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Rajan Vig

Rajan Vig

Rajan is a trader in Mexico City and works across the fuels, gas and electricity space. He is currently a Board Member of ACE (Asociación…

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Mexico Confirms Major Tax Cut For PEMEX

President Andrés Manuel López Obrador presented the Business Plan of Petróleos Mexicanos (Pemex) this morning for 2019-2023, stating that the Plan he is supporting he has acted in Pemex's best interests and in those of the Mexican oil industry, and that "sowing oil" is the only strategy to save Pemex.

He explained that this plan advocates supporting Pemex in the first three years of his government, with a budget and tax reduction so that Pemex has resources and can invest, and that in the last three years, with more production and surpluses, the oil company will return to being a profitable company and that it will contribute to the development of Mexico.

‘’We have done well in rescuing the industry and we are optimistic despite the fact that the adversaries would like us to perform badly in this and other things, but they will be left with that desire," the President said at his press conference, this morning at the National Palace.

During the next three years, the Ministry of Finance will allocate 141,000 million pesos ($7.4 billion) to support the finances of Petróleos Mexicanos (Pemex), until 2022 (previously it was 2021).

In a morning conference, the Head of Pemex, Octavio Romero Oropeza, explained that by 2020, the government contribution to Pemex will be 66,000 million pesos ($3.44 billion), an amount that will decrease to 38,000 million pesos ($1.99 billion) in 2021 and 37,000 million pesos ($1.93 billion) in 2022.

In the following three years, the government contribution will be 12% of the accumulated budget of the company and will be added the reduction of a tax burden that will save 128,000 million pesos ($6.7 billion) for Pemex.

The reduction of this tax charge, which represents more than 85% of the direct load on oil production and is currently at 65%, will be added to the 30,000 million pesos ($1.57 billion) that will be reduced in 2019. Related: An Unexpected Boon For Alberta’s Oil Producers

In this way, with adding the government contribution and the reduction of tax, over the next three years Pemex will have additional resources for 111,000 million pesos ($5.81 billion) in 2020, approximately 31% of the total resources available to the company next year, which according to the Business Plan will amount to total of 347,000 million pesos ($18.16 billion), an amount that is lower than the budget of 464,601 million pesos ($24.32 billion) in 2019.

By 2021, the government contribution and the reduction of the tax burden will be equivalent to 29% of the total finances available to the company, a total budget of 411,000 million pesos ($21.51 billion). By 2022, the tax burden will no longer be covered by the government but the government will still contribute will be 9% of the company's resources, so that by 2024 the company will have financial resources by own revenues of 392,000 million pesos ($20.52 billion).

Octavio Romero Oropeza, Head of Pemex, added that the Plan contemplates public-private engagement through long-term service contracts for oil production. Romero Oropeza added that Pemex will seek business opportunities with the private sector but any contract signed will be based on "fair and transparent agreements."

The strategy of the state company, Romero Oropeza mentioned is different to the one Pemex has deployed over recent years. Pemex had traditionally invested in extracting deep sea oil reserves but Pemex's new plan will now focus on shallow water reserves.

A surprise exclusion from the morning presentation was the newly elected Secretary of the Treasury, Arturo Herrera, days after his senior, Carlos Urzua, resigned from his post.

The market response was grave: the peso is also among the worst performers in emerging markets today, falling 0.5% to 19.0773 per dollar, after the announcement of the Plan; at 10:30 am in Mexico City, the benchmark S&P/ BMV IPC index, composed of the shares of the 35 most liquid firms in the market, fell 0.63 percent, or 271.03 points, to 42,792.92 units.

After Pemex presented its Business Plan, Citibank said that a rating downgrade for the company and for Mexico's sovereign debt is only "a matter of time" due to the sheer debt the most indebted oil major in the world possesses as well as presenting a Plan with lofty ambitions but no real explanation on how to execute. 

By Rajan Vig for Oilprice.com

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