PEMEX, the Mexican giant with feet of clay, crushed between debt and ESG

Once one of the world's most successful oil companies, Mexican state firm Pemex, has fallen deeper into debt over the past decade, surviving only thanks to cheaper shallow-water oil operations and a government bailout. But it can't always go on like this.

Incumbent Mexican President Claudia Sheinbaum, recently elected, is expected to continue supporting President Andres Manuel Lopez Obrador's (AMLO) ambitious oil and gas plans, despite Pemex's failures, as well as adding renewable energy capacity. However, after years of security failures and ongoing financial problems, many are wondering how long the Mexican oil and gas major can stay afloat.

Mexico has long relied on oil and gas production for revenue. The country has 5.978 billion barrels of proven crude oil reserves and production is around 1.8 million bpd . The state oil company Pemex has been a major player in Mexico's oil industry, particularly as AMLO limited foreign participation in the country's energy market by pursuing nationalization policies.

For several years, the Government has invested heavily to support Pemex, which has fallen into debt. Since 2019, for every “peso” the Government has invested in Pemex, it has received a return of just 1.4 pesos, compared to 5.7 pesos between 2015 and 2018 and much more in previous years. So investments are no longer as productive as they once were, in fact we are just above breakeven.

Under the previous administration of Enrique Peña Nieto, the government sought to end Pemex's monopoly in the Mexican oil industry by reducing the need for risky exploration activities and attracting more private investment into the sector. The aim was also to slow down the progressive decline in production that began in 2000, which also put the state's financial funds at risk, as we can see from the following graph

However, President AMLO has aimed to make Mexico more self-sufficient by nationalizing much of its energy industry. This includes the development of the new Dos Bocas oil refinery in Tabasco, operated by Pemex, which is expected to boost Mexico's crude refining capacity to ensure greater energy security. Considering that the country's six existing refineries currently operate at just 50 percent capacity, this could offer a major boost.

However, the choice also has a negative side: in fact, this is expected to lead to a reduction in oil revenues, as Mexico will stop exporting much of its crude oil . AMLO's government has invested approximately $53 billion of public money in fossil fuels, as well as offering $25 billion in tax cuts.

Falling production and wrong policies have led to extreme debt

One of the main reasons why Pemex's revenue has declined is due to declining oil production over the past few decades. Previously a top-five oil producer, Pemex has fallen out of the top 10 global crude producers over the past decade. Much of the reason for Pemex's reduction in oil production is due to underinvestment in oil operations in recent years.

For years, the Government has used oil and gas revenues irresponsibly, instead of introducing tax reforms that support the development of new businesses, which has forced Pemex to borrow money to keep its plants running.

It has now become the most indebted oil company in the world, with debt of about $102 billion, or about 7% of Mexico's GDP . It is still making a profit in its exploration and production businesses, but downstream operations are loss-making. Because of its poor financial performance, credit agencies downgraded Pemex, making it more expensive for the company to borrow.

Climate change weighs down Pemex

Pemex now fears that concern about climate change could hamper its investment opportunities, as many banks and other investors are divesting from the fossil fuel industry. In 2022, Pemex said “ESG financing limitations” pose a threat, as does “the accelerating energy transition that is shrinking the market for Pemex crude oil and products,” an issue of continued concern.

The company launched its first ESG strategy this year , in a bid to encourage investors to support its operations despite its poor financial situation. Pemex has committed to achieving net zero carbon emissions by 2050 and managed to reduce its greenhouse gas emissions by 2.3% between 2021 and 2022. The company plans to invest between 10% and 14% of annual capital expenditure for its sustainability strategy. All money which however will reduce the profitability of its main business.

However, it has a poor track record on sustainability. While other countries reduce their gas flaring activities, i.e. burning gas extracted with oil, to reduce emissions, Pemex continues to be one of the worst culprits in the world for flaring. In 2022, Mexico burned the seventh highest amount of gas in the world , while in 2021 it was the tenth largest producer of methane emissions. Pemex has the potential to attract more investment if it reduces flaring and diversifies its energy assets to focus on renewable energy and the extraction of critical minerals, but all of this needs to be done, and not just remain a bunch of words.

Despite previous failures, Sheinbaum aims to increase Pemex's production from 1.5 million bpd to 1.8 million bpd . It is not yet certain whether the Government will absorb $40 billion of Pemex's debt to help the company expand its oil operations, as well as potentially expand into renewable energy and lithium mining. Meanwhile, attracting foreign investment will depend heavily on Pemex's efforts to decarbonize and improve its ESG practices. While there is some hope for Pemex's future, there are still several challenges hindering its return.

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The article PEMEX, the Mexican giant with feet of clay, crushed between debts and ESG comes from Economic Scenarios .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/pemex-il-gigante-messicano-dai-piedi-dargilla-schiacciato-fra-debiti-e-esg/ on Sat, 27 Jul 2024 10:47:42 +0000.