Pemex: back to square one
When it was leaked that Pemex would to cut its budget in 4Q24 and stop hiring new contractors, the new head of the E&P arm, Néstor Martínez, said he expected the company’s oil production to drop by a minuscule 5,000 barrels per day (bpd), from about 1.42mn bpd excluding condensates. However, some senior industry participants cautioned that the figure could be much higher, based on the details of tasks that were about to be affected by the spending reduction, in particular what is known as major well repayments. Without such works, they explained, a well can’t keep pumping crude and must be closed to avoid spills or explosions.
When asked about a more realistic forecast, the same sources estimate that production could fall by the dozens of thousands, perhaps even a hundred thousand barrels per day, a figure that at first seemed overly pessimistic. However, people familiar with the daily production reports of the state-owned company now say that Pemex crude production could well fall by around 100,000 to 150,000 bpd, while warning to be careful about those preliminary figures because they could vary from the average data that will be published later this month. However, even if that loss in production occurred at the end of November, it could likely extend to December, since Pemex maintained the pause on contracting services and delaying payments to its suppliers in order to cope with its announced budget cut for the end of this year.
Losing 150,000 bpd would bring Pemex crude production down from 1.42mn to 1.27mn bpd, a level not seen since the 1970s. That figure rises when the company adds around 260,000 bpd of oil condensates. But the total crude and oil condensates production could go down from 1.78mn to 1.63mn bpd, a figure below the one seen in January 2019, the worst month of the past administration, despite all the efforts and funds spent over the last six years to prop up the company and ensure energy sovereignty. Back to square one, at least in crude and oil condensates production.
How long would it take to recover 150,000 bpd?
Following the 2021 explosion of a production platform in the company’s largest oil cluster, Ku-Maloob-Zaap (KMZ), which reduced its hydrocarbon extraction by 412,000 bpd, the company rushed into recovering that production. Some experts might argue that after the explosion the fields were not the same, but ultimately production was mostly restored over the following weeks and months.
Pemex’s current situation, however, is radically different, more so because the decline in extraction is coming from the lack of funds. Furthermore, experts point out that restoring production from those fields could cost much more than the savings achieved today. Nonetheless, the company and its management seem intent on delivering on the promised cuts. Pemex has frozen most of its new deals with suppliers, stopping all ongoing processes, according to a document signed by the head of Pemex E&P, Néstor Martínez, dated on November 12. Only contracts related to “crucial operations” may go forward.
Thus, it comes as no surprise that E&P activity seems to be collapsing. Drilling activity data suggests that Pemex has cut services from drillers like CP Latina, Perforadora Latina, Borr Drilling and Paratus Energy, something we highlighted in our previous newsletter. The data shows that Pemex and other companies drilled 92 wells from January-August this year, 50% below the 181 drilled in the same period a year ago. Of those wells, Pemex drilled 85, a decline of 38% compared to the 136 wells it drilled in 2023.
Drilling activity so far this year is even behind rates observed during the Covid-19 pandemic, when the government pushed Pemex to continue its upstream activity despite lower oil prices. Pemex’s separate figures in September show that the company only drilled five wells that month. The slowdown could worsen further over the following months as the announced budget cuts take a toll on upstream activities.
A rather lean Christmas for Pemex’s suppliers
While Pemex’s management continues to explore options to deal with its large debt with its suppliers, the situation on the ground is escalating. New problems include the lack of transportation to offshore platforms, as the companies providing helicopters and vessels have cut back on activities due to the delay in payments. Sources also point out that large suppliers are laying off personnel for the same reason, and due to the cancellation of new contracts for the first months of 2025.
The largest trade group of Pemex suppliers, AMESPAC, recently appointed Rafael Espino, a former Senator from ruling party Morena who also served as a member of the board of Pemex, trying to attract the attention of the authorities to find a solution. However, despite these efforts, noise about a potential supplier strike is making the rounds again, as it did in December 2023.
Sources have said that, should one of Pemex’s top-five service companies make the first move, the rest would follow. Perhaps the most affected company in that top-five could be US giant Weatherford, because it has the largest balance with Pemex as it didn’t fully accept last year’s solution of issuing credit default swaps (CDSs) so commercial banks could factor their unpaid invoices. In fact, the only regular payments made by Pemex over the last few months are those related to the CDS scheme, which saw the participation of giants like SLB, Halliburton and Baker Huges.
