The Dramatic Fall of Mexico’s Oil Giant
- Pemex, once a global oil giant, is now burdened by debt and declining production.
- The Mexican government's support for Pemex has come at a high cost.
- Pemex faces challenges in both addressing environmental concerns and attracting investment.
Once one of the world’s most successful oil companies, the Mexican state-owned firm Pemex, has been falling increasingly into debt over the last decade, only surviving by pursuing cheaper shallow-water oil operations and being bailed out by the government. The recently elected incumbent Mexican president, Claudia Sheinbaum, is expected to continue supporting President Andres Manuel Lopez Obrador’s (AMLO) ambitious oil and gas plans despite Pemex’s failings, in addition to adding renewable energy capacity. However, following years of safety failures and ongoing financial issues, many are questioning just how long Mexico’s oil and gas major can stay afloat.
Mexico has long relied on oil and gas production to bring in revenue. It is home to 5.978 billion barrels of proven reserves of crude and production stands at around 1.8 million bpd. The state-owned oil company Pemex has been an important player in Mexico’s oil industry, particularly as AMLO curbed foreign participation in the country’s energy market as he pursued nationalisation policies. However, for several years, the government has been investing heavily in supporting Pemex as it fell into debt. Since 2019, for each peso the government invested in Pemex, it received a return of just 1.4 pesos, compared to 5.7 pesos between 2015 and 2018 and much more in previous years.
Under the previous Enrique Peña Nieto administration, the government sought to end Pemex’s monopoly of Mexico’s oil industry, reducing the need for risky exploration activities by attracting greater private investment in the sector. However, President AMLO aimed to make Mexico more self-sufficient by nationalising much of its energy industry. This included the development of the new Dos Bocas oil refinery in Tabasco, run by Pemex, which is expected to boost Mexico’s crude refining capacity to provide greater energy security. Considering the country’s six existing refineries operate at just 50 percent capacity at present this could offer a major boost. However, this is expected to lead to a reduction in oil revenue, as Mexico will stop exporting a lot of its crude. AMLO’s government has invested around $53 billion of public money in fossil fuels, as well as offering $25 billion in tax cuts.
One of the main reasons that Pemex’s revenue has fallen is due to a decrease in oil production in recent decades. Previously a top-five oil producer, Pemex dropped out of the top-10 crude producers worldwide in the last decade. Much of the reason for Pemex’s reduced oil production is due to the underinvestment in oil operations in recent years. For years, the government used oil and gas revenues irresponsibly instead of introducing fiscal reforms that would support the development of new assets, which forced Pemex to borrow money. It has now become the most indebted oil company in the world, with a debt of around $102 billion, equivalent to around 7 percent of Mexico’s GDP. It is still turning a profit on its exploration and production activities, but downstream operations are making a loss. Due to its poor financial records, credit agencies have downgraded Pemex, making it more expensive for the firm to borrow.
Pemex is now worried that concern around climate change could hinder its investment opportunities, as many banks and other investors are divesting from the fossil fuel industry. In 2022, Pemex stated, “Limitations from ESG financing" are posing a threat, as is the "acceleration in energy transition that is decreasing the market for Pemex's crude oil and products,” an issue about which it is still concerned. The company launched its first ESG strategy this year in a bid to encourage investors to back its operations, despite its poor financial situation. Pemex has pledged to achieve net-zero carbon emissions by 2050 and was successful in reducing its greenhouse gas emissions by 2.3 percent between 2021 and 2022. The firm plans to invest between 10 and 14 percent of its annual capital expenditure to its sustainability strategy.
However, it has a poor track record when it comes to sustainability. As other countries reduce their gas flaring activities to reduce emissions, Pemex continues to be one of the world’s worst culprits for flaring. Mexico flared the seventh-highest quantity of gas worldwide in 2022, while it was the 10th-largest methane emitter in 2021. Nevertheless, Pemex has the potential to attract greater investment if it reduces flaring and diversifies its energy activities to focus on renewable energy and critical mineral mining, but this has yet to be seen.
Despite previous failings, Sheinbaum aims for Pemex to boost production from 1.5 million bpd to 1.8 million bpd. It is still uncertain whether the government will absorb $40 billion of Pemex’s debt to help the company expand its oil activities as well as potentially expand into renewable energy and lithium mining. Meanwhile, attracting foreign investment will depend heavily on Pemex’s efforts to decarbonise and improve its ESG practices. While there is some hope for Pemex’s future, there are still several challenges standing in the way of a comeback.
By Felicity Bradstock for Oilprice.com
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