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Mexico To Cut More Than US$5 Billion From Pemex Budget

Pemex drilling rig

Mexican finance minister Jose Antonio Meade announced on Thursday that approximately US$5.4 billion in funds for state-run oil firm Pemex will be eliminated from the proposed federal budget in 2017.

"Pemex is making the biggest contribution to the cuts," Meade said about the company that will see an 18 percent reduction in funds and will make up some 41 percent of the US$12.83 billion slashed from the budget.

The budget was created with an outlook of $42 per barrel of oil and an expected output of 1.93 million barrels per day (bpd) in 2017. Mexican oil production has steadily decreased over the past eleven years as output is anticipated to drop from 2.16 million bpd to below the 2.0 million bpd mark for the first time since 1980.

Since the government signed off on a major energy reform in 2013 to break up the Pemex monopoly in Mexico, the company has seen increased competition from private sector producers. Indeed, the budget contemplates a gradual easing of price ceilings for gasoline as foreign oil firms plan to open gas stations in Mexico over the upcoming months.

In reaction to Meade’s announcement, Pemex CEO José Antonio González acknowledged that the firm had already enacted a series of cuts this year, such as halting deep-water development projects last February. The 2016 federal budget already ordered Pemex to slash spending by around US$5.5 billion, but it wasn’t enough to stop the company from posting its fourteenth consecutive quarterly loss amid the weak global price of oil and faltering production.

The budget cuts may help alleviate the heavy tax burden on Pemex, but could hurt the company in other ways. A recent report from Moody’s concluded that troubled Mexican state-run firm Pemex will likely need to seek external financing in order to raise capital by 2017. The credit agency believes Mexico’s gas and oil industries have been unable to overcome shortcomings by the low market prices of the commodities; thus, Pemex production will likely drop by an average of 5 percent yearly even though the company will continue to be the top individual revenue source for the Mexican state.

One possible revenue source could come from the exploration of the offshore Trión field located off Mexico’s Gulf coast. Last month, four foreign oil companies – Total, BP, ExxonMobil, and Chevron – announced their intention to ally with Pemex as part of a farm out option at Trión. Though Trión purportedly holds natural gas and crude equaling some 485.4 million barrels of oil, other companies are not keen over the possible stipulations behind a joint operating agreement with Pemex.

By Erwin Cifuentes for Oilprice.com

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  • GregSS on September 12 2016 said:
    The first thing Pemex needs to do is tear down those Petrobras tanks!

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