MI’s Mexico Energy Chatter – Nov. 27, 2024

Relief in sight for Pemex Suppliers?

The day after Mexico’s lower House approved the constitutional amendments to eliminate independent regulators including the Energy Regulatory Commission (CRE) and the National Hydrocarbon Commission (CNH), Víctor Rodríguez, Pemex’s CEO, told Pemex’s long-suffering suppliers that payment was in sight. In a talk “Transformation of the Mexican Oil Sector”, organized by the College of Petroleum Engineers of Mexico (CIPM), Rodríguez said Pemex is working with its new best friend, the Finance Ministry, to get a “large loan” from banks so the company can pay suppliers. However, the company will do these payments with “justice” considerations, as it won’t simply go and pay out its debts with the 20% of its largest vendors to reduce its overall debt to providers, said Mr. Rodríguez, without elaborating, leaving his audience wondering who the lucky ones would be.

Rodríguez also said that many of the invoices were false or inflated, and implied corruption was rife. “Within the pool of suppliers we have, not all invoices are legitimate. There were many invoices for work that wasn’t done. There were invoices with exorbitant markups: 3%, 4% of their actual value. Or invoices showing 90% financial completion but with only 20% of physical work completed. There’s a lot of nonsense here.” he said, according to a video of the remarks that was shared on social media. Rodríguez said he would fire anyone from Pemex who asked for a commission to approve payments, a fairly common practice in Pemex dating back decades, but in practice one that has proved hard to stop, irrespective of the party in power.

Lawmakers from opposition party PRI warned on 20 November that the delays in payments are pushing some companies to the brink of collapse, claiming that the debt to suppliers could be double or triple the official figures, since Pemex has recently restricted its invoicing system, preventing some vendors from submitting their invoices. Rodriguez himself accepted this. “Pemex’s financial debt is not the problem. We now have a budget allocation to cover debt repayments, allowing us breathing room to meet these obligations through December 2025 …The issue is with our suppliers. Many companies have gone bankrupt or are already insolvent because Pemex hasn’t paid them. I have a vast array of suppliers that we owe money to.”

About a year ago there was the rumor that the whole Pemex supply chain would call for a general strike against the company due to the delays in payments, which was at its highest point since the pandemic. Back then, the strike didn’t materialize in part because the largest suppliers found a way to get paid through a scheme where some banks factored Pemex’s invoices linked to credit default swaps (CDS) backed by companies like SLB, Halliburton, Weatherford and Baker Huges. Back then, the US ambassador to Mexico, Ken Salazar, played a key role in bringing Mexico’s government to the table, but he is now on his way out following Trump’s victory.

So who will be fortunate or connected enough to get paid, and when? And will this be enough to entice them to continue working with Pemex in the future? And stave off bankruptcy? Optimists point to major fiscal support, and new coordination and excellent relations between Pemex, the Finance Ministry and the Energy Ministry, and a clear upgrade in caliber of people heading these organizations versus those in the previous administration. Pessimists worry that Pemex’s profitability challenges are no longer solvable long-term without politically unacceptable decisions such as closing refineries and bringing in foreign capital to share risk in E&P.

Pemex Plan Pitfalls

Pemex’s finances were in part to blame for Moody’s downgrade of Mexico’s outlook from stable to negative on November 15, right before Sheinbaum presented her first federal budget. “There is an increased probability that the sovereign will absorb part or all of Pemex’s financial obligations,” wrote Moody’s. “While the way that the authorities may carry out this transaction is unclear at this time, it may result in a further increase in the federal government’s debt and interest burdens.”

Moody’s did not see in the government’s new plan for the hydrocarbon sector the hopeful signs that appeared in the electricity plan presented early this month (see here for our thoughts on the matter). While analysts and the industry welcomed the government’s new tone, leaving behind the open confrontation with the private sector that characterized the AMLO administration, Moody’s believed Sheinbaum’s plan did not show a clear path to improve the hydrocarbon sector. The so-called “mixed-contracts” between Pemex and the private sector give no clue on how deep this relationship would go.

The most successful contract in Pemex’s recent history is the farmout in ultra-deep water field Trion with Australia’s BHP, now Woodside Energy, which won the beauty contest back in 2016, and on which Pemex has not had to spend a dime in its development. However, President Sheinbaum has suggested she will not back continuing this type of arrangement; instead her administration might be considering doing farmouts where Pemex could choose its partner, an option considered in 2014.

