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News Article

Creativity Needed When Handling the Industry’s Finances

By Pedro Alcalá | Thu, 07/15/2021 - 19:07

You can watch the video of this panel here.

Oil and gas finances in Mexico have a complicated connection with fiscal policies and public budgeting. A large part of the sector is dominated by state entities and political actors that are not always easy to reach and understand in their financial maneuvers. However, participants of the last panel of Mexico Oil & Gas Summit 2021, titled “Financing the Future”, managed to have an objective conversation about the current state of the industry´s finances. 

The panel was moderated by Rodolfo Rueda Ballesteros, Partner for Houston & Mexico at Thompson & Knight LLP, who quickly threw down the gauntlet by centering the subject around PEMEX, both in terms of its debt and also in terms of its investments. Rueda Ballesteros made it clear that the number one concern was getting the NOC to escape its “rock and a hard place” situation caused by the combination of its elevated tax burden and its elevated debt burden. 

Panelist Manuel Rodríguez Arregui, Founder and Director General of Ainda Energía & Infraestructura, focused on the positive, given his acknowledgement that so much of these discussions usually took place under a “doom and gloom” type of context. 

PEMEX is measured by the credit rating agencies in terms of its operational flows and debts, not its assets. This is an opportunity for PEMEX because it turns these assets into an ace in the hole for them. “Everything that PEMEX has received after the Energy Reform through assignments and the Round Zero represented business as usual for them. But associations, farmouts and contract migrations to licenses that they control are a different kind of game.” 

Rodriguez Arregui believes that PEMEX can have many things to offer if it develops new ways of interacting with the free market. “PEMEX has an advantage in the current market. It can participate in joint ventures, where it can be the main beneficiary but not the only one.” PEMEX can be much more creative regarding its accounting practices, using associations to move its assets around its own financial convenience. The current regulatory framework gives the NOC the right to do this. Based on this experience in the infrastructure market, Rodríguez Arregui suggested that PEMEX should get used to sharing responsibility more and to develop projects with more stakeholder involved. “Nobody in the infrastructure sector undergoes a large-scale project with a sole stakeholder. So why should PEMEX? They are an infrastructure company too, at the end of the day.”  

Rodríguez Arregui cautioned that there are no easy answers. “We are not going to improve PEMEX's situation by reducing its taxes and giving it more money. What we have to do is take advantage of private investment” Arregui went one step further by saying that Mexico is paying for PEMEX’s debt, in a way that leads to public medicine supply not being paid for, and this is a public policy that can only be referred to as completely unsustainable. Rodríguez Arregui also mentioned that in this estimation, PEMEX still had a bright future ahead of it because oil demand “is nowhere near reaching its maximum point, especially when you consider the future of natural gas, as both a fuel and also a feedstock for vast segments of industrial activity, as well as most, if not all, of the petrochemical sector.” As Rodríguez Arregui said the energy transition is not on the way towards making hydrocarbons irrelevant in the short term: “Despite the increased use of renewable energy, oil will continue to be the main fuel. We have to take advantage of it, before it is displaced,”

Panelist Lucas Aristizabal, Senior Director of Latin America Corporate Ratings at Fitch Ratings, agreed with Rodríguez Arregui in the sense that PEMEX’s production horizon was much brighter than most people think, especially since the production decline has been stabilized successfully by the government so far, especially when successfully using new discoveries to make up for production declines at flagship mature fields like KMZ. These include new fields like Ixachi, which have represented a significant added wealth for the NOC. PEMEX is also increasing its reserves and helping its financial situation through these kinds of reserve incorporation practices. Aristizabal also considers SENER’s direct support to PEMEX as a positive development in regards that they made more visible the issue of PEMEX’ debt. In the long run, however, Aristizabal believes that contracts need to come with enough commercial incentives to attract the necessary investment or the numbers would never make sense: “Incentive contracts can benefit the industry in the long term, but only if they are accompanied by migrations to new licenses with different tax schemes.”

Panelist Arturo Carranza, Energy Advisor at CFE, was similarly blunt about PEMEX’s issues: “PEMEX presents two challenges: its financial debt and its tax burden. Both do not allow it to improve its performance, despite its efforts.” Carranza mentioned that the NOC’s  tax burden represented the loss of 20 percent of its internal sales in the first three months of 2021, considered a devastating blow. At the same time, Carranza sees many opportunities with the incoming energy transition, stating that “PEMEX must take advantage of the energy transition to increase investor confidence. This will be essential for its transition from a fossil company to a greener company. The world needs to ramp up its climate transition to avoid dramatic increases in temperature. The energy sector contributes two thirds of carbon emissions, so the oil and gas sector needs to step in to support.”

Pedro Alcalá Pedro Alcalá Journalist and Industry Analyst