A Dramatic U-Turn in Mexican Oil and Gas
Mexican President Andrés Manuel López Obrador has tried to put the brakes on the country’s historic shift towards privatization that began under his predecessor. Former President Enrique Peña Nieto pushed through a privatization plan that ended seven decades of state control over the oil sector. Pemex remained in state hands, but oil and gas exploration and production was opened up to international companies. Pemex partnered with many of them, but private companies were also allowed to take the lead.
After
his election last year, AMLO tried to change course. He signaled an indefinite
end to oil auctions, citing disappointing results from them private companies.
He also shifted back and forth on the integrity of prior auctions, at times
suggesting that they were done in a corrupt fashion.
At
the same time, AMLO tried to resuscitate Pemex, proposing massive
billion-dollar capital injections into the state-owned company and pushing for
Pemex to return to its historic place as the dominant entity in the energy sector.
The
problem for Pemex is that it has become the most indebted oil company in the
world, sitting on over $100 billion in debt. It presides over aging oil fields
that have been in production for decades, with output suffering from a steep
decline that began in the mid-2000s. Mexico produced 1.67 million barrels per
day (mb/d) in July, roughly half the total from a peak in 2004. Falling
production and rising debt are a toxic mix, especially since reviving output
will require ratcheting up spending. Lower oil prices over the last few years
have only accelerated and magnified the financial problems at the company.
Pemex
has seen its credit rating cut by multiple credit agencies over the past year.
For instance, in June, Fitch Rating slashed Pemex’s credit rating to BBB from
BBB+.
Adding
to the complexity is the fact that Pemex’s predicament creates problems for the
Mexican government. Pemex is a huge source of revenue for the budget, but
because of its declining position, the government is trying to step in and
help. But any effort from the government is a drag on public finances. Tax cuts
and capital injections, for instance, pose sovereign credit risks. But any
decision to cut spending, which in theory would be better for the state budget,
could hollow out Pemex. This is the conundrum that AMLO has been unable to find
a way out of.
For
instance, an expensive and questionable decision to spend more than $7 billion
on a new oil refinery could simply create another white elephant. Pemex’s
refineries are already loss-making, and operate below capacity. Spending
billions of dollars on a new one raises red flags.
Finally,
the economy is slowing as global headwinds have not spared Mexico. “Lower
growth, together with changes to energy policy and the role of Pemex, introduce
risks to Mexico’s medium-term fiscal outlook,” Moody’s stated in June when it
cut its credit outlook for Mexico to negative. “Unpredictable policy-making is
undermining investor confidence and medium-term economic prospects.” The
economy did not grow in the second quarter.
Against
this backdrop, AMLO is considering an about-face. The FT reports that the
Mexican President is poised to allow Pemex to resume joint ventures with
private companies next year, and could allow for private sector exploration
offshore as well. The FT said that AMLO met with Claudio Descalzi, the CEO of
ENI. The Italian oil company has had some success in oil exploration in
offshore Mexico since the energy privatization law earlier this decade. The
meeting highlights AMLO’s newfound interest in the role of international
companies.
The
FT reports that AMLO is trying to head off another credit downgrade for Pemex.
Were that to occur, the rating could fall into junk territory, which could
force billions of dollars of capital from institutional investors to sell off
Pemex’s debt. If Pemex is subsequently dragged down further, that in turn would
create more sovereign risks.
Instead,
pushing more of the burden on the private sector, the argument goes, would
relieve pressure on both the Mexican state and Pemex.
“We
are working with the president so farm-outs [joint-ventures] can start up in
2020,” one Mexican official told the FT. “For deepwater, it would all be for
the private sector.”
Analysts
believe that the decision, should it occur, would send a positive signal to
international investors, especially since it follows the recent agreement to
end pricing dispute over natural gas imports.
AMLO wanted to return Pemex to its 20th Century glory. But he now seems poised to turn the playbook of his predecessor.