Industry insiders worry that mixed-contracts would only mean another refreshed model of Pemex’s contract-services model, which has yielded poor results over the past 20 years in projects like gas fields in Burgos, unconventional fields in Chicontepec or the latest one in the offshore gas field Lakach. If so, more downgrades may be inevitable as Pemex’s drag on public finances grows.

Pemex’s contributions have plummeted this year

Pemex highlights from the budget

• The Finance Ministry proposed a reduction in the budget for Pemex. The company will spend MXN 464.3bn (USD 22.7bn) in 2025, a 7.5% YoY reduction in real terms. The 2025 Pemex budget includes MXN 209bn (USD 10.22bn) for capex, from which Pemex E&P business will spend MXN 180.5bn. This capex represents a reduction compared to the MXN 235bn Pemex expected to spend by the end of 2024.
• Mexico’s government also tagged MXN 136bn (USD 6.65bn) to pay for Pemex upcoming debt maturities, including bonds and some credit lines. The company faces USD 8.9bn in debt maturities next year. The Pemex budget includes an indebtedness ceiling of USD 5.5bn for next year, however, President Sheinbaum has said the Finance Ministry will continue to support Pemex, as the state-owned company is paying too high of an spread compared to the sovereign.
• The 2025 budget proposal also includes modifications in Pemex royalties; going forward it will only pay a new royalty called Derecho Petrolero para el Bienestar, instead of the three royalties it’s paying now for exploratory and extraction activities, and the largest one the Derecho de Utilidad Compartida (DUC). At first glance, the new royalty seems pretty similar to the DUC as it does not allow Pemex to deduct costs, said financial analysts; this is in line with the promise of a neutral initial effect when the new plan was announced.
• The government expects crude production, including oil condensates, will average 1.86mn barrels per day (bpd) next year, a figure that the country hasn’t reached since May 2024, according to official data.
• The budget also shows lower spending for Zama, at MXN 3.1bn (USD 151mn) for 2025, even less than the figure approved by CNH. Pemex delayed the first production at its offshore field Zama, which was expected to produce its first barrels at the end of the next year. The company is still working in some parts of the basic engineering because of the lack of funds designated for the field, said the staff of hydrocarbon regulator CNH in a session held on 14 November. Pemex expected to start building platforms and pipelines around the field next year, and spend $1.05bn to bring the first crude production from the field. However, the company will now only invest $370.8mn during 2025 in Zama.

