Economics: Continuing weakness at Pemex and CFE could further squeeze public finance

MEXICO - Report 10 May 2021 by Mauricio Gonzalez and Francisco González

Roughly a month ago Pemex unfurled a revised Business Plan for the coming years that significantly scaled back production targets except when it comes to its forced-yet-troubled march to make Mexico self-sufficient in the refining of petroleum products. Strikingly, the text and other management statements were sorely lacking in explanations for such greatly lowered upstream ambitions, but last week’s release of first quarter financial results provided additional clues.

Crude output continues to ebb, except where private firms are still operating. While the plan promised one last surge in natural gas production this year before an open-ended downtrend takes hold, gas output slipped below 1Q 2020 levels, making the country increasingly dependent on imports, which have exploded from less than 15% of domestic demand as recently as 2019 to around 70% and counting.

Despite mounting delays in construction and major maintenance efforts in the country’s long under-attended network of refineries, installed distillation capacity usage rose more than 10 percentage points. But that achievement was facilitated by an easy comparison and comes with a shift toward a less-than-promising product mix in which the greatest expansion by far is that of fuel oil. This shift toward a midstream focus was also reflected in a double-digit drop in crude exports. Separately, Pemex is belatedly recognizing delays in the construction of the Dos Bocas refinery as well as the major cost overruns that many had warned of from the beginning.

The extent of Pemex debt and failure to meet production targets are also raising alarms as to how much the government will have to expand its support of the company. In this complicated context, power utility CFE, after receiving well over 21 billion pesos in subsidies, managed to turn a 30.58 billion operating profit of a year earlier in to a 5.83 billion peso loss in 1Q 2021 as the company was caught without price hedges during the mid-February natural gas price/supply crunch.

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