Troubled Pemex Announces a Big Boost

With perfect timing as the new government embarks on restructuring Mexico’s oil industry.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Mexico’s embattled oil giant Pemex has almost tripled its estimate of the potential reserves offered by Ixachi, a recently discovered onshore oil field in Veracruz. The field, located to the south of the major port city of Veracruz, was discovered in November last year, when its 3P reserves (proved, probable and possible) were estimated at 366 million boe (barrels of oil equivalent).

At the time of the discovery the company asserted that the field could hold far more reserves. On Tuesday it revised the figure to over 1 billion boe after drilling two new wells. The new estimated total value of the field is $40 billion. If the estimate proves to be accurate, Ixachi would represent one of the largest discoveries worldwide made this decade — and according to Antonio Escalera, Pemex’s director of reserves, “the most important discovery in Mexico in the last 25 years.”

The deposit has the added strategic advantage of being close to established infrastructure such as wells and a pipeline system, so it can enter production quickly. Preliminary estimates suggest that at full production, scheduled to begin in 2022, the field will provide a daily supply of around 80,000 barrels of condensate, an ultra-light form of crude oil, and more than 700 million cubic feet of natural gas.

But let’s keep this in perspective. Few large oil fields have been discovered globally in the past decade. Between 2011 and 2017, offshore exploration activity dropped every year, hitting its lowest level since the 1940s last year. To put the scale of the Ixachi discovery into context, Mexico’s biggest current oil field, the Ku-Maloob-Zaap complex (known as KMZ), produces around 800,000 barrels per day — around 10 times Ixachi’s newly revised output.

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Nonetheless, that improved output, which Pemex claims “will help satisfy the hydrocarbons demand Mexico needs for its short- to mid-term development,” could not have come at a better time for Mexico’s shrunken oil giant.

Production at the largely state-owned company has been in decline for over a decade. That, together with the parlous state of Pemex’s refining business, has locked Mexico into dependence on U.S. imports of gasoline and natural gas. In October Pemex’s crude output fell to 1.76 million barrels per day (bpd), down more than 7% compared with the same month last year. It was the lowest monthly output reported this year and one of the lowest since 1990, when publicly accessible records began.

The new discovery also comes amidst growing concerns about the sustainability of Pemex’s towering debt pile, which at last count clocked in at $106 billion — €42 billion more than in 2012. In October Moody’s ratedPemex’s latest issuance of senior unsecured notes as one notch above junk, blaming the company’s “weak liquidity, a heavy tax burden and the resulting weak free cash flow, high financial leverage and low interest coverage; and challenges related to crude production and reserve replacement.”

In the same month Fitch Ratings downgraded the outlook for Pemex’s debt from stable to negative amid concerns about the incoming government’s proposed energy policies. It rates Pemex three notches above “junk” (BBB+) because the company is state-owned. Its standalone credit profile — if Pemex were not backstopped by the Mexican state — is seven notches into junk (CCC).

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Moody’s and Fitch’s sobering reports were meant as a warning shot against the ambitious energy plans Mexico’s president elect, Andres Manuel Lopez Obrador (AMLO for short), has vowed to put into action. A key component of those plans is the proposed construction of a new $8 billion oil refinery in his home state of Tabasco and the rehabilitation of the six refineries already in operation in Mexico, all aimed at making Mexico more energy self sufficient and less dependent on U.S imports.

The announcement of the latest discoveries at Ixachi could further embolden AMLO in his mission to rebuild Mexico’s oil industry, revitalize Pemex, and develop a more nationalistic approach to energy policy. The president elect, who takes office on Dec. 1, has pledged to increase oil production to 2.6 million bpd by the end of his administration in 2024.

It’s a hugely ambitious goal but according to Pemex’s current CEO, Carlos Trevino, one that is “achievable” — as long as “it is accompanied with a sound budget.” AMLO has repeatedly insisted that his government will not spend a single peso more than it raises and will also ensure that “investments in companies, shares and the financial markets as a whole” are secure.

Given that Mexico’s benchmark index plunged to its lowest level in four years on Monday, investors seem largely unconvinced. The deadline for the new government’s budget is December 15. As the chief economist of HSBC Mexico, Alexis Milo Caraza, notes, it will be the most “eagerly anticipated budget in recent history” and investors will be poring over it with a fine-tooth comb to try to gauge the financial implications for both Pemex and the State government. By Don Quijones.


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