Fixing PEMEX’s Finances From the InsideBy Pedro Alcalá | Wed, 06/30/2021 - 10:31
Q: How did you become an independent adviser to PEMEX?
A: As a lawyer and businessman, I was a committed supporter of President López Obrador throughout his political career, including his three presidential campaigns. He knew I was the head of a number of administrative boards for the public and private sectors, in addition to my legal experience, which has been significantly focused on tax law and federal revenue. This experience is what I think made him consider me for PEMEX’s independent advisory board. I also have experience in public administrative finance and the structuring of treasuries, in addition to having experience with how these matters are handled in Mexico at the federal level. I also supported the president politically in my home state of Chihuahua. I believe I was chosen for this position given my extensive professional experience on fiscal matters, which are crucial to the health of PEMEX.
Q: What are some of the most pressing issues the NOC needs to address?
A: There is particular urgency for the NOC to increase its margins of profitability. After PEMEX was designated a productive enterprise of the state by the 2014 Energy Reform, this prioritization of profit was actually inscribed into the legal framework that governs it. However, inertia and antiquated customs in its internal processes and protocols have prevented it from really adapting to this need for revenue. There is a social dimension to a lot of PEMEX’s operations that sometimes comes into conflict with better business practices. These conflicts need to be resolved. In addition, operational efficiency is a pressing issue. My most important concern is to conciliate the president’s vision of PEMEX as a vehicle for energy sovereignty with the need to manage the NOC like a private corporation that should not be affected by political interests.
Q: Would you say PEMEX’s debt is or is not an insurmountable challenge?
A: The key is understanding PEMEX’s tax regime. Despite years of promises to lighten the NOC’s fiscal burden, no such change has taken place. It is a confiscatory regime that goes beyond the company’s operational flow. PEMEX cannot develop conditions necessary to ease itself from its debt burden before its tax burden is restructured. Maintenance, exploration and production operations can benefit in the short term from the larger available investment funds that could result from a reduction in taxes. The magnitude of PEMEX’s debt is quite substantial but it is not insurmountable, especially when you consider that it is not coupled with a federal or sovereign debt of a comparable size. This means that there is space for the fiscal restructuring that would be necessary to allow the NOC some breathing room. The president has been explicit in his mandate for SHCP to support PEMEX. This support became available in 2021 when direct financial packages from the federal government went straight to SENER and PEMEX. The ultimate objective here is to take an oppressive debt and make it sustainable and comparable to that of other oil majors. PEMEX’s current debt costs Mexico a considerable amount of money; it needs to be turned into an asset that allows the NOC to operate under a normality that can increase its profit margins. This vicious circle can be broken.
Q: How sustainable is it for the federal government to continue a strategy of direct support to PEMEX?
A: When you remove interest payments and the effect of the exchange rate, PEMEX is an eminently profitable company. The idea that these kinds of supports would become permanent fixtures that would, in the long run, risk becoming unsustainable contradicts the robust financial nature of the NOC. By design, it will not need this support for long. During the López Obrador administration, PEMEX has accomplished much in terms of efficiency, getting the price for each barrel extracted down to US$14 in some cases. This will drive its profitability to even higher levels. By focusing on production levels and national consumption, the government is prioritizing a direct capitalization in the nation’s own currency that reduces the negative impact of the exchange rate. The president intends to stabilize national production levels around 2MMb/d while prioritizing exploration and production projects that can boost profitability and continue reducing the average price for extracting each barrel. Increasing production is only important when each barrel is worth more to the company. With these principles in mind, the potential for PEMEX to become a sustainable source for the state can be unlocked.
Rafael Espino is a lawyer and legal academic specialized in tax law at an international level. He has also headed a number of prominent projects in the healthcare sector.