PEMEX: One Step Forward, Two Steps Back?

In March, Mexican production hit a 17-month high at 1.746MMb/d and represented an increase of 3.6 percent on March 2019. This milestone is significant for and marks the first reversal of declining production in 14 years, El Economista reports.

PEMEX made its own landmark, increasing production by 1.8 percent between 2019 and 2020 to hit an output of 1.638MMb/d in March. This is huge news for both the company and the López Obrador administration, which set PEMEX’s return to glory as one of its primary goals. However, with the OPEC+ production cut agreement due to begin on Friday, these figures may be blunted. Mexico was successful in fending off a request from the group’s members to cleave 400Mb/d from its production, but it is obliged to implement reductions of 100Mb/d through May and June.

The obligatory reduction is needed to stabilize global production and help return oil prices to profitable standing. Mexico must play its part, there is no doubt. But the cuts come at an unfortunate time for PEMEX, which, as it is repeatedly informed by leading credit agencies, must prioritize production to help its financial flows and credit standing.

But just as the company takes one step forward, it appears to be taking two steps back.

The arrival of President Andrés López Manuel Obrador was a great boon to the struggling NOC. The president is a sworn supporter of PEMEX and has vowed to protect the company that he believes holds the key to Mexico’s national development. While austerity measures have been implanted elsewhere, President López Obrador has lessened PEMEX’s tax burden and funneled funding to the company. At the presentation of the National Refining Plan in May 2019, the president stated his commitment. “We are convinced of the importance of rescuing PEMEX because if we rescue PEMEX and we rescue the energy sector, we will rescue Mexico,” he said.

The ways that the administration intended to revitalize the company were set out in the PEMEX Business Plan. This included the development of priority fields that would receive investment of up to MX$42.46 billion (US$1.79 billion). Ixachi, a field located in Veracruz, could not be considered a new discovery, but is the most important recent discovery of all as it holds estimated reserves of 1.3 billion boe. Another major field, Quesqui, may hold 700MMboe and was hailed in various media as PEMEX’s most important discovery in 30 years.

However, the production plan that PEMEX has for its priority fields is well behind schedule. As reported by Forbes, the NOC reached only 42 percent of the production it forecast in December 2019 to come from priority fields in 1Q20. The company’s intended output had been 80Mb/doe but achieved only 33.723b/doe. December’s forecast was itself reduced from the strategic plan and production figures reported earlier in 2019, which stated that 150Mb/d would be produced by new fields, not including Quesqui, reports Forbes.

According to Forbes, PEMEX has blamed the meager return, which came from only nine of its priority fields and Quesqui, was due to a lack of infrastructure and problems with drilling wells, among others. In January, El Economista said that PEMEX had spent only 6.7 percent of its priority field investment fund and had begun production on only four of the 20 fields.

Production in May will probably see a drop off. However, this drop might not be driven by the OPEC+ agreement alone. Rystad Energy recently told Mexico Business News that its thorough assessment of well-by-well data from CNH suggests that due to the natural decline of Mexico’s mature fields, even if planned wells come online on time, May and June will see a 50M/b production decline regardless of measures taken to meet the production cut deal.

There are other reasons to presume production could falter again.  One of these is the the global oil price collapse that did not spare Mexico, dragging its export basket into negative figures. After having refused the OPEC+ demand, President López Obrador announced that PEMEX would be shutting down new wells due to their unviability. He chose to shut in production on new wells because, said Bloomberg, valves on newer wells “do not lose pressure” like those on mature fields.

PEMEX has also started reducing personnel at its offshore platforms. Reuters reported that 259 rig workers were transferred onshore on Sunday, with Milenio stating the total number of PEMEX workers taken ashore is over 3,000. As of today, 27 PEMEX workers have died likely due to COVID-19, Milenio reports. These factors may see PEMEX’s production figures, not to mention those of Mexico, contract again.

The current crisis could not have been avoided but drastic delays on “priority” fields suggest that PEMEX’s problems remain. The company must now find the right track to increase production and prosper once more.