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Analysis

Budget Favors PEMEX Despite Weaker Market Demand

By Peter Appleby | Thu, 09/10/2020 - 17:45

The federal government’s 2021 budget is proposing a year-on-year budget increase of 4 percent for PEMEX, as the struggling NOC looks forward to continuing with its plans in a hostile market.

The Minister of Finance Arturo Herrera unveiled on Tuesday a budget proposal that reflected the government’s austerity leanings and that, according to Herrera, took into consideration the difficult reality facing both Mexican and global economies in the short and mid-term. The budget also offered a 4.6 percent growth forecast for Mexico’s GDP that Minister Herrera considered a “responsible” and “not a very optimistic estimate.”

The proposal includes several eye-catching elements for the country’s energy sector next year. CFE, charged with overseeing the development of the renewables sector, saw an 11.6 percent year-on-year budget cut while PEMEX will be backed by MX$544.6 billion (US$25.4 billion), a 4 percent increase from last year’s MX$523.4 billion (US$24.4 billion). This would be the company’s highest budget since 2015. From this, PEP will receive MX$289.9 billion (US$13.5 billion) to continue developing the company’s key projects, including the dozens of priority fields that PEMEX is to develop.

PEMEX’s historical importance to Mexico’s wider economy and the renewed influence the company has found under the MORENA government is undeniable. The company has been a major source of public revenue for many years and contributed around 9 percent of Mexico’s GDP during the 1990s.

Nevertheless, that contribution has fallen consistently in line with PEMEX’s production drop over the last two decades, with the steep production decline particularly apparent following the company’s peak production of 3.4MMb/d in 2004. Government actions including this year’s 22 percent reduction of the hefty tax burden that PEMEX has struggled under for decades has also reduced the NOC’s revenue flowing directly to the public purse.

Despite the government’s help, PEMEX will contribute just 2.7 percent to Mexico’s GDP in 2021, a Barclay’s estimate suggests.

PEMEX has its work cut out. The company will have to control its mounting debt in the most hostile market in decades. To meet government goals and continue its resurgence as an oil power, PEMEX will have to increase production levels that have continued to fall since a self-imposed 100Mb/d output cut in May and June as part of OPEC’s global 9.7MMb/d cut to stabilize plummeting oil prices. National output stood at 1.746MMb/d in March but fell to 1.604MMb/d in July, according to the most recent data. Barclay’s believes production will remain between 1.6MMb/d and 1.7MMb/d throughout 2021.

Even if PEMEX was able to increase its production, would the market have an appetite for it?

Almost six months after Mexico officially entered Phase 3 of the COVID-19 pandemic and with the death toll just under 70,000, Mexico City has recovered 78 percent of its habitual level of traffic. More movement will bolster retail sales that dropped to a trickle during Mexico’s national lockdown, which was partly responsible for PEMEX’s US$25.5 billion loss in 1H20.

Yet the state remains in “orange,” the second-highest threat level. When the capital’s traffic light color be reduced remains unclear. One thing, however, seems certain. When the capital’s mobility restrictions are lifted, COVID-19 cases will rise and when this happens, the government will have to decide whether to reinstate the lockdown or put the economy on halt for the sake of saving lives.

COVID-19 cases have risen in almost all other country that have reopened their economy and allowed greater movement of people. Some of the world’s major oil consuming nations including China, India and the US have reinstated lockdowns in areas where outbreaks have reappeared.

This uncertainty is straining markets. According to Bloomberg, “the tone of the market has turned more bearish.” A report from Bank of America stated that “it will take three years for global oil demand to recover from COVID-19 to its new normal, assuming we have a vaccine or a cure,” Bloomberg said.

And this uncertainty has been reflected in oil prices. According to Oilprice.com, the Mexican crude oil basket fell 14 percent from US$41.12 per barrel on Sept. 1 to US$35.50 per barrel on Sept. 8. Prices remain a third lower than the US$61.10 per barrel reached on Sep. 20, 2020.

The proposal must still be approved by Congress where MORENA holds the majority of power. In the next few weeks, the proposal will be poured over and numbers may be juggled. The government sees the financial backing of PEMEX as a necessity and, considering plans like the Dos Bocas refinery, one that it will not be steered away from. But market hostility and a global economy ravaged by a novel virus will not make PEMEX’s goals easy.

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Peter Appleby Peter Appleby Journalist and Industry Analyst