PEMEX’s struggles are no news for the Mexican oil and gas industry, but things are getting worse as the oil prices keep dropping, pulling down with them the global oil and gas industry. For now, it seems, there is no way out. On the 21st of January, when Brent Crude stood at US$28.38 per barrel, the director of BP, Bob Dudley, made everyone’s price concerns all too real by admitting that a fall to US$10 oil was “not impossible”. It is one thing for independent analysts to make such announcements, but it is another one when an oil major does. It is time for the oil industry to buckle up because the entire global economy is in for a ride, and PEMEX could easily fall off the tracks.
Dudley reckons this will only be a short-term fall to an unsustainable price, which would pick up again “around April or May, as the stock drawdowns [in preparation] for the summer driving season in the northern hemisphere, demand in China [could lead] prices [to] start on an upward trajectory”. According to his predictions, oil prices will have climbed back up to US$30-40 by mid-2016, and to US$50 by the end of the year. As much as investors are looking for good news, this seems unlikely in light of the fight over market share in Europe in which the US and Middle East are engaged, and the constant increase in supply with no end in sight.
Although the new oil price situation is bringing difficulties to the large and established IOCs, it is even harder on the NOCs, which are already struggling with other problems. ConocoPhillips may be losing US$1.79 billion a quarter, but it does not have other concerns jeopardizing its survival. While Petrobras is trying to survive a corruption scandal that has paralyzed the top government’s top echelons, PEMEX has yet to pinpoint the main challenge hindering it from reaching efficiency. In a recent exclusive interview with David Enríquez, Partner at Goodrich, Riquelme y Asociados, the lawyer explains that the Mexican NOC is crumbling under the weight of an extensive and inadequate fiscal policy, and a culture that is not adapted to reflect the new state of the industry, the impact of both is exacerbated by the current oil prices.
The end of the second week of January saw the Mexican mix close at US$20.91 per barrel, a price qualified as scandalous if considering the parastatal’s production costs. That same week, PEMEX announced that its production costs averaged US$10 per barrel, which would be sustainable at current oil prices, except that this does not include additional costs incurred such as exploration and development costs, and royalties and taxes. When taking exploration and development costs into consideration, and as disclosed by PEMEX Director General, Emilio Lozoya, just a year earlier, production costs reach US$23. It is sufficient to compare this figure to the retail price to see that the NOC is not profitable. To make matters worse, the previously mentioned price still does not reflect the complete costs incurred as it does not include the significant tax burden imposed on the NOC. It is estimated to lie between 60-70% of the price per boe. If we consider the total cost and tax burden and compare it to the retail price, the sad reality is that each day of activity at PEMEX increases the risk that the company collapses tomorrow. No wonder Moody’s downgraded the parastatal’s rating last November to Baa1 to reflect a negative outlook.
In response to this downgrade, the NOC released a statement in which it announced its intentions to take advantage of the various tools provided by the Energy Reform in order to maintain a healthy financial structure and generate economic value for the company and the country. Other suggestions for PEMEX include taking advantage of financial vehicles such as the Fibra E (MLP-type financial instrument), according to Moody’s, or following the same route as Saudi Aramco, which is considering the floating of some of its shares, according to Enríquez. The future of PEMEX may depend on its ability to do just that.
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