During last week’s OPEC+ meeting Mexico was asked to cut its production in 400,000 barrels per day (mbd), to what the country’s Minister of Energy Rocio Nahle said no and walked out of the meeting. Later OPEC+ official minutes indicated that the agreement to cut production by 10 million barrels per day was contingent on Mexico’s consent for also cutting production. At the time of writing Mexico’s president announced that the cut finally agreed was for 100mbd.
However exiting the OPEC+ agreement is not a surprise since Petroleos Mexicanos (Pemex) has been diverging from other companies in its response to the COVID-19 crisis and the steep fall in oil prices. The company intends to continue with its 2019 original plan to develop 22 priority upstream assets and build a new refinery. Although approximately 13% of Pemex crude oil and condensate production is hedged at US$49 per barrel (bbl), in average the company’s producing fields start to generate negative post-tax cash flow at US$20 per bbl. At a company-level the breakeven is higher if other corporate taxes are taken into account as well as the company’s financial commitments. In recent days the Mexican reference price has seen large discounts and reached levels of US$10.6 perbbl on April 1st, 2020.
Bidding rounds and farm-out schemes are practically stalled in Mexico and for Pemex to rely on complementary funding in its new projects the government is directly injecting capital into the company. By proceeding with its last year plan the current administration puts not only the company at risk of insolvency but can also negatively impact the Mexican government finances.
President Lopez Obrador has also announced that if some of Mexican crude exports are not able to secure a good selling price, this crude oil can be refined domestically increasing domestic supply of refined products. Currently the volume of crude exports at risk is around 400 mbd and although this makes economic sense given the higher value of imports of products versus export of crude oil, such strategy requires a higher refining utilization capacity, which at the moment still is below 35% at less than 500 mbd of crude oil processing. The necessary expenditure to increase the existing refining capacity will be no less than a few billion dollars just for required maintenance, not considering necessary reconfigurations to process the Mexican heavy crude oil. This can only add to the strain of the company’s finances. All in all and contrary to the desired outcome, Pemex can end up significantly weakened throughout its 2020 plans and inevitably also impact the Mexican government finances if the company has to be rescued from near bankruptcy.