Pemex and Mexico’s Energy Reform under the New Administration · 2019. 12. 19. · Pemex average...

Pemex and Mexico’s Energy Reform

under the New Administration

The Outlook for Mexico’s Energy Sector under the López Obrador Administration

Woodrow Wilson International Center for Scholars

Washington D.C., March 5, 2019

Leticia Arroyo Abad (City University of New York)

and Noel Maurer

(George Washington University)

Production, 1900-2019(in millions of barrels per day)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020

Revenues and pre-tax expenses, 2001-17(millions of 2017 pesos)

(500,000)

(250,000)

-

250,000

500,000

750,000

1,000,000

1,250,000

1,500,000

1,750,000

2,000,000

2,250,000

2001 2003 2005 2007 2009 2011 2013 2015 2017Pemex pre-tax profits Pemex expenses from 20-F, 2017 pesos

The problem

Abad (CUNY) and Maurer (GWU) The Outlook for Mexico’s Energy Sector under the López Obrador Administration Washington D.C., March 5th, 2019

A Crude Reform: Pemex in Mexico’s New Energy Landscape

• Reform in theory

• Reform in practice

• Reform under AMLO


Constraints Solutions

Energy reform in theory


Financial

Fiscal

Human capital

External capital

Tax reductions

Reorganization

Estimated production, 2010-25 mbd by field (sans Cantarell)

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

KMZ Other Pemex (sans Cantarell) Ogarrio Cardenas-Mora Trion

Farmouts did not change the game

• Other than Trion, the farmouts are sideshows

• Trion has a development break-even price of $53 at current tax rates

• Pemex has recently found shallow-water fields that should produce (by 2020) 193k-210k bdp (Manik-101A, Mulach-1, Kinbe, Koban, Xikin and Esah-1)

Reform in practice: External capital


Pemex taxes, 2001-17 (share of Pemex revenue, federal taxes, and GDP)

0

10

20

30

40

50

60

70

80

90

100

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Maya blend price Oil taxes / Total taxes

Oil taxes / GDP Oil taxes / Pemex revenue

Pemex’s tax burden

• Taxes fell remarkably after 2015

• But taxes aren’t the real problem; consider that pre-tax earnings have collapsed

Reform in practice: Taxes


Pemex employees and unionized share

75%

76%

77%

78%

79%

80%

81%

82%

100,000

110,000

120,000

130,000

140,000

150,000

160,000

Total* Unionized share

Pemex payroll as % of revenue, 2002-17

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Reform in practice: Human capital


Pemex wages and Mexican wages

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

-

100,000

200,000

300,000

400,000

500,000

600,000

700,000

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Nom

inal

U.S

. dol

lars

2016

pes

os

Pemex average wage, 2016 pesos Mexico average wage, 2016 pesos

Pemex average wage, nominal dollars Mexico average wage, US dollars

Incentive structures

• Pemex line employees are well-paid by Mexican standards but underpaid by international standards

• We doubt the incentive story―Pemex executives and engineers

(unlike, say, YPF or Petrobras) are rarely recruited by outside companies

Reform in practice: Why not more savings?


How it was passed …

• EPN used the PRI’s centralized nature to strike a deal with the PAN;

• The split in the left gave EPN cover to propose the Pacto;

• Energy reform wasn’t part of the Pacto, but EPN used the atmosphere of cooperation to speed reform through with PAN support;

• Smaller parties bought off• Passed on party-line vote• Deschamps threatened into line

… led to thin popular support

• The process didn’t give reform popular support;

• EPN spent a ton of money advertising how great energy reform was going to be. It set an expectations bar that people would quickly get better and cheaper gasoline and electricity. When that didn’t happen, the public was very disappointed and even angry.

Energy reform: little popular buy-in


Reform under AMLO: Pemex’s rescue package


External capital

Debt management

Farmouts

Tax burden

Six-year $750m tax break

Federal support

Inefficiency

Anti-theft

Anti-corruption?

Debt repayments, 2018-33 (billions of current US dollars) Context

• Pemex is the world’s most indebted oil company

• Debt payments should be “manageable” but Pemex’s cost structure makes that difficult

• The farmouts (always overstated) have an uncertain future

Reform under AMLO: External capital


6.98.9

10.69.3 8.7 8.5

6.6

4.2

97.5

4.3 3.6

0.3 0.1 0

23.7

0

5

10

15

20

25

Source: PEMEX (2019)

Estimated production, 2010-25 (mbd by field –sans Cantarell) Context

• Pemex is the world’s most indebted oil company

• Debt payments should be “manageable” but Pemex’s cost structure makes that difficult

• The farmouts (always overstated) have an uncertain future

Reform under AMLO: External capital


0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

KMZ Other Pemex (sans Cantarell) Ogarrio Cardenas-Mora Trion

The support package The support package in context• The tax cuts amount to 4% of the

company’s annual liability• The capital injections add up to less than

half the company’s average annual debt amortization.

• The markets didn’t like it:⏤Peso weakened with announcement⏤Bond yields increased by 7 basis points

• The ratings agencies didn’t like it⏤Fitch downgraded long-term debt from BBB+

to BBB- paired with negative outlook• The IMF didn’t like it (but the IMF hates

everything)

Reform under AMLO: Tax break and federal support


Source: Secretaria de Hacienda (2019)

Volume in fuel theft, Dec 2018-Feb 2019(in mbd)

• Patrols require 15,000 soldiers in three shifts

• The action is necessary—but won’t dramatically improve Pemex’s bottom line

• Internal inefficiencies are massive:⏤It takes 70.7 days to pay suppliers⏤Salina Cruz refinery took longer to get back

running and is still running at only 39.6% capacity

⏤Illegal tappings went unchecked and the SCADA system was poorly installed (so … uh … where does the data to the left come from?)

⏤Fertilizer and cogeneration ventures flopped⏤Nitrogen injection operations slow to shut down


Reform under AMLO: Addressing inefficiencies?

0

10

20

30

40

50

60

70

80

90

2018

12/2

1/18

12/2

4/18

12/2

7/18

12/3

0/18

1/2/

19

1/5/

19

1/8/

19

1/11

/19

1/14

/19

1/17

/19

1/20

/19

1/23

/19

1/26

/19

1/29

/19

2/1/

19

2/4/

19

2/7/

19

2/10

/19

Source: PEMEX (2019)

• Mexico doesn’t need hydrocarbons• By 2030, the country can generate 284 TWh of renewable electricity per year — based on lowball projections

• The country has already freed itself from dependence on oil revenues

Federal taxes, 2001-17 (share of GDP)

Big picture: Why save Pemex?


-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

Domestic hydrocarbon taxes Hydrocarbon production taxesIncome taxes VAT

• Mexico doesn’t need hydrocarbons• By 2030, the country can generate 284 TWh of renewable electricity per year — based on lowball projections

• The country has already freed itself from dependence on oil revenues

Big picture: Why save Pemex?

Source: Sener and IRENA, “Renewable Energy Prospects: Mexico” (2015) available at https://www.irena.org/publications/2015/May/Renewable-Energy-Prospects-Mexico


https://www.irena.org/publications/2015/May/Renewable-Energy-Prospects-Mexico

Pemex and Mexico’s Energy Reform under the New Administration · 2019. 12. 19. · Pemex average...

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