NS4054 Fall Term 2015 Problems at Pemex

Overview I Oxford Analytica, Mexico: Pemex’s long term viability is uncertain, March 3, 2015 State owned Pemex on February 27, 2015 reported a financial loss of $17.9 billion year on year Recent plunge in oil prices set back the opening of the energy sector making investment in the industry less attractive Problem for Pemex – compromises financial viability given high capital needs and rigid labor force Reserves in 2015 could fall below 13 billion barrels, nearly half the 2000 peak Government absorption of unfunded Pemex pension commitments could increase public debt by some 10% of GDP

Overview II In recent years huge investments have failed to reverse the decline in oil production and reserves. The expectation that Pemex would be able to become an effective oil major with significant autonomy from its major shareholder the Mexican government – overly optimistic The fall in oil prices has further diminished that possibility.

Pemex I Financial Losses Plunging Production Pemex’s financial outflows have been massive Taxes and other transfers to the federal government Company reported a financial loss for 2014 of 263.8 billion pesos (up from 170.1 billion in 2013 After transferring 746.1 billion pesos to the government Financial shortfalls have run parallel with falling oil reserves and output Proven reserves have shrunk particularly without interruption since 2000 when they stood at 25.1 billion barrels Most recent official estimate is 13.4 billion or a decline of 45.5%

Mexico: Proven Reserves

Pemex II Crude oil production peaked in October 2003 at an average of 3.46 mbd. Rapid decline started in mid-2005 although soaring prices more than compensated for several years Large investments notably in the Gulf of Mexico stabilized production from mid-2009 until end of third quarter 2013 However the decline returned during 2014 with production averaging 2.43mbd its lowest level since at least 2984 Output now probably at levels not seen since the 1970s when Mexico emerged as an important producer and exporter

Mexico: Daily Oil Production and Export Price

Pemex III Budget Cuts The 2015 Pemex financial plan had been formulated in August on what had seemed a reasonable price of $79 per barrel On February 16, 2015 Pemex announced it would need to cut investment in order to hit is original financial target for the year – a record deficit of 155 billion pesos Main target of the cuts (11.5% of total budget) is downstream, particularly modernization of oil refineries As roughly half of all gasoline is imported, imports should be expected to increase in the medium term. Exploration will also be affected with a medium-term negative impact on the levels of proven reserves and production

Pemex IV Government has shown no intention of extracting less tax from Pemex Government obtains about 1/3 of its revenues from Pemex So bad that in 2015 Pemex will issues debt in domestic and international markets ostensibly to finance investment In reality it is to transfer the resources to the government in the form of a tax

Pemex V De facto Bankruptcy? Unlike many other oil companies, Pemex lacks flexibility to reduce its labor force quickly Privileged conditions enjoyed by unionized workers By last quarter of 2014 company had 155,000 employees, about 110,000 members of the Oil Workers Union Even if workers could be fired, severance payments would represent a significant short-term cost With practically no financial reserves for pensions accumulated by the company increasing pension paymenets ae financed directly from the yearly budget.

Pemex VI Total cost of future unfunded pensions stands at 1.47 trillion pesos Why Pemex’s total liabilities at end of 2014 stood at 2.89 trillion pesos surpassing total assets by 769.5 billion pesos. Despite this Pemex continues to enjoy access to international capital markets. During 2015 it aims to increase its external debt by 6.5 billion pesos – mostly through bonds – implicit guarantee of the Mexican government Pemex leadership will face its toughest challenge negotiating with a powerful union that has little incentive to renounce its substantial and costly privileges Immediate response to falling oil prices, with negative medium term consequences will be to slash exploration and refining investment

Pemex VII The new energy companies starting up with the reforms will likely have significantly lower labor costs and tax obligations Hard to see how Pemex will survive in the new environment.