Mexico’s Finance Minister Arturo Herrera has had to defend the government’s budget proposal for next financial year after it came under fire for stipulating an unrealistic oil production growth rate.
“We have presented a realistic budget, without underestimating income or expenditures,” Herrera told media as quoted by Reuters. “For a very long period, income was underestimated in a more or less systematic way, so that there was always surplus income at the end of the year.”
Mexico’s government released its draft budget for 2020 earlier this week, stipulating oil production of 1.95 million bpd at the end of next year. That’s up from 1.73 million bpd, according to Reuters. If Pemex succeeds in achieving a higher production rate, this would be a major win: Mexico’s oil production has been falling for 14 years in a row.
Mexico’s new government came into power with promises to turn around the country’s oil industry and boost production after, it said, the previous government failed. Currently, the Obrador government is reviewing contracts with foreign oil companies signed during the Pena-Nieto term and has suspended all new auctions until the reviews are over. The president has pledged to boost production by 50 percent by the end of his term.
In the meantime, Pemex has increased its spending plans for this year by 14 percent, with a focus on already producing fields. This is certainly a reasonable bet: new exploration and production requires more money than producing fields. Yet it is precisely the lack of new exploration that led to the decline in Mexico’s output in the first place. While exploiting existing fields could prop up production over the short term, a long-term increase would require new exploration.
In addition to the oil production increase, Mexico’s 2020 draft budget also stipulated several “fiscal shock absorbers” to prevent adverse effects on public finances from too low international oil prices. The shock absorbers, according to the proposal, envisaged “a strategy of oil hedges contracted both by Pemex and the federal government to cover oil income against reductions compared to the price,” or in other words, Mexico’s famous oil hedge worth $1 billion or more every year.
By Irina Slav for Oilprice.com
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Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.