Challenges to Prepare for Future SuccessWed, 01/20/2016 - 13:42
The opening of Mexico’s oil and gas industry was hit by a perfect storm when the oil prices toppled down to levels not seen in decades. The American reference WTI dropped to a historic low in early 2016 when it reached levels below US$30/b. The global hydrocarbon market has been trying to rectify this unfortunate situation through various meetings, the most recent of which took place in Doha in March 2016, but provided no meaningful outcome due to the divergent interests of the oil producing nations.
When asked about Mexico’s stance in this negotiation, José Antonio González Anaya, PEMEX’s new Director General, comments that he is on Mexico’s side. In his view, the fundamental difference between Mexico and most oil countries lies in the fact that Mexico is producing at top capacity. “Although it would be beneficial for PEMEX and the country to have higher oil prices, I want to clarify that the Mexican economy is rapidly reducing its dependency on oil revenues, which currently only represents 7-10% of the economy. Public finances, however, are dependent on oil revenues,” González Anaya admits. “It is a tricky situation but the Mexican government is making quick progress and succeeding in its quest to become less reliant on the sector.”
In order to survive and be successful in this new era, PEMEX has implemented a budget cut of approximately US$5.5 billion, counting on an oil price of US$25/b for the Mexican Mix, or approximately US$35/b for WTI. González Anaya laments that the deep cuts do not reflect the longterm opportunities available, as they had to be made in order to adjust to the short-term challenges. “This leaves PEMEX with current operating budget of about US$20.8 billion, leaving sufficient room for the NOC to meet its target for this year.
Moreover, PEMEX is taking advantage of the tremendous flexibility that the Energy Reform provided it with to face these issues,” he reassures optimistically. Indeed, one of the main changes brought about by the reform is the possibility for the NOC to partner with private operators, giving it access to much-needed capital and technology. This newly acquired flexibility allows González Anaya to confidently claim that PEMEX could potentially still survive another budget cut by further improving its savings and cost efficiencies.
Despite the improvements, the results of which are yet to be seen, PEMEX experienced a drop in its credit rating.
When confronted with this reality, the NOC’s Director General highlights the fact that only one of the three credit rating agencies has taken this step. “In order to rectify this situation, we have been meeting with investors and taking all necessary measures to ensure we regain our investor grade,” González Anaya discloses. The NOC has taken the decision to issue new debt both domestically and abroad, despite the recently announced government support program aimed at lowering its debt requirement by US$2.7 billion.
The Mexican oil company is also reviewing all of its assets and preparing to put those that are deemed non-strategic on the table. “PEMEX was a vertically integrated monopoly for 75 years,” González Anaya reminds. “Within the new rules, there are many things that do not necessarily have to be run by PEMEX.” González Anaya says he expects refining to be open to partnerships, and he anticipates that non-strategic downstream assets will be the first to undergo this change. “We will retain part of the equity, but it does not necessarily have to be the majority.” The NOC also hopes to cut CAPEX by sharing it with new partners, a key factor that brings González Anaya optimism about the future of the company. PEMEX hopes to leverage on the fact that most companies do not like to enter a country without a domestic partner, creating numerous opportunities for the NOC.
An idea that has crossed the minds of most industry experts is the possibility of PEMEX going public as an alternative way to attract funding. This could be a favorable decision, as it would raise capital, keep the company from having to sell assets when the oil prices are low, and introduce accountability into finances and operations. “The biggest challenge that we would face in this endeavor would be transparency. It is important to remember that we have been a state-owned company since 1938, and although we are slowly moving towards transparency, we have not fully achieved this. As we move in that direction, however, we will become more accountable, allowing us to concentrate on profitable decisions and activities,” González Anaya explains.