Other Pemex news

• Pemex will look for private-sector partners to fund projects like shallow water field Zama and other projects in ultra-deep waters, said the company quoting its CEO and an industry source. “We are going to partner with the private sector. The importance of making well-done contracts in exploration and production, since there are many types in this matter,” said Pemex CEO Víctor Rodríguez at the CIPM event.
• Rodríguez admitted the lack of funds that Pemex faces to carry on with projects like bringing into production the megafield Zama. The company needs to find partners to fund one of the largest projects in its pipeline in the next six years. Rodríguez added that the company must wait for Congress to approve the legal modifications following the constitutional amendments passed last month.
• Pemex is analyzing the creation of an oil-cluster near the field Trion, a farmout with Australian company Woodside, where Pemex would own only a 10% stake, said the industry source. Nearby Trion there are other Pemex discoveries like Maximino and Nobilis that could be developed by private operators.
• The company must shift its exploration strategy as Pemex has only struck small fields over the last six years, said Eduardo Poblano, deputy chief of Pemex portfolio management at Pemex Exploracion y Produccion during the event at CIPM. The state-run company will refocus its strategy in the upcoming years, however, Pemex faces “political and social issues” regarding tapping crude reserves that require hydraulic fracturing or going to ultra-deep water areas, where most of Mexico’s contingent reserves have been identified, said Poblano. “We have to persuade people that the technologies we have for deep waters and unconventional fields are feasible and good for business,” he said.
• Pemex asked for a temporary work suspension on a driller contracted to CP Latina, arguing a reduction in budget. “Latina has received a letter from Pemex requesting a temporary suspension following a cost-reduction measure for the last quarter of 2024 that is estimated to last 50 days, starting the first days of December 2024 and finalizing at the end of January 2025,” according to the company’s third quarter earning release published this week. CP Latina leases two jack-ups to Pemex, Santa Maria and Covadonga, that were working at offshore fields Akal and Yaxche. Drilling activities most likely will resume in the same field Yaxche, said the company.
• Pemex announced a cost-reduction budget for the rest of the year. Some vendors have said the budget cuts have paused most of the company’s payments for the rest of the year. CP Latina also accused that because of Pemex’s delay in payments, it did not generate cash to pay the interest coupon due on 15 October. The driller asked for an initial extension to 15 November and another for 2 December. The delay in payments from Pemex have reached almost 180 days on top of the 90-day commercial term, according to CP Latina report. “This has resulted in limited opportunities to discount invoices with the commercial banks. Pemex indicated that it would start to reduce the delays, but it has not materialized as of today,” said the company.
• Pemex oil production fell for a fifth consecutive month, dropping to 1,423,755 bpd in October, down by 7.6% from a year earlier and off by 1.9% from the prior month. It is the lowest crude output since May 1979 when it recorded 1,412,246 bpd, according to the CNH historic database.
• Mexico’s crude output from non-state companies rose by 6% in October from a year earlier, although it declined month-on-month as production from Eni, Hokchi and Fieldwood fell.
• Pemex processed 730,744 bpd in October, a 17% drop MoM, and the lowest figure since June 2022. The company did not register any oil refining at its new Olmeca refinery.
• Pemex exported 831,000 bpd in October, a 25% increase MoM as the company refined less crude at its refineries.
• Pemex paid around MXN 20.6bn in oil royalties in October after four months in a row of tax relieves, according to the Mexican Petroleum Trust (Fondo Mexicano del Petróleo). The company has only paid in four months its oil royalties during this 2024. The oil royalties’s payment occurred the same month that the company announced a MXN 26bn in budget cuts in 4Q24.

Other energy news

• As expected, the Chamber of Deputies approved the constitutional amendments to eliminate independent regulators including the Energy Regulatory Commission (CRE) and the National Hydrocarbon Commission (CNH). It is now in the Senate’s hands, with approval a formality.
• Brazilian-Mexican petrochemical producer Braskem Idesa will face weaker than expected polyethylene (PE) prices for 2025 as the international market is still showing a low recovery, said rating agency Fitch. “PE prices remained weaker than expected in 2024, and spreads have been lower, despite a decline in ethane prices,” said the agency. “Fitch Ratings expects that the cycle will turn in 2H25, but is now incorporating the view of a U-shaped recovery rather than the V-shape expected for 2024, which did not materialize.” Fitch’s base case reflects its assumptions of Braskem Idesa’s PE prices of USD1,144/ton in 2024, USD1,116/ton in 2025 and USD1,126/ton in 2026 and spreads of USD871/ton in 2024, USD814/ton in 2025 and USD819/ton in 2026. The agency upgraded the company’s outlook from negative to stable despite this scenario as Braskem Idesa has shown positive results on its plan to reduce costs, and it’s advancing in the construction of its new ethane storage terminal. “The revised Outlook to Stable reflects the start of a turnaround of the negative price trends of 2023 and early 2024, in addition to the advancement of the Terminal Quimica Puerto Mexico (TQPM) and achieved efficiencies,” said the agency.
• Braskem Idesa terminal was 87% complete in September 2024, significantly reducing the risk of execution thanks to the advanced stage of the project. The terminal is key for Braskem Idesa in the long term as it will help the company to operate without relying on the ethane supply coming from Pemex. Pemex and Braskem Idesa renegotiated the original terms of the ethane supply in 2021 after the state-owned company complained the deal was too beneficial for the Brazilian-Mexican JV. Under the new deal, Pemex agreed to supply a minimum volume of 30,000 bpd of ethane until early February 2025. Fitch estimates that Pemex will supply 28,000 bpd in 2024, 20,000 bpd in 2025, 20,000 in 2026 and 15,000 bpd going forward. The ethane terminal has enough capacity to fulfill Braskem Idesa needs to feed its petrochemical complex Etileno XXI, however, Pemex ethane is less expensive compared to the imports as the company has to add the shipping costs.

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