Why can’t Pemex compete?

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Last week Pemex received a financial bailout of $4.2 billion from the Mexican treasury. These revenues provide only a temporary reprieve and fall far short of solving the company’s financial problems, which are vast. Yet Pemex has one of the lowest production costs: 7 USD/barrel in 80% of its fields, 16.54 in the Chicontepec blocks, and under 10 in shallow waters. Mexico’s costs are well below those of Brazil (49), Canada (41), and the U.S. (36) and comparable to those of Saudi Arabia and Iraq (10). So why are we constantly hearing that Pemex needs to become more competitive? And why does the company have such dire finances, including $30 bn in losses for 2015, $90 bn in pension liabilities, and close to$100 bn in debt, if costs are below prices? Some answers:

  • Production: The cost per extracted barrel may be competitive, but Pemex has been producing increasingly less.
  • Losses elsewhere: while Pemex makes a profit in oil and gas extraction, it has to cover large loses from refining and petro-chemicals.
  • Fiscal burden: Pemex has long been the government’s cash cow, handing over to the treasury over half of its revenues in royalties and taxes, which forces the company to borrow from its pension fund and contract debt for capital investments. With the decline in the price of oil, the government has been forced to cut expenditures and now bail Pemex out. The burden continues after the reforms, as Pemex is obligated to hand over more in royalties and taxes than the private firms with whom it competes on bids.
  • Bad Investments: Pemex has invested a lot in finding new reserves where it does not have the necessary expertise, like deep-water, with poor results, and underinvested in producing natural gas, which it has had to import.
  • Payroll and pensioners: In 2015 10,360 employees were dismissed from Pemex and a similar number has been announced for this year, bringing the number of employees to 115,300 in an effort to reduce the payroll burden. According to the Research Center for Development (CIDAC), productivity per employee at Pemex is half that of ExxonMobil, 65% of Shell’s, and a third of Statoil’s. Of course, the pain will mostly be felt by middle management, contractors, and workers. Senior management continues to grow and pay itself generously, while the leaders of the powerful oil workers’ union make out like bandits. Pension obligations are also weighing the company down and will continue to do so for many years to come.

I guess that part of the answer to the questions is that it depends on how you calculate costs. Per barrel extracted, Pemex operates at a loss. It is estimated the price of a barrel oil has to be around $60 for Pemex to be profitable. The price of oil will, eventually recover. But what Pemex needs is to gain autonomy to make its own financial decisions and pay taxes at a comparable rate of its competitors.

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