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Mexico’s Offshore Oil Investment Set To Plunge Despite Government Pledges

Investment in Mexico’s offshore oil sector is set to plunge by 21 percent between 2020 and 2025 compared to previous expectations, as the price crash and the financial issues of state oil firm Pemex will stall some projects, despite the government pledge to turn around the declining Mexican oil production, IHS Markit said in an analysis on Friday.

With oil prices crashing and international oil companies reassessing offshore oil spending and planned exploration projects, and with Pemex struggling with local supply chain contractors, capital expenditure (capex) for new offshore projects is expected down by a cumulative US$4.6 billion in the 2020-2025 period, compared to previous estimates, IHS Markit said.

The reduction in offshore capex in 2020 and 2021 will not be significant, because of Mexico’s oil hedge and tax reductions. The lost investment will be mostly concentrated in the years after 2022, said IHS Markit’s Senior Associate for the Energy Cost and Technology team, Renata Machado, and Marcos Lepore, Research Analyst for Oil and Gas Markets.

Demand for offshore equipment and services is set to drop by an average of 14 percent through 2025, according to the analysts.

“Pemex, facing financial and operational problems, is already suffering from delays in its projects, and more are to come,” they noted.

Pemex’s financial situation is precarious, and it is set to become even more difficult with the oil price crash, Fitch Ratings said earlier this month, downgrading the company deeper into junk territory.

The company’s stand-alone credit profile is deteriorating because of its “limited flexibility to navigate the downturn in the oil and gas industry given its elevated tax burden, high leverage, rising per barrel lifting costs and high investment needs to maintain production and replenish reserves,” the rating agency said.

“At the current Mexico's crude basket price of below $20/bbl, PEMEX's upstream business does not generate enough cash flow to cover operational and financial costs (half-cycle costs) of more than $25/bbl and the company will need extraordinary government support in the immediate future,” Fitch noted.    

By Tsvetana Paraskova for Oilprice.com

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