Pemex, Mexico’s national oil company, announced a significant reduction in spending on its exploration and production activities, aiming to save approximately 26.8 billion pesos (US$1.35 billion). This austerity plan particularly affects the fourth quarter of 2024, during which the company has decided to postpone several strategic projects until 2025, including the acquisition of seismic equipment and the drilling of certain wells.
This decision comes against a backdrop of strong financial pressure for Pemex. With accumulated debt exceeding $100 billion, the company is struggling to balance its books while maintaining its current production levels, set at around 1.5 million barrels per day (bpd) of crude oil. This figure rises to 1.8 million bpd when including condensate, a natural gas liquid often likened to crude oil.
Sectoral and economic challenges
Pemex, although a centerpiece of the Mexican economy, is largely dependent on financial support from the state. In 2023, the Mexican government had to inject $42 billion into the company to help it manage its debt, while reducing its corporate tax to free up funds. Despite this, Pemex continues to have limited access to financing in international markets, due to its poor credit rating and rising production costs.
One of the main challenges faced by the company is maintaining production while controlling expenses. Indeed, Pemex’s cost of production has increased by 60% over the past two years, reaching around USD 18 per barrel, well above levels seen in other oil-producing regions, such as Arab countries. This increase is due to aging infrastructure and operational inefficiencies, particularly in its refineries.
Consequences for the future
The slowdown in investment could jeopardize Pemex’s long-term ambitions. By delaying exploration projects, the company risks not discovering new deposits quickly enough to offset the natural decline in its current wells. Additionally, the acquisition of critical equipment for exploration could slow Pemex’s ability to identify new resources.
Finally, the company must deal with increasing environmental costs, particularly due to natural gas flaring. This practice, which consists of burning excess gas during oil production, has doubled since 2018, despite commitments to reduce emissions. In 2022, Pemex will flare an average of 548 million cubic feet of gas per day, which worsens its financial situation because it misses the opportunity to develop this resource, while increasing its environmental burden.
Pemex, in its spending reduction strategy, finds itself in a broader context of a Mexican energy sector facing several challenges. Mexico still relies heavily on its oil resources to support its public finances, with nearly 17% of tax revenue coming directly from Pemex’s oil operations. However, the continued decline in proven oil reserves, which have fallen by more than 40% over the past decade, poses a long-term threat to the sustainability of this economic dependence.
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