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Are the Energy Secretariat and Pemex in crisis mode?

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Dwight Dyer
Source: El Daily Post

As the price for the Mexican export oil blend sunk under $23 per barrel on Jan. 11, state oil company Pemex and the Energy Secretariat were busy reassuring the public that the company is still competitive. However, they also begrudgingly indicated adjustments will have to be made in the short term to sort through the instability in international markets. Are Mexican officials in crisis mode?

World of confusion. Back in January 2015, Pemex director general Emilio Lozoya was quoted as saying that the company’s oil production cost was $23 per barrel. A few days ago, as the price of the Mexican export blend continued its downward march past that mark, media and analysts, myself included, cried wolf. Yesterday, Pemex responded by clarifying that its average production operating costs are closer to $10 per barrel, which make it a very competitive firm in the global oil market. That $23 figure actually refers to “total costs”, i.e. capital and operating expenses, for developing and bringing new resources to market.

Indeed, as Rystad Energy, a Norwegian energy consulting firm, reported back in November 2015, average operating costs in Mexico are $10.70 per barrel, which compares favorably with costs per barrel in Brazil ($31.5), the UK ($30.5), Canada ($22.4) and even the United States ($14.80). Costs in Mexico are comparable to Kazakhstan’s ($11.5) and Norway’s ($12.1), but are significantly higher than Iran’s ($5.70), Saudi Arabia’s ($5.40), Iraq’s ($5.10) or Kuwait’s ($4.80).

Why all the fuss, then? Well, part of the problem derives from the fact that Pemex’s average total costs per barrel produced, again according to Rystad, are $29, which is considerably above both Pemex’s own $23 figure and the $21.5 that the company is getting in the market right now. Actually, Mexico’s average capital expenses ($18.30 per barrel) are the fifth highest among the world’s top 20 oil producing countries. If this is so, then Pemex needs to make adjustments to ensure that it can ride out the hard times, which could go on for much of the year. This is where things get tricky.

To cut costs, Pemex can mainly do two things: lay off workers and choose what projects to save for later. Private companies usually take these actions in tandem, evinced by the drop in the rig count (which indicates the number of profitable wells) and the major personnel reductions that have made headlines over the last year: 7,000 workers in Chevron, 10,000 in Shell, 20,000 in Schlumberger, 16,000 in Halliburton, and so on. The urgency of Pemex’s pending decisions was underlined by Undersecretary of Energy for Hydrocarbons Lourdes Melgar on Jan. 13, when she tiptoed around the suggestion for Pemex to approve changes to its 2016 investment and restructuring plans before the end of the first quarter. It should be noted that she is a member of the company’s executive board, so she knows full well what is coming.

Bad news. These plans, as reported by El Universal daily, were recently approved by Pemex’s executive board. They include a likely first budget cut of 70 billion pesos to the company’s investment budget and 13,000 layoffs. No details were provided of where the budget cuts would be applied, but there is a good chance that they’ll go to upstream activities. Goodbye, deep water exploration! Then, there is the politically unpalatable issue of layoffs. Actually, there will likely be a larger number of union workers going into retirement, whose posts will likely be cancelled, than actual layoffs, the number of which remains tightly guarded. Still, the hush-hush suggests politics trumps economics.

 

The lack of transparency surrounding Pemex’s decisions stands in stark contrast with Energy Secretary Pedro Joaquín Coldwell’s claims to this effect about the reform process.

 

Lozoya will be the bearer of bad news at the end of February, when Pemex’s financial statement for 2015 is released, and in early March, when he presents the details of the cuts to the executive board. It’ll be interesting to see how the company expects to sustain production, increase productivity and pull itself out of the deep sea of red ink its finances are floundering in. All this, before the Energy Secretariat even considers bringing farmouts into the discussion.

The bottom line. Pemex, like any other major oil company, is going through a difficult time. Unlike other major companies, though, Pemex is extremely reticent to be upfront about the hard decisions it has to make. The main reason for this, I would posit, is that by acknowledging the company´s troubles it is undermining the Peña Nieto administration’s rhetoric about the expected benefits of energy reform. And that is why Mexico’s energy sector officials are in crisis mode.

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Do you have energy-related information or questions you want to share with us? Email them to dyer@eldailypost.com.

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