Doubts shroud Mexico's plan to revive Pemex

Tax breaks are just one way Mexican President Andrés Manuel López Obrador (AMLO) can give a shot in the arm to federal NOC Pemex, which has has seen its oil output decline every year since 2004. 

“I think they have made efforts to lower the fiscal burden on Pemex, but I don’t think it's sufficient,” Luis Gonzali, portfolio manager at Franklin Templeton in Mexico City, told BNamericas. 

In May, the government announced tax breaks for Pemex that would total US$7.3bn over several years. 

Based on government announcements, Pete Speer, senior VP at Moody’s, told a conference in Mexico City on Wednesday that he foresees tax breaks – as part of a package that includes capital injections and ongoing early redemption of notes – of US$2.3bn for Pemex in 2020. 

“Making Pemex financially healthy has to come through an integral fiscal reform,” Gonzali said. “With a bit of luck, we could hope for that in the second half of the sexenio [the president’s six-year term].”  

AMLO, who took office last December, has stated repeatedly that Pemex will receive support during the first three years of his term and, as oil production increases, the company will contribute more to government coffers in the last three years.  

“The government has to increase its non-oil revenue, and find a way of broadening its base of contributions if it wants to lower the fiscal burden on Pemex. There’s no other way,” Gonzali said.   

ROSY OUTLOOK

“For the first time in 14 years, we've stopped the progressive fall in oil production,” AMLO said in his first annual address to congress on Sunday.

“It’s a pleasure that I can say that in the nine months we’ve been in government, output has not declined. To the contrary, it has been maintained,” he said. “We have stabilized oil production, and in December we'll count on an additional 50,000b/d, and that will begin the recovery of national oil output. This is an important advance.”

“The output is important, but I think that the projections of the government are optimistic,” Gonzali said. 

AMLO has said he expects Pemex production to steadily increase because of a crackdown on fuel theft and, more significantly, the construction of a massive oil refinery at Dos Bocas. 

Financial, energy and environmental analysts have roundly criticized Dos Bocas. The Mexican public policy watchdog IMCO puts the odds of Dos Bocas delivering the output claimed by Pemex at 2%. 

But, by counting on the success of Dos Bocas and more efficient operations, Pemex projects a steady rise in output to 2.67Mb/d by 2024. Production averaged 1.67Mb/d during first five months of this year.

Gonzali said that it “can last between 5-7 years before you begin to see results from the investments you made” in the oil industry, so expectations of a short-term turnaround in output were unlikely. 

Analysts at Moody’s reiterated the same point during the conference, based on the five-plus years it takes for investments to result in higher oil production. 

Meanwhile, “the biggest risk is that [the government] cannot collect a sufficient amount to meet its income for the budget,” Gonzali said.  

Given that Pemex has historically accounted for a large share of government income, an inability to produce and sell sufficient oil could drag on fiscal finances. 

ANNUAL OIL HEDGE

The global economy could also weigh on Pemex's turnaround. 

In recent weeks, “the SHCP [finance ministry] announced that it is evaluating the possibility of not carrying out the annual oil hedge program,” Gonzali said. 

“That could be a very serious mistake. Above all, in the face of an environment of global economic slowdown, and, along with that, lower oil prices.” A drop in oil prices could cripple Pemex’s income. 

However, in recent days unnamed investment bankers in New York City have reportedly said Mexico’s finance ministry is actively negotiating hedging contracts on Wall Street as a means of allowing it to lock in prices at a fixed level.