Mexican President Andrés Manuel López Obrador has been a vocal critic of the energy reform of his predecessor Enrique Peña Nieto, who opened in 2013 Mexico’s oil and gas sector to private investment for the first time in seven decades.
Six months into office, the populist left-wing President López Obrador now blasts the energy reform as “a failure” and vows not to call new bidding rounds for foreign oil companies for oil exploration and production in Mexico unless those companies show results, because currently they are not investing and not producing.
Two weeks into office, López Obrador suspended in December 2018 new oil auctions for three years. Last week, Mexico’s energy regulator CNH also canceled an auction to pick foreign partners for Mexican state energy giant Pemex scheduled for October.
López Obrador seeks a greater role for Pemex in reversing the downward trend in Mexican oil production and is criticizing the energy reform and the foreign oil firms for failing to do so, probably ignoring the fact that lead times between awarding contracts to drilling for oil to finding oil—which, by the way, foreign firms did—to start up production are measured in years, not months.
After the 2013 energy reform, Mexico held several successful auctions attracting international majors to its oil industry. Some world-class oil discoveries in shallow waters stoked investor appetite, which López Obrador is now cooling with the three-year auction halt, demands for swift start of production, and a pledge not to hold any new auction until he sees results.
The new president’s energy policies are alienating foreign oil majors and are creating an uncertain—to say the least—investment climate in Mexico’s oil industry.
Analysts and credit rating agencies doubt that Mexico will succeed reversing its oil production decline by entrusting this effort to the most indebted oil company in the world—state-held Pemex, which the government continues to support with tax rate cuts and tax breaks, but which weighs on the government’s finances because of its deteriorating credit profile. Related: Is This The Beginning Of The End For Tesla’s Solar Business?
Pemex’s crude oil production continues to decline—according to Pemex figures, its production averaged 1.813 million bpd in 2018. This year, between January and April, crude output averaged 1.672 million bpd. To compare, Pemex’s crude oil production averaged 2.429 million bpd in 2014, falling to 1.948 million bpd in 2017.
López Obrador and Pemex have grand plans for reversing the decline, with the government coming to the rescue of Pemex, as the oil firm itself said in December. A new strategic plan aims to guarantee “the country’s energy security and sovereignty” and targets to raise crude oil production to 2.48 million bpd by the end of this administration’s term in office—the end of 2024.
While the government touts ‘energy independence’ and vows increased Pemex investments in Mexico’s oil sector, credit rating agencies Moody’s and Fitch warned earlier this month that the state oil firm would see further negative cash flows and decline in production and reserves due to a serious underinvestment in the upstream.
In early June, Fitch Ratings downgraded Pemex’s Foreign and Local Currency Issuer Default Ratings (IDRs) to BB+ from BBB-, with a “negative” outlook to reflect the downgrade of Mexico’s ratings, which in turn was the result of “a combination of the increased risk to the sovereign’s public finances from Pemex’s deteriorating credit profile together with ongoing weakness in the macroeconomic outlook, which is exacerbated by external threats from trade tensions, some domestic policy uncertainty and ongoing fiscal constraints.”
“Although PEMEX has implemented some cost cutting measure and received moderate tax cuts from Mexico, the company continues to severely underinvest in its upstream business, which could lead to further production and reserves decline. The very high level of transfers from PEMEX to the Mexican government continues to significantly pressure PEMEX’s cash flow generation and reinvestment ability and weaken its SCP [stand alone credit profile],” Fitch said.
On the same day, Moody’s changed its outlook on Pemex to “negative” from “stable” to reflect “expectations of ongoing negative free cash flow at PEMEX and declining proved reserves, despite efforts to cut costs and boost capital spending,” Pete Speer, Moody’s Senior Vice President, said.
“Even with management’s plans for costs reductions and efficiency gains, contemplated savings from reduced fuel theft, and support from the government in the form of tax relief and other measures, Moody’s still forecasts that PEMEX will generate substantial negative free cash flow in 2019 and 2020 at an oil price assumption of $55 per barrel for Mexican crude,” the agency said.
By Tsvetana Paraskova for Oilprice.com
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