1. NS4054 Fall Term 2015 Problems at Pemex

2. 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

3. 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.

4. 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 billion pesos (up from billion in 2013
After transferring 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%

5. Mexico: Proven Reserves

6. 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

7. Mexico: Daily Oil Production and Export Price

8. 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

9. 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

10. 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.

11. 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 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

12. 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.