OPEC+ Deal Agreed but Volatility Threatens Mexican Companies
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OPEC+ Deal Agreed but Volatility Threatens Mexican Companies

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Peter Appleby By Peter Appleby | Journalist and Industry Analyst - Mon, 06/08/2020 - 17:32

The historic production cut enacted by OPEC+ countries, including Mexico, to restore order to the oil market is set to be extended to the end of July, member countries have decided. The month-long extension will run 100Mb/d below the original 9.7MM/d cut after Mexico resolved to end its commitment at the end of June, according to Reuters.

Meanwhile, countries including Saudi Arabia and Libya have decided not to extend their own additional cuts beyond June, CNBC reports. This means that from the end of July, the output cut agreement will move into its second phase, whereby a lesser 7.7MMb/d will be cut from the countries’ production as was agreed in the group’s 10th Extraordinary Meeting on April 12.

Mexico had already stated its decision not to participate in the cut extension. According to Milenio, Energy Minister Rocío Nahle said that she told the other ministers of Mexico’s decision and that there was no quarrel or bad blood between them. “It is time for Mexicans to see it from another perspective. We did not let anyone down,” she said.

While the decision of OPEC+ members saw a rise in oil prices, the decision of certain nations not to extend their extra cuts caused a 4 percent drop in oil futures, Bloomberg reports. WTI fell US$1.30 to US$38.25 per barrel while Brent fall US$1.09 to US$41.21 per barrel.

While market volatility is inevitable, it is never an investment-friendly environment for players. It is the market expression of uncertainty and a signal that, despite oil’s climbing prices over the last six weeks, that there is a long way yet to go.

Cuts have already been made by operators around the world, many of whom work in Mexico. Murphy Oil recently announced it would defer the drilling of a second well on Block 5 until 2021. When operators make cuts, the rest of the supply chain feels the heat. On Monday, Hokchi, operator of the shallow water Hokchi Field, announced the early cancellation of its Grupo R lease contract for the Cantarell III platform because of prevailing market conditions.

PEMEX, the country’s major player, is also making savings. In April, PEMEX cut 2020’s E&P budget by MX$40.5 billion (US$1.9 billion), or 15 percent of the budget, due to the crisis.

PEMEX’s cuts and, more importantly, its inability to pay certain contracts, are putting the jobs of up to 10,000 workers at risks, says Darío Celis in El Financiero. According to the columnist, 15 oil platform contracts intended for the waters around Campeche have been suspended by PEMEX. Five contracts belonged to COSL, three to Seadrill, two to Perforadora Central, two to Goimar and one to Perforadora Latina. Perforadora Mexico had three contracts and, according to Celis, has told PEMEX that the company will go bankrupt with the suspension of the contracts.

PEMEX has also suspended the rental of up to 60 vessels from Grupo TMM, MexMar and Marinsa, says the columnist. Maintenance cuts will impact companies including Typhoon, Diavaz, Demar and Grupo R, he says.

PEMEX’s payment difficulties are well-known. Last month, Sie7e Energy’s Alfredo García told Mexico Business News that payment conditions are an obstacle for increased competitivity.

“Sie7e Energy has seen that the long wait times for payments from PEMEX to service providers have not improved Mexico’s attractiveness. Service providers are often paying their own operations from their own pockets and PEMEX payment times are getting longer. Therefore, some companies are falling behind on the payments they have to make. Sie7e Energy believes that, due to these factors, oil and gas projects being a contractor are not an attractive investment opportunity in Mexico at the moment,” he said.

But by risking the livelihoods of workers and the health of companies, PEMEX may be cutting its own ability to achieve the goals the administration has set. A strong pool of capable service providers within a resilient supply chain aids the company’s development of priority fields and offers support, via qualified personnel holding knowledge and experience, in the replenishing of the country’s reserves.

Suppliers along Mexico’s eastern coast are a major source of employment for local people. Having been devastated in 2014, the supply chain is only just getting back to its feet and COVID-19 is putting it at risk again.

Despite the OPEC+ agreement and rising prices, volatility prevails. The industry, and Mexico must be agile and thoughtful in its response.

Photo by:   Flickr, Bureau of Safety and Environmental Enforcement

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