Pemex: Mexico’s Last Resort

From Stratfor (subscription required), an excellent analysis of Mexico’s Petroleos Mexicanos (Pemex) turning to its last resort to prevent Mexico from becoming a net oil importer within a decade, namely its announcement that the company may start drilling for crude oil abroad if the government fails to ease legislation to allow foreign energy partners into the domestic market.  As the article notes:

“…Pemex CEO Jesus Reyes Heroles sounded the alarm July 22 when he announced that Pemex may pursue energy projects overseas unless Congress follows through in passing much-needed oil reforms to allow foreign partners to participate in domestic offshore projects. This is an option of last resort for Pemex if it wants to salvage the country’s failing energy industry.

Mexico’s energy industry is hamstrung by a nationalist-rooted constitution that prohibits foreign energy firms from investing in the country. Without foreign participation, Pemex lacks the technological expertise to breathe life back into its aging oil industry and prevent Mexico, currently the world’s sixth largest oil producer, from turning into a net oil importer within a decade.

Pemex is signaling that it would much prefer not to wait forever for Congress to enact the necessary legislative reforms. Mexico’s oil output has been on a sharp decline since 2005, largely due to a significant drop in output (34 percent in the past year) from the massive, aging Cantarell field in the Bay of Campeche. Even if legislation was passed this week to allow foreign energy firms into the country, it would still take at least another four to five years before Mexico could begin to bring its oil production back up. This timetable is all too disconcerting for Mexican President Felipe Calderon, considering that Pemex’s revenues make up 40 percent of the government’s budget. If Pemex goes down, it will take Mexico’s entire fiscal balance down with it.

Pemex’s plan B to revive the Mexican oil industry is to acquire the necessary technical know-how by partnering with foreign firms such as Brazil’s Petrobras in difficult offshore projects off the coast of Cuba, the U.S. side of the Gulf of Mexico and elsewhere in Latin America. Then it can apply that expertise in tackling its challenging offshore deposits at home.

For Pemex to study abroad, however, it is going to need cash — and lots of it. Considering that Pemex would not be the one bringing any technical skill to these overseas projects, the best chance the company has to secure energy partnerships is for the Mexican government to foot most of the bill, much like the South Korean government did for the Korean National Oil Co. in its quest to become a skilled player in the energy field.

And the cash will not be easy to come by. Oil prices may be soaring, but Mexico is largely missing out on the petrodollar party. Given its severe lack of refining capacity, Mexico has had to spend a huge chunk of its budget on costly gasoline imports to supply a populace well accustomed to highly subsidized fuel prices. Not only is Pemex lacking surplus oil money, it actually lost nearly $1 billion in the first quarter of 2008 due to a combination of gasoline imports, fuel subsidies and general corruption. If Pemex’s overseas projects are going to be subsidized, it will take a lot of political will and haggling before the government can seriously consider releasing the necessary funds.

But time is running out, and Pemex’s agitation over the issue is sure to grab Congress’s attention. Pressure is already piling on Mexico’s ruling National Action Party to get the Institutional Revolutionary Party on board with the oil reforms to get Mexico back on a stable energy path. But even if the legislation moves soon, it will still be too late to halt Mexico’s declining production. Investing overseas is still a long shot for Pemex to rescue Mexico from economic breakdown, but it is really the only shot they have.”

This entry was posted on Wednesday, July 23rd, 2008 at 9:49 am and is filed under Mexico, Petróleos Mexicanos (Pemex).  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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