Pemex accelerates its fall in 4Q2018

MEXICO - Report 11 Mar 2019 by Mauricio Gonzalez, Jesus Reyes Heroles G.G. and Francisco González

Pemex’s fourth quarter results surpassed the worst fears as to how quickly the company is being driven operationally and financially into the ground, pulling public finance along with it. Following decades in which the government treated the oil company as a cash cow with which to plug budget holes, in recent years the federal administration and Congress have handed Pemex annual budgets marked by deep cuts to its opex and capex programs, thereby accelerating the steep fall in the country’s production of crude, gas, all manner of fuels and petrochemicals, and making sure the once mighty oil giant remains firmly on the road to its demise.

The country’s rate of replacement of 1P reserves shrank from 101.1% in 2012, to 17.5% in 2017 as Pemex’s exploration budget was dramatically curtailed. Refining capacity usage in Mexico’s long overlooked national refinery system deteriorated to a mere 38% in 2018. The rate of crude oil processing narrowed to a paltry 31% during the fourth quarter, a period that included the final two months in the administration of President Enrique Peña Nieto.

Even as it applies the brakes to many key aspects of the 2013 reform that began opening the sector to private investment, the new administration under President Andrés Manuel López Obrador has been trying to reassure those inside and outside Mexico concerned about the company’s precarious health, including major ratings agencies. But so far such observers have seen little that would persuade them that the government is capable of stemming Pemex’s decline, much less reverting its downward spiral. The latest and most serious evidence that officials are failing in this regard was Standard & Poor’s March 4 announcement that it had slashed the credit rating for Pemex and cut its outlook to negative, adding more pressure to the company’s finances.

Pemex emerged from the Zero Round with licenses for 83% of total probable reserves, but even that opportunity was squandered through a failed strategy of individually converting them into farm-outs. Today, Pemex’s operational and financial situation puts at risk not only its international market viability, but also Mexico’s own financial stability.

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