Could PEMEX Benefit From Rising Crude Prices?

Oil prices are showing an upward trend. The Mexican crude basket has reached price levels unseen since 2018, hitting US$70.2 per barrel on June 25. However, lower production levels, a focus on refining and further high imports could hamper PEMEX’s possibility to benefit, experts agree.

On Friday, June 25 the Mexican export mix hit its highest point since October 31, 2018, an uptick of 60 cents compared to the previous day. Despite the price having dropped slightly after, an upward trend can be perceived, in which the Mexican crude basket joined WTI and Brent, as well asother international crude oil benchmarks. As of June 29, the Mexican crude basket stands at US$69.03. This figure represents a sharp contrast with last year’s figures hovering around the US$40 mark. “The signs of economic recovery at a global level encourage the demand for oil, which benefits from an improvement in the global industry," announced Banco BASE. Nevertheless, experts warn that if a price boom materializes it may very well be the last one. The pressure on companies and governments to decarbonize and utilize fewer fossil fuels may diminish demand to lower levels.

Despite the bullish outlook, the strategy of Mexico’s heavily indebted national oil company PEMEX is not optimally aligned to benefit from the increased oil prices, independent energy analyst Rosanety Barrios told NGI. Barrios highlights that PEMEX imports most of the petroleum products that it sells in the market, ramping up these imports to high levels in 2021. And if crude prices increase, so do refined products. She also argued that PEMEX “loses a scandalous amount of money” when it comes to its refining business, where it uses more expensive oil to produce refined products that are sold cheaper.

Production figures, along with PEMEX’s declining upstream portfolio, are a further cause for concern. Crude oil production by PEMEX and its partners fell for the second consecutive month in May 2021, reaching a daily average of 1,688 MMboe/d. This was 0.2 percent less than April’s 1,693 MMboe/d.

Despite these challenges, PEMEX does stand to benefit. PEMEX reported earnings of US$1,99 billion in May 2021, its highest level in the past two years. With an upward trend, PEMEX could look to improve on these numbers further in June and onward, but a more optimal strategy is desirable. “I believe PEMEX still wants to cover the entirety of the industry’s value chain on its own, even though these ambitions do not fit into its financial and operational realities. This leaves the NOC with two options. Option one is to focus its operation on specific segments and activities within the value chain that are best-suited to increasing its revenue, particularly in the upstream category. Option two calls for making its operations as efficient as possible using the tools that the Energy Reform provides. This includes the use of farmouts, associations and alternative contractual models that allow it to share risk with more ease,” said Energy Sector Analyst Arturo Carranza in a Mexico Business News interview.