspended oil auctions for the next three years and placed a moratorium on farm-outs until production from existing projects begins flowing.

Mexican authorities now face the task of propping up ailing state oil company Pemex without the prospect of any joint-venture capital or future private participation. In February, the government offered $1.3bn in capital injection and $0.8bn in tax relief to help bailout the company — a tiny contribution compared to the total $104.1bn owed, and only 0.1pc of GDP.

Pemex must pay $6.6bn in maturing debt obligations this year and a further $9.6bn in 2020 — as part of a total of around $45bn in bond debt by 2023. The government is considering extracting $7bn from its sovereign wealth fund — about half of its total value — to meet the net payments in the immediate term. But, beyond 2019, there is uncertainty about how Pemex and its government owner can meet their commitments.

Pemex has one of the highest tax burdens of any state-owned oil firm, at around 95pc, comparable only to Venezuela's Pdvsa. This requirement handcuffs the firm's ability to reinvest finances into production and improve its bottom line. Production has been falling annually since it peaked at 3.4mn bl/d in 2004, averaging less than 2.1mn bl/d in 2018.

Pemex will not invest enough to salvage output this year, in the view of Edgar Cruz Borges, head of credit research at BBVA Bancomer, a Spanish bank. "Pemex would need to put at least $8bn solely in oil field development to stabilise production. According to our numbers, we expect the company will invest c.$4.4bn in development."

If production continues to fall, it will further weaken Pemex's finances and make it more challenging to channel investment into the country's deepwater assets when reserves in shallower waters run dry. Production from Mexico's previous largest field, Cantarell, has plummeted by 95pc, although it has stabilised to around 100,000bl/d, while Ku-Maloob-Zaap, now the largest, reached plateau in 2009 but will soon begin declining.

In the absence of farm-outs, Pemex could also struggle with the expertise required to explore deepwater fields.

Slow out of the blocks

Despite targeting quick gains from shallow water and onshore projects, in contrast to the previous government's focus on deepwater assets, regulatory approval has been sluggish.

Pemex highlighted 20 fields to help lift production — 16 in shallow water and 4 onshore. However, the National Hydrocarbon Commission (CNH), the country's oil and gas regulator, has only received and approved submissions on four projects, despite Pemex CEO Octavio Romero Oropeza's calling for approval times to be slashed from 270 days to 22 days. And two of the fields, Chocol and Xikin, had actually already been sanctioned under the previous Nieto presidency.

Pemex has one of the highest tax burdens of any state-owned oil firm

Esah and Cheek are the only new fields to be endorsed by the state regulator. Pemex will invest $339mn into Cheek to target just under 18.7mn bl of oil and around 14.9tn ft³ of natural gas. The greater reserves from Esah will see Pemex invest around $482.3mn and reach 10,000bl/d in 2020, before rising to 25,000 bl/d in 2021 and maintaining this level until around 2033. Chocol will provide only 1,600-1,700bl/d by 2020 start-up, while Xikin has the greatest reserves and is expected to add 70,000bl/d by 2020. If Pemex is granted approval for the remaining projects, it envisages drilling 506 wells, and installing 13 platforms for its shallow water projects and 27 new pipelines.

López Obrador is also prioritising the development of an $8bn new refinery in his home state of Tabasco. Ratings agency Moody's has warned the project risks increasing Pemex's debt, as fuel sales would be in Mexican pesos rather than the dollar-denominated debt.

"The construction of Dos Bocas remains a major concern of Wall Street and rating agencies," says John Padilla, managing director at IPD Latin America, an energy consultancy. "Pemex has six existing domestic refineries that are producing less than 30pc of their capacity. With IMO regulations on the horizon, it would be substantially more prudent to dedicate refinery targeted resources to the upgrade and long-neglected maintenance of the existing refineries, rather than building a new one."

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