The majority of the world’s oil producers have been racing to heavily cut back spending and production in response to the oil market crisis, while Mexico’s national oil company, Petroleos Mexicanos (Pemex), has been acting like the crash never happened, vowing to nearly double drilling activity and, ironically, needing the intervention of Donald Trump to meet its assigned production cut of 400,000 bpd required by OPEC+.
But in a true testament of just how brutal the oil price crash has been, Pemex has finally bowed to the pressure and joined its Latin American peers Brazil’s Petróleo Brasileiro SA (Petrobras) and Colombia’s state firm Ecopetrol SA to trim their 2020 capex by 30%, according to a new Moody’s report via Natural Gas Intelligence.
Big-spending Pemex is set to cut its 2020 capital expenditure by ~$2B, or 20% of its planned capex of $10B with Petrobras lowering spending by $3B while Ecopetrol will cut by $2.3B. The three national oil companies (NOCs) will combine for 88% of the region’s planned $8.4B in 2020 spending cuts.
Lowering Production
In April, recalcitrant Pemex had vowed to nearly double drilling to 423 wells and accelerate development of 15 recent discoveries; grow its production by 9% in the current year and 1 million barrels/day by 2024 in a desperate bid to stem years of production declines. Never mind the fact that experts say that many of those operations are unprofitable at current oil prices.
But that will now have to wait.
Mexico is the only Latin American country that has continued growing its rig count since the coronavirus hit, with May rig count clocking in at 42 rigs compared with 34 in the year-ago month.Still, the country’s oil production fell to 1.64 million b/d in May compared with 1.66 million b/d during last year’s comparable period. Meanwhile gas production fell 5.5% to 3.61 Bcf/d down from 3.82 Bcf/d a year earlier. Pemex is responsible for producing the vast majority of Mexico’s oil and gas, accounting for 1.59 million b/d of May’s 1.64 million b/d clip. Related: Chevron Acquires Noble Energy In First Major COVID Oil Deal
Pemex’s decision to cut back spending has definitely been informed by the reality of the oil markets after the company reported a heavy loss last term.
The company said it had incurred a staggering loss of 562 billion pesos ($23 billion) during the first quarter, a massive jump from the 35.7 billion pesos ($1.5 billion) loss in the year-ago period in part due to a weakening peso.
Moody’s has estimated that Pemex will now have to draw completely on its $8.9 billion committed credit facilities to adequately fund its capital spending in the current year just to keep its production stable.
Further, Pemex’s traditional annual hedge will only yield some 7.5 billion pesos ($311 million) this year. That’s the case because the hedge only covers some 20% of crude exports, with this year’s hedge fixed at $49 per barrel.
Government Support
That said, Pemex continues to enjoy the full support of the Mexican government.
Its executives have frequently touted the support it receives from the government to strengthen the oil company’s financial position. This includes a profit-sharing duty, or DUC by its Spanish acronym, which will cover ~80% of the company’s direct fiscal burden to the tune of 65 billion pesos ($2.7 billion) this year.
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In total, Pemex will receive government support of about 156 billion pesos ($6.5 billion) in measures to mitigate the impact of Covid-19 and falling oil prices.
Unlike Petrobras, which is genuinely run as an independent entity with generating profits a top consideration, production growth is the Mexican government’s top priority. But with the Mexcican economy recently having hit the skids, it would be foolhardy for Andrés Manuel López Obrador’s government to continue throwing good money after bad given how much cash Pemex has been bleeding.
By Alex Kimani for Oilprice.com
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