Money, Time and Politics: How Pemex’s Wings got Clipped on Production Goals

(Reuters) Shortly before taking office late in 2018, President Andres Manuel Lopez Obrador vowed to boost crude oil production at Mexican giant Pemex by nearly half, following more than a dozen years of decline.

The ambitious goal of increasing the state-run company’s oil output from 1.8 million barrels per day (bpd) to 2.6 million bpd by the end of his six-year term was cast as a national imperative, essential to powering Mexico’s economy and development.

But this month, the president announced crude production at the company formally known as Petroleos Mexicanos would rise no higher than 2 million bpd – enough, he said, to satisfy national refining needs, but not so much as to harm the environment.

In a rare interview, the trusted loyalist appointed by Lopez Obrador to lead Pemex said the shift was driven by key policy considerations and time lost to the coronavirus pandemic, while also acknowledging the heavily indebted company’s longstanding cash crunch.

“The issue is not whether you have the capacity to get there,” Pemex Chief Executive Octavio Romero told Reuters. “It’s a matter of political definition, it’s a matter of time, it’s a matter of resources.”

Pointing to one roadblock cited by many analysts, Romero also underlined the government’s opposition to allowing potential Pemex partners an equity stake in pumping more barrels. Lopez Obrador regards such deals as a betrayal of the national interest.

“We’re not going to share production, we’re not going to share profits,” Romero said, describing the types of contracts Pemex will not offer would-be partners, without admitting or denying their impact on the production goals.

Instead, oilfield service contracts would be put up for grabs, he explained, which he insisted would help boost output.

Last year’s market turmoil contributed to the lower production goal, Romero said, citing the global fall in demand that led to pandemic-related cuts to Pemex’s investment budget, exacerbated by a massive decline in company revenue after crude prices crashed.

In 2019, soon after Romero took over, Pemex promised to find and develop 20 new fields each year to grow output, aided by service contractors.

But the plan sputtered early on, analysts say.

POLITICAL DIMENSION

Pemex overestimated the initial output goal by relying on relatively small fields, said Gonzalo Monroy, an oil industry analyst. Monroy argues that while such projects can be brought online fast, they are vulnerable to delays.

Pemex completed drilling of 168 wells last year, 34 fewer than in 2019. In an annual report, it attributed the decrease to hold-ups in the development of new fields.

Monroy said the company also likely underestimated the challenges of sustaining its largest fields, in decline for years.

Hitting 2.6 million bpd, he said, was simply “not reasonable” as long as Lopez Obrador opposes sharing some upside with oil majors.

“Everything had to go well to get to that level,” he added, which he said was always wildly optimistic.

Romero said last year, when Pemex’s revenue plummeted by nearly a third from 2019, was particularly “terrible,” as the company was battered by global recession, which caused oil prices to crater.

Lopez Obrador reluctantly signed on in April to a modest Pemex output cut of 100,000 bpd for a couple months negotiated by global producers to support prices.

Its investment plans were cut to about $11 billion, with $2 billion shaved from its all-important exploration and production budget.

Since then, Lopez Obrador has authorized fresh capital injections from federal coffers into Pemex, as well as cutting the company’s taxes.

Most recently, Romero announced the government will assume $6 billion in Pemex’s regular debt payments this year.

The company will keep its focus on squeezing as much oil as possible from more accessible onshore and shallow water fields, aided by service contractors.

Romero said Pemex could offer the contractors added incentives in the form of extra fees based on barrels extracted. Similar schemes failed to significantly boost output in the past, industry experts say.

Complicating matters, Pemex owes its suppliers, including several multi-national oilfield service companies, nearly $15 billion, over 50% more than it did in 2019.

Still, Romero noted that his company’s new, priority fields now contribute some 160,000 bpd, a figure he said will grow to 465,000 bpd by the end of 2021, funded by this year’s $13 billion capital spending plan.

Adding 300,000 barrels of daily production while managing natural declines elsewhere would be enough to reach the government’s new goal of 2 million bpd.

He pointed to three recent onshore oil discoveries with estimated resources of between 900 million and 1.2 billion barrels as additional sources of future production.

He also expressed confidence that the tough times are behind Pemex, while still seeking to temper expectations going forward.

“We know where to get the oil,” he said. “But we’ve got to be rational and factor in the political dimension.”

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