Pemex debt news
According to the 2025 federal income law, Mexico’s government will be able to issue new debt on behalf of Pemex during 2025 without impacting its own debt ceiling. The government will have a debt ceiling of MXN 1.58tr (~USD 77.8bn) in internal debt and USD 15.5bn in external debt, in addition to the separate limit for Pemex of MXN 143bn (~USD 7.1bn) and USD 5.5bn in debt denominated in foreign currency. This maneuver frees up the government’s debt ceiling but effectively raises the country’s real external debt limit to USD 21bn, up from USD 15.5bn. This could also hinder President Sheinbaum’s goal of reducing Mexico’s fiscal deficit from 6% in 2024 to 3.9% in 2025. The government has said that the goal is for Pemex to not tap the bond market next year despite this approved debt ceiling, as the company would face higher yields than the ones paid by Mexico’s sovereign debt in the international markets.
Rating agency Moody’s believes that Pemex could tap the bond market in mid-2025 to refinance its 2026 and 2027 debt maturities. “By 2026, PEMEX would require about USD 17.4bn from the government to continue its current refining-focused policy, including about USD 12.7bn in long-term debt maturities, which far exceeds the annual average of USD9.2bn during 2019-2023,” said the agency in a note to investors. Ultimately, if the operation results in a “economic loss” for bondholders, Moody’s would see it as a default event. “For the government, a PEMEX debt restructuring strategy carries several credit risks, including increased reputational risk, progressive interest costs, and higher debt levels for the government itself,” said Moody’s.
An alternative scenario is that Mexico’s government could simply continue paying off for Pemex debt maturities. The government already committed USD 6.8bn so Pemex can pay debt maturities next year. The company would probably pay USD 4.5bn in bond maturities and only half of the USD 4.1bn in credit lines that mature next year, as the other half could be refinanced. In 2026 the company faces USD 12.7bn in debt maturities and USD 7.7bn in 2027. Pemex crude and natural gas output will average 2.3mn b/d of equivalent oil in the next few years as Moody’s does not expect any major crude or gas field coming into line soon. The company would spend around USD 14bn in capex in the upcoming years.
Pemex faces about US$44 bn in maturities over the next years
Source: Moody’s, Pemex. As of Sep. 2024. Figures in US$ bn. Does not include revolvers or other liabilities.
In other energy news…
- Most of the oil and gas contingent reserves in Mexico are currently in Pemex hands, particularly in ultra deep and deep-waters of the Gulf of Mexico, where the company has refused to invest in the last six years, according to the hydrocarbon regulator, CNH. The regulator has identified 6.69bn barrels of oil equivalent contingent reserves as of January 2024, 6% more compared to the data from January 2023. The contingent reserves are resources that have been identified through one method like 3D seismic data or an exploratory well but present one or more contingency that make them not commercially viable like lack of activity to continue its development or those activities are still ongoing.
- CNH approved Pemex’s plan to revert the decline in crude output at offshore field Akal NW. The area is close to the Akal field, which was the main producer of Pemex’s largest discovery Cantarell, contributing with around 2mn b/d at its peak of production in the early 2000s. Akal currently produces only around 15,000 b/d. Pemex wants to increase crude production in Akal NW from around 4,000 b/d to 8,000 b/d in 2025. However, the increase will last only for a few months as the state-owned company expects crude output to rapidly decline to around 2,000 b/d by 2027.
- The Mexican Energy Association (AME) appointed Adalberto García Medrano as its president, and Narcís de Carreras Roque from Valia Energy as vice president, both for the period 2024-2026. García Madrano, CEO of AES México, replaces Abraham Zamora, who led the association from 2022 to 2024.
- Congress finally approved the elimination of the energy regulators the Energy Regulatory Commission (CRE) and the CNH. These two regulators will now be absorbed by the Energy Ministry but details on how this would work remain unknown. Congress will have to present the legal amendments to implement their new composition and legal framework over the next months.
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