Mexico has held the door open to cutting production at state energy group Pemex after oil prices crashed this week in what would be a major policy U-turn for the government of Andrés Manuel López Obrador, which has made boosting the company’s declining output a core objective.
“The price of the Mexican [oil export] mix is determined by international oil prices. All producing countries in the latest Opec-Non-Opec meeting expressed our willingness to adjust by a percentage to avoid overproduction,” Rocío Nahle, energy secretary, tweeted. “We are in permanent communication.”
The energy ministry was not immediately available for comment, and Pemex did not confirm a cut in the offing. It pumped 1.7m barrels a day of crude on average in January after averaging 1.693m b/d in 2019, below government forecasts and half its peak of 3.4m b/d in 2004.
Analysts said Ms Nahle’s suggestion smacked of diplomacy, not conviction. Most of Pemex’s assets require a price of about $50 a barrel to break even and its bonds are already under threat of a second downgrade to junk within months.
After Saudi Arabia unleashed an oil price war at the weekend, the price of the Mexican mix fell to $27.40 a barrel, virtually half the $49 on which the government has based its 2020 budget sums.
Pemex already doubled its losses in 2019, when oil prices averaged around $60, and is one of the world’s most indebted oil companies with debts of $105bn at the end of last year.
“With prices where they are, 75 per cent of Pemex’s fields will only generate losses if they don’t change plans for this year, therefore they need to slash activity,” said Pablo Medina, analyst at Welligence, an energy consultancy in Houston. “But López Obrador’s key idea is to grow production. It’s like a death spiral — believing you must grow [production] because you promised it is a losing proposition.”
Assuming prices stay where they are at, “Pemex should be aiming to produce 1.4m to 1.5m [b/d],” Mr Medina said.
Mr López Obrador is betting big on oil and is building an $8bn refinery to which he hopes to divert Mexican oil exports in order to sever dependence on US fuel imports. The Mexican president has lambasted the previous administration for “abandoning” the industry and slashing investment at Pemex, and says his policies are rescuing the former monopoly.
“He’s trapped in his discourse. It’s very, very dangerous and he risks digging a terrific hole,” said Rosanety Barrios, an energy analyst. “If a boat has a serious risk of sinking, the first thing you do is offload some weight.”
The risks go well beyond Pemex. The government, which relies on the oil company to fund 18 per cent of the national budget, has already had to step in to bail out the cash-strapped company, which analysts say is plagued by inefficiency. The president has refused to allow partnerships with private companies to share development and operating risk, overruling the finance ministry.
But Mr López Obrador’s austerity administration has little spare cash. The economy was cratering even before the global coronavirus emergency struck, and it has already tapped part of a state rainy-day fund.
The president has promised fiscal prudence and not to increase debt or taxes, but the 2020 budget was based on an optimistic estimate of 2 per cent economic growth. Some analysts now see just 0.5 per cent growth as the financial markets brace for a downgrade of Pemex, with a sovereign downgrade likely in tow, by mid-year.
Moody’s warned that the outlook was darkening. Joydeep Mukherji at S&P Global Ratings told the Financial Times a sovereign downgrade depended on how Mexico’s debt and growth evolved. “It could be one or the other,” he said.
Mexico says its 2020 finances are protected because of the government’s annual oil hedge — an insurance against low prices. It also has credit lines from the IMF and the US.
Speculation has swirled that Mr López Obrador could announce opportunities for private investment in the energy sector on March 18 — the anniversary of Mexico’s 1938 oil expropriation. But Alonso Cervera at Credit Suisse warned: “Oil companies will be far less interested than when oil prices were at $50.”