Pemex and the Mexican Economy

Executive Summary

Pemex is a state-owned company that manages all of Mexico’s oil and gas sector. The majority of its oil fields are located onshore or in shallow waters, yielding low extraction costs. Yet the company is extremely inefficient and heavily indebted. Both production and proven reserves of oil are declining and the company consistently loses money.

In response to Pemex’s worsening situation the government of former President Enrique Peña Nieto introduced energy reforms which were approved by the Mexican Congress in 2013. The energy reforms opened up the oil sector to foreign and private investment in the form of joint ventures. The goal was for private companies to provide financing, share production costs, and transfer technical and management skills to Pemex. However, the new President Manuel Lopez Obrador (AMLO) does not have a favorable view of the energy reforms. He has a nationalistic vision for Mexico’s oil and gas sector and would like to limit foreign and private sector involvement in the industry.

Fitch Ratings Inc. recently downgraded Pemex debt to one notch above junk. The ratings company explained that the key driver for the downgrade is Pemex’s heavy tax burden, which represents a significant share of the company’s cashflow. This tax burden has translated into low investment and ballooning debt, rising 36% between 2014 and 2018 to reach $106 billion USD. Other factors also contribute to Pemex’s poor bottom line numbers: substantial unfunded pension liabilities, dwindling production due to low investment, corruption, fuel theft, as well as a bloated and inefficient corporate culture.

In an attempt to stave off further credit rating downgrades, the government unveiled a bailout package on February 15, 2019 of $5.5 billion USD. Markets were underwhelmed, and although Pemex bond prices fell and the peso weakened, a major sell off was avoided in part through government assurances that it would increase the financial support if necessary.

Pemex is crucial for the Mexican economy. Although energy’s contribution to GDP and its share of total oil and gas exports are not very high (5% and 6% respectively in 2017) the company is very important for three reasons: (1) there is heavy government reliance on Pemex for budget revenues (2) it is the source of all oil and gas in Mexico and (3) it is a significant source of foreign exchange receipts. A financial crisis in Pemex could result in a disruption to the supply of oil in the country; this could put a serious drag on the economy. It could also jeopardize an important source of government revenue.