Abu Dhabi, UAEThursday 3 December 2020

The rise and fall of Mexico’s Pemex highlights the dangers of a failing national icon

The company owes $106bn in debt and has seen its production plunge from 3.4 million barrels per day in 2004 to about 1.6 million bpd

An employee makes a payment next to fuel pumps at a Pemex gas station in Mexico City. The company is drowning in debt, its oil output is declining, and now it appears to be losing fuel market share in its own backyard. Reuters
An employee makes a payment next to fuel pumps at a Pemex gas station in Mexico City. The company is drowning in debt, its oil output is declining, and now it appears to be losing fuel market share in its own backyard. Reuters

Petróleos Mexicanos – Pemex – is the original national oil company. Founded on June 7, 1938 the year in which Mexico nationalised its oil, it has long been a national icon. But its problems are now a warning for other state oil firms in the new era.

Pemex is one of the three leading Latin American national oil companies (NOCs), alongside Petróleos de Venezuela SA (PdVSA) and Petrobras of Brazil. All have been through tough times over the last decade.

PdVSA’s production has collapsed amid mismanagement, plundering, power cuts, strikes and American sanctions. Petrobras racked up enormous debts in developing the huge pre-salt deep offshore fields and was embroiled in the “Car Wash” corruption scandal. But, gradually selling off assets, it has managed to get back on track. Unconstrained by the Opec+ deal, to which Brazil is not a party, its output is up this year.

Pemex’s performance lies somewhere in the middle. A company that produced 3.4 million barrels per day in 2004 and 2.6 million bpd of oil in 2012 has now dropped to just above 1.6 million bpd, even if output stabilised last year. The giant Cantarell in the Gulf of Mexico once yielded 2.1 million bpd on its own, one of the world’s most productive fields, but this has now dwindled to some 160 000 bpd.

Mexico’s six refineries only operate at about 40 per cent of capacity, and it is a large importer of petrol, diesel and natural gas despite its own resources.

In 2008, Pemex funded almost half the government budget; now this has dropped to 11 per cent. At current oil prices, its negative cashflow is as much as $20 billion annually. It owes $106bn in debt and some $70bn in unfunded pension claims.

More than 300 employees have died of Covid-19, making it the world’s worst-hit company. It acts as a social fund, with 126,000 employees and more than 600,000 dependents. Saudi Aramco produces more five times as much oil with about 79,000 personnel.

To turn around the oil sector, former president Enrique Peña Nieto saw through a controversial constitutional reform in 2013. The industry was reopened to private and foreign investment for the first time in seventy-five years. Deputy oil minister Aldo Flores-Quiroga, previously head of the International Energy Forum in Riyadh, and his team carefully produced a balanced petroleum contract to attract outside companies.

Results soon followed. In 2017, Italy’s Eni made the first discovery by an international firm since 1938, and a consortium of US firm Talos, Germany’s Wintershall and UK’s Premier found the Zama field, with an estimated 670 million barrels of reserves. This year, Spain’s Repsol discovered two fields in deep water.

But in 2018, Andrés Manuel López Obrador, often known as AMLO, won a landslide victory in presidential elections. His leftist populist campaign focused on boosting Pemex as a nationalist symbol and economic engine.

The climate swiftly turned against the private sector. Despite its poor recent track record and high costs, Pemex announced it would produce 2.03 million bpd next year and 3 million bpd by 2030, an unachievable jump from current levels. In the face of low oil prices, it has cut next year’s target, but still forecasts significant growth.

But instead of allowing the Talos consortium to press ahead with developing Zama, Pemex has insisted it should operate the field itself. About 60 per cent of the reserves lie within Talos’s block, while 40 per cent apparently extend into Pemex-held areas, though the company has not drilled there yet. This negates the original advantage of allowing in more efficient and quicker international companies to explore.

And rather than rehabilitating existing refineries, Pemex is building a new $8bn facility in the president’s home state of Tabasco. The Dos Bocas site lacks port capacity, and analysts suggest it is likely to cost more like $15bn-$20bn.

This July, former chief executive Emilio Lozoya was extradited from Spain to Mexico to face bribery charges. He has now accused three former presidents of corruption. In July, Mr López Obrador alleged, “there is information that to get the votes for the energy reform there were bribes.” In a mirror-image of Brazilian president Jair Bolsanaro’s selective prosecution of the Car Wash scandal, it appears Mr López Obrador may use Mr Lozoya’s testimony against Mr Nieto and his predecessor, former president Felipe Calderón, as well as other political opponents.

The melding of politics and energy is not new to Latin America or the world. The violent oscillations between free market and statist policies do seem peculiarly associated with that region, though, as Argentina, Bolivia, Ecuador and most spectacularly Venezuela have been through similar experiences.

Pemex’s travails are a warning to other national oil companies and their governments. They face the prospect of low oil prices for an extended period, and possibly falling world oil demand in the medium term. When petroleum makes up a large chunk of national revenues, a failing NOC risks a failing country.

This requires state oil firms to be transparent, non-corrupt and highly efficient, adopting modern technology and working with international partners. They cannot be social welfare agencies, nor quasi-fiscal entities that accumulate debt to prop up unsustainable government budgets. New projects, whether fields or refineries, must be commercially viable, not decreed to meet politicians’ goals.

Countries can be proud of their oil history and their hard-won sovereignty over their resources. But they should be even prouder of their ability to adapt, to attract international business with stable and practical conditions, and to build a new energy future.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis

Updated: October 18, 2020 11:23 AM

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