The situation in Mexico’s oil industry continues to rapidly disintegrate as falling oil production and rising costs resulted in an $18 billion fourth-quarter loss for the state-run oil company, PEMEX. Part of the reason for the huge financial loss at PEMEX was the fall in the value of the Mexican Peso. While PEMEX’s costs are in Pesos, it sells crude oil and purchases petroleum products in Dollars. Because the Mexican Peso declined 8% versus the Dollar, it put a huge strain on the company’s year-end financials.
Regardless, Mexico’s oil production continues to fall due to the natural decline from resource depletion. However, as Mexico’s oil production falls, its net oil exports have dropped significantly as well. Thus, falling net oil imports translates to less revenue for PEMEX. According to BP’s 2017 Statistical Review, Mexico’s net oil exports hit a low of 587,000 barrels per day (bd) in 2016, down from 1,867,000 bd in 2004:
While Mexico’s oil production declined from a peak in 2004, its domestic consumption has remained basically flat. Which means, Mexico’s net oil exports have fallen by more than two-thirds in just 12 years. Unfortunately, it looks like Mexico’s oil production will be down another 10% in 2017.
The next chart from Mazamascience.com shows Mexico’s net oil exports since 1960:
Mexico’s total oil production is shown in the grey area, while consumption is displayed by the black line. The green area reveals the country’s net oil exports. As we can see, Mexico’s net oil exports peaked in 2004 at 1.86 million barrels per day (mbd) and are now likely below 0.5 mbd. Falling net oil exports are a death-knell to the Mexican government because it receives a lot of its revenue from PEMEX.
Furthermore, the United States has received a lot of its oil from Mexico over the past three decades. However, this has all changed in the past two years as Mexico has switched from being a net exporter to a net importer of crude oil and petroleum products from the United States:
Mexico’s net oil and petroleum product exports to the United States peaked in 2006 at 1.6 mbd and had turned into net imports of 603,000 bd in December 2017. Again, this is terrible news for PEMEX and the Mexican economy. While the United States can print Dollars to its heart’s desire, as it is still the world’s reserve currency, Mexico does not have the same luxury.
If we take a look at PEMEX’s financial statements, we can spot the unfolding trouble:
As mentioned at the beginning of the article, PEMEX suffered an $18 billion net income loss in the fourth-quarter of 2017. Not only did PEMEX’s cost of sales increase significantly, but it also suffered a $7.6 billion Foreign Exchange loss due to the depreciation of the Peso.
Now, the next table shows PEMEX’s Cash Flow. There are two important highlights in the table below:
PEMEX’s interest expense was $5.9 billion for 2017. However, their total net interest expense was $5.4 billion. That is one hell of a lot of money to pay those who hold your debt. The second important figure is the cash flow from operations of $2.9 billion was less than the $4.3 billion in capital expenditures. PEMEX spent $1.4 billion more money in producing their oil and gas than they received from operating cash. Their negative free cash flow and other items pushed PEMEX’s long-term debt to a record $95 billion in 2017:
The more debt PEMEX adds to its balance sheet the higher will be its annual interest expense. And, to make matters even worse, Mexico’s oil production will continue to decline right at the time its debt is exploding. It will be impossible for PEMEX to pay back its debt, so it is logical to assume that the state-run oil company will likely go bankrupt in the future causing extreme difficulties for the Mexican Govt and economy.
Now, I am not singling out PEMEX or Mexico’s oil production as what’s going wrong in the global oil industry. ALL public and state-run oil companies will go belly-up… it’s just a matter of time.
We must remember when Egypt switched from being a net exporter to net importer of oil; the Arab Spring occurred the very next year:
With the rising food costs during the 2008-2009 inflationary period in Egypt and on top of the country becoming a net importer of oil in 2010, the government was powerless to deal with the crisis.
Lastly, as Mexico’s oil production continues to decline, its state-run oil company, PEMEX, will likely default on its debt. This will cause severe problems for the government and the domestic economy. However, what happens in Mexico as it pertains to oil, will not stay in Mexico. The U.S. and global oil industries are in serious trouble. While these problems won’t impact the world this year or next, it will become a disaster over the next decade.