/
Analysis

Public Expenditure Cuts Hammer PEMEX Investment Budget

Wed, 01/21/2015 - 17:21

The federal government’s decision to cut its public expenditure for 2015 by 2.65%, or MX$124 billion (US$8 billion), would not be a major problem if half that cut was not coming from one source: PEMEX’s budget. The amount being taken from the PEMEX budget represents 10.4% of the MX$594.6 billion total expenditure the NOC had planned for 2015. Industry experts have widely condemned the move, calling it disproportionate and stating it threatens to stall the implementation of the Energy Reform. Further complicating matters, many of PEMEX’s costs cannot be cut, especially its bloated payroll. For example, companies such as ExxonMobil with a turnover four times higher than PEMEX have less than half its staff, with 76,900 employees compared to PEMEX’s 153,000 at the end of 2014.

It would seem to many economists that the current decline in oil prices would provide an ideal opportunity for PEMEX to shed staff in an effort to reduce its operating costs, as mandated by the federal budget cut. However, cropping PEMEX’s unionized staff is a legal minefield. The privileges provided by PEMEX’s collective agreement and the pressure that may be exerted by the powerful Oil Workers Union (STPRM) only exacerbate this. Personal services, staff salaries, and social security cost PEMEX MX$90 billion every year. When pensions and retirement benefit commitments are added, this figure reaches MX$133.2 billion. Finally, interest on the parastatal’s debt adds up to MX$53.9 billion, totaling MX$187.1 billion of immovable expenses. This means that the only portion of PEMEX’s budget that could be cut is that dedicated to investment. According to the Treasury, this stood at MX$354.6 billion for 2015. However, the consequences of having CAPEX take the brunt of these cuts could severely harm PEMEX’s competitiveness. This would not only hurt its production capacity but the entire service industry that has flourished around the former monopoly holder over several decades.

As already announced, PEMEX’s refineries will be the first to tighten their belts, since the NOC’s refining and petrochemical areas offer lower profit margins than exploration and production activities. This announcement arrives a few short months after PEMEX signed contracts worth US$6.7 billion to build cleaner fuel plants and to reconfigure its refineries, in spite of the premise that budget cuts should not undermine its ability to supply the market with petroleum products. The trimming will also affect contracts with service providers that will now have to be renegotiated. This fact also emphasizes industry concerns that the reformed PEMEX will still be administered by the government’s public finances concern, instead of the business vision needed to guide the new productive enterprise of the state.