An Environmental Engineer and Climate Scientist by profession, the troubles of Mexico’s state oil giant Pemex, will no doubt have provided the new President with much hand-wringing torment.
One of the biggest polluters in the world, and with a debt-pile of over $100bn, the company is hardly a natural bed-fellow for a leftist progressive with de facto green credentials. But then again, oil and Latin America are synonymous, and the company itself is one of the cornerstones of the Mexican economy.
The petroleum industry in Mexico is well established and mature. The country is the 11th largest oil producer in the world and the 4th biggest in the Western Hemisphere (after USA, Canada and Brazil). In addition, only Venezuela has larger proven oil reserves in the Americas.
Pemex itself (Pemex = Petroleos Mexicanos) was founded in 1938 on the back of the expropriation and nationalisation of all privately held oil interests in Mexico and for most of the 21st Century, Pemex has been Latin America’s second largest enterprise by annual revenue (Brazil’s state-run oil giant Petrobras is the biggest). Around 20% of all tax revenues collected by the Mexican Government emanate from Pemex.
Eye-watering debts
As any half-decent businessperson knows, big companies aren’t necessarily good companies. Despite gargantuan sales of $90bn per annum, over the last 25 years Pemex has rarely made any profit and instead has become associated with inefficiency, waste and flabby management enjoying ballooning salaries.
As a result, the company has managed to rack-up eye-watering debts – to the tune of $110bn – making it the most indebted oil company in the world. On accession to the position of President, Ms Scheinbaum not only had to face up to a company owing billions of $ to an incredible array of creditors, but worse, around $30bn of that debt was due for maturation (i.e. repayment) in the next 3 years (2026 – 28).
Many of Pemex’s problems stem from Scheinbaum’s predecessor – Andres Manuel Lopez Obrador. An avowed economic nationalist, “AMLO” showed incredible and reckless largesse to the state-owned entity with over $75bn in cash injections and tax breaks being granted over the course of the President’s 6-year term.
Much of this money was showered on the brand new “Dos Bocas” refinery, built in AMLO’s home province of Tabasco and yet to produce any meaningful volume. This reflects one of Pemex’s most critical shortcomings – its refining sector. Capacity utilisation rates of below 50% and almost permanent annual losses, highlight the company’s struggle to optimise operational efficiency across its six (other) domestic processing units.
And this is despite gargantuan state subsidies, whereby the refineries buy cut-price (domestically produced) oil, rather than having to purchase crude at higher international market rates.
“HARDLY A NATURAL BED-FELLOW FOR A LEFTIST PROGRESSIVE WITH DE FACTO GREEN CREDENTIALS.”
The situation in crude oil exploration isn’t much healthier either, and not just because Pemex is forced to sell to its own refineries below market rates. At the same time, volumes have tumbled over the last 20 years, plus the cost of production creeps up year on year as extraction from the mature and geologically complex Mexican fields becomes more difficult.
Oil production peaked in 2004, at 3.4m barrels per day (bpd), but this has now fallen to about 1.5m bpd. Furthermore, the product produced is heavy and sulphurous, meaning that it costs more for a refinery to process Mexican crude which, in turn, means that even crude exported to international markets (around 500K bpd) must also be sold at a heavy discount.
One might conclude that a clanking refining sector and faltering oil production would mean that Pemex had turned their attentions to natural gas. After all, 60% of electricity generation in Mexico comes from gas fired power stations (renewables account for 22%), and the northern part of the country sits on vast reserves of shale gas (effectively a geological extension of the US / Texas fields).
Not so! In fact, the company has continued to take the inexplicable strategic view that gas exploration is a second-tier operation and has preferred instead to annually import 2.3trn cubic feet of natural gas from the USA (up 40% since 2018). Furthermore, with only 2 days of gas storage available in Mexico (versus, for example, 15 days in the UK, 30 days in Spain and over 100 days in France), the country is acutely reliant on US commercial goodwill – not an entirely straight-forward premise in the current political climate…
Pemex’s recovery
Detailed solutions for Pemex’s recovery now abound, including a special investment vehicle located in Luxembourg of all places, which is looking to raise bonds against the Mexican Government rather than Pemex itself (clearly a paper-thin “wall” if ever there was one). It is hoped that yet another layer of debt will help Pemex increase oil production to 2m bpd and natural gas to 5bn cubic feet (from around 3.7bn today).
Time will tell whether these targets can be met, but one key question remains, and that is how any oil company can rack up debts of over $100bn, when the price environment has broadly been so benign (i.e. a high crude price) over the last quarter of a century. This would indicate that Pemex is a mortally wounded entity that should probably be broken up before things get any worse, because worse might just be around the corner.
Many analysts are now pointing to a huge glut in oil supplies over the next 12 months which would push prices down. This means that, with high extraction costs, a spiraling wage burden, huge pension liabilities and, of course, the interest payments on the overall debt, Pemex may still not be able to turn a profit – even if it is successful in raising production.
Image credit: iStock
www.stabilityfromvolatility.co.uk
