Energy Security May Really Be About the Discipline to Sell Assets

• “The most indebted oil company in the world.”

• “…not able to make payments due to suppliers due to too much debt.”

• “Another corruption scandal.” 

You may think that these are recent headlines from Mexico, but they are from Brazil in 2014 and 2015 when Petrobras’ debt ballooned to over US$126 billion. The state oil company of Brazil was in trouble. The company had made revolutionary improvements in the 1990s and early 2000s to its technical capabilities and had become one of the most competent deepwater operators in the world. This coupled with the extraordinary results in the pre-salt deepwater projects in Brazil seemed to be the key to long-term energy security in Brazil. But the enormous capital required to develop ultra-deepwater projects, coupled with an ambitious period where Petrobras wanted to do everything, both inside and outside of its home country, led to an unsustainable debt level. What did Petrobras decide to do? Sell assets. Numerous noncore assets were put on the block, with US$15 billion raised in 2015-2016, a further US$20 billion in 2017-2018, and exits from numerous international markets. The effect was extraordinary, not only did the sale of assets raise significant capital, but it also allowed the company to focus on its core, resulting in significant increases in profitability, even when you strip away the impact of variation in commodity price. The company was successfully able to reduce its debt from US$126 billion to US$37 billion by 2021, and the company had become significantly more profitable on a smaller asset base. 

Turning to Argentina, in 2024, YPF has put 55 noncore blocks up for sale. Arguably the lack of international capital flowing into Argentina is forcing YPF to act pragmatically to raise capital by selling assets. The Argentine national company understands that it cannot be successful in Vaca Muerta unless it concentrates. The efforts in this non-conventional formation, led by YPF and numerous local companies such as Pampa, Vista, Teceptrol and Pluspetrol and joined by numerous international players, is converting Argentina back to be a net exporter of energy after years of being mired in a long period of net importer status. YPF’s stated goals for the sales are to raise capital and to improve operating efficiency.  

Two countries in Latin America have fundamentally improved their energy security by selling assets from their national oil companies. This runs contrary to the idea that state companies should do it all for a country to maintain energy security. The reality is no company anywhere or in any industry is good at everything. Specialization tends to breed efficiency. The most efficient countries at oil and gas operations are also those that have a diverse set of companies, each focused on their area of expertise. Even big integrated companies realize this, and respond by breaking up their businesses into distinct units with specialized management focused on each area.

PEMEX is facing an enormous challenge over the next few years. Its high debt levels have led to a vicious cycle. Suppliers are not being paid on time. Partners are not being paid on time. Interest is not being recognized on the delayed payments. Many banks are no longer willing to take on PEMEX credit risk. The result is that suppliers are left with only one option: increase prices to “cover” the cost of financing the PEMEX payment uncertainty. Unfortunately, this has created a magnified impact when it comes to the efficiency of the Mexican oil industry. The cost of capital for even the largest service companies is higher than what PEMEX pays for its debt. When you add on the risk for timing of payment, service companies are marking up pricing because they must. Historically, costs for services in Mexico were like those in Texas, with lower labor costs in Mexico offsetting the slightly lower efficiency in Mexico versus Texas. Today, service costs are 30-50% higher in Mexico than in the United States, and the situation is getting worse as more and more small companies, ill-suited to surviving the payment delays from PEMEX are going out of business. The reduced competition is leading to even higher pricing. 

If Mexico wants to have a healthy oil industry, something must be done. PEMEX should pay its suppliers on time, without fail. The false economy of using suppliers to indirectly finance PEMEX is creating a rapidly degrading situation in the market that is making it difficult for any efficiency to be obtained, even for operators who do pay on time. The Mexican service industry is very ill and needs to be brought back to health. PEMEX would directly benefit from lower pricing and greater operating efficiency, driving better profits, which would help it reduce the pressure on debt repayment. 

PEMEX could also benefit from learning from other state oil companies and realize that selling noncore assets, or assets where they lack the ability to focus on the development of the technical capabilities required, would lead to a significant influx of capital. Third-party estimates have suggested that PEMEX could raise US$10-30 billion by selling only the assets for which it has no current plans to do any work in the next three years. That equated to upward of 25% of the total debt load of the company. Should asset sales not be an option politically, even farmouts, where the private operator was allowed to operate the field on behalf of the state, with the participation of PEMEX, would allow PEMEX to stretch its available capital further. 

PEMEX today is in a hole. There is no easy way to dig itself out. It will require tough decisions, discipline, and a recognition that there is an increasingly smaller amount of capital available for oil and gas activities around the world. Showing the global markets that PEMEX is willing to do this hard work is the best way for the Mexican oil sector to be put back on a healthy path for the future, and allow the industry to keep doing the work to help Mexico grow as a country. Selling assets may be the best way for Mexico to truly ensure energy sovereignty.