PEMEX Losses Shine Light on a Broken System

It never rains but it pours. On the back of the greatest demand drop off in oil’s history, the Mexican crude basket’s negative pricing and a series of credit rating downgrades, Mexico’s national oil company on Friday posted a loss of MX$562.25 billion (US$23 billion) for 1Q20.

According to PEMEX’s financial results statistics, the company has not experienced a loss of this size since 2004, the same period in which the fields of the legendary Cantarell Complex ended their peak production period and began a natural decline.

The company’s inability to find a Cantarell replacement has been one of the many factors that has hobbled its revival even during the impassioned premiership of President Andrés Manuel López Obrador who, though only two years into his term and has not yet had sufficient time to fully institute his energy vision, is a fierce backer of the troubled company. Recent discoveries that include Quesqui and Ixachi fields should help PEMEX reverse its diminishing power, but the development of these fields and a score of others has recently been blighted by set-backs.

The loss has come despite Mexico recording a 17-month production high in March – the first time the country’s production has grown in 14 years – and PEMEX’s own production increase of 1.8 percent year-on-year, hitting 1.683MMb/d output in March 2020. The federal government recently chose to increase refining and cut exports, while up to 15 refined hydrocarbons-laden vessels have been stranded off of Mexico’s coasts unable to unload cargo as gasoline sales have plummeted at retail sites nationwide. COVID-19’s obliteration of oil demand has given PEMEX the same problems all other operators have had. Yet few others enjoy political and financial backing of a federal government like the NOC does.

To put the size of PEMEX’s losses into perspective, as pointed out by Luis Miguel González in El Economista, the 1Q20 results mean that PEMEX lost money at a rate of MX$4 million (US$170,000) per minute. The problems that are clearly damaging PEMEX are not new nor the fault of the López Obrador administration. However, a clear strategy that fits the reality of a new global market is the only way that the administration can achieve its intention of rejuvenating the NOC to once again stand among the major oil companies of the world.

One clear issue to be resolved is the company's exploration and production strategy, which would remedy the concerns that drove PEMEX’s downgrades by Fitch, Moody’s and S&P. The lack of stable production is one of the central criticisms of the agencies and one that is not helped by the lack of a permanent PEP director.

In Moody’s most recent downgrade of PEMEX on April 17, the company specified its concern with “underinvestment in exploration and production in favor of an expansion of its refining business, which has generated losses for several years.” PEMEX’s problems in developing its priority fields led to the company missing its forecasted production output on new fields by 58 percent in 1Q20, delivering just over 33Mb/doe of the 80Mb/doe predicted and spending only 6.7 percent of its investment fund. This must be remedied.

The Dos Bocas refinery, which will cost US$8 billion by conservative estimates, is a puzzling choice for investment when PEMEX already counts on six refineries that are functioning well below 50 percent capacity following years of chronic underinvestment.

PEMEX also remains inefficient at a corporate level. As EY’s Hector Rocha explained to Mexico Oil and Gas Review last year, the bureaucratic nature of the company is incapsulated by La Ruta de la Bestia, the odyssey-like process that every decision must endure before being made.

The streamlining of processes like these can usher the company into the present century and help cushion the financial impact of unpredictable and unavoidable events like the COVID-19 pandemic. Reforma reports that a virtual meeting is set to take place between members of the Chamber of Deputy’s Energy Commission, Energy Minister Rocío Nahle and PEMEX Director Octavio Romero may discuss changes to the company’s business strategy to bolster its defenses against unpredictable occurrences and improve its competitivity.

Without a fresh perspective, the broken PEMEX system may not be repaired.