Pemex Privatization: Something to Keep Your Eye On

December 3, 2015 By

December 2, 2015

by Barry Schaps

Around this time of year, many newsletters and blogs post screaming headlines about the “hottest” items to watch for next year. This is more of a “keep your eye on this space” notice as Stillwater Associates focuses its attention on the planned transformation of Petroleos de Mexico (Pemex). Make no mistake, the reorganization and privatization of major components of Pemex is a huge undertaking fraught with risks and complexities. Pemex, currently the government owned and controlled oil monopoly in Mexico, is determined to engage the private sector for much needed capital investment from the wellhead to the retail service station. This investment is needed to assist in its transformation to be a productive state “business” enterprise focused on the commercial realities of the oil and gas marketplace.

We thought we would list some specific areas where change is required in order for Pemex to make the transition, and leave the details for future newsletters. Some items and questions for your consideration:

  • In its nearly 80 years in business, Pemex will experience its largest financial loss ever this year.
  • Crude oil production in Mexico has fallen to 2.3 million barrels per day (mdb) from its peak 3.8 mbd in 2005. (By comparison, during the last six years U.S. oil production increased over 70%).
  • Decontrol plans would allow third-party companies to purchase crude oil once it has been produced.
  • As demand for internal consumption of natural gas in Mexico reached record levels during 2015, its production fell to 6.4 Bcfd from about 7.0 Bcfd in 2010.
  • The owned and operated Pemex refineries cannot produce the required slate of transportation fuels for its growing population while producing too much high sulfur fuel oil. Addressing this clean product shortfall requires imports of gasoline and distillate from U.S. gulf coast refineries and a recently approved “swap” of heavy Mexican crude oil for much lighter U.S. shale basin sourced crude.
  • As Mexico phases out oil burning electric generating plants and introduces more natural gas fired generators, the incremental supply of natural gas will come from the U.S. through new cross border pipelines being built by midstream companies.
  • From the consumer perspective, the Pemex monopoly for the retail sale of gasoline and diesel will end, allowing for a degree of price transparency and introducing additional marketplace volatility.
  • Traditionally Mexico has been a huge net energy exporter to the U.S., but with dropping crude oil production rates coupled with required imports of natural gas and transportation fuels from the U.S. the question is: Can Mexico sustain its energy self-sufficiency?
  • Can the Mexican government stay the course of change given its political volatility and entrenched bureaucracy? The necessary constitutional approvals came about in late 2013 with more framework announced in 2014, but the issuance of permits to private companies has been slow.
  • The existing Pemex infrastructure in refineries, pipelines, distribution facilities, and retail locations require massive overhaul and rehabilitation. Many billions of dollars will need to flow to these assets. Given the unproven track record for reform and privatization, can a workable legal framework develop allowing for the securitization of loans by private entities?

We recognize more questions have been asked than answered here, but this is an evolving environment warranting your attention next year. Watch this space for more details.