Key Pemex projects to escape budget ax

Because of fiscal difficulties facing the Mexican government, stemming largely from the slump in oil prices, state-owned petroleum company Petroleos Mexicanos has seen its budget cut in 1999, in real terms, by 4.3% from 1998's level, to 78.3 billion pesos.

Pemex had originally requested 80.2 billion pesos, but with a late spending-cut frenzy by the federal Congress in late December, another 2 billion pesos was trimmed off.

However, Congress also authorized a significant increase in the level of special debt Pemex is permitted to take on in order to continue work on several large, strategic projects. This debt, which is owed to private service/supply companies that are undertaking the work, is not paid by Pemex until the work is completed. Known in Spanish as pidiregas, this form of special "delayed-budget impact" debt is set to increase to 58.1 billion pesos this year from 28.6 billion pesos in 1998.

According to Pemex Director Adrian Lajous, Pemex plans to use 38 billion pesos of this pidiregas debt this year. This amount, Lajous said, will be sufficient to allow Pemex to go ahead with its long-term strategic projects, which would otherwise be slowed or halted altogether.

Also helping its funding plans is Pemex's first bond issue of the year, which the state company successfully placed on the international debt market on Feb. 18. The 10-year, $1 billion bond, which Pemex said will be used on unspecified priority investment projects, has an interest rate of 7.362%, or 230.5 basis points above U.S. Treasury bills. Because of the constraints on Pemex's 1999 budget, finding large-scale external financing will be crucial for the state-run company to continue with major investments such as the nitrogen reinjection project at the Cantarell oil field and the development of fields in the Burgos natural gas basin (see story, this page).

Strategic investments spared

Lajous said the investment projects are needed for Pemex to meet its future strategic goals, and that the cuts in Pemex's budget would have to come from other areas.

"We should not and cannot sacrifice the future that investment (today) will make a reality," Lajous said.

The principal projects using the pidiregas financing scheme are: a controversial nitrogen-injection project at the massive offshore Cantarell oil fields complex, development of the Burgos basin natural gas fields, modernization of the Delta de Grijalva oil fields in Tabasco, completion of a new cryogenic natural gas processing plant being built at Ciudad Pemex, and the overhauling of at least four and possibly six Pemex refineries.

Pemex in February let contract to a group led by Mexico's Grupo Tribasa SA for a $1.2 billion revamp of its Ciudad Madero refinery (OGJ, Feb. 22, 1999, p. 30). A similar revamp is already under way, by the same group, at Pemex's Cadereyta refinery. Another tender, involving revamps at the Pemex refineries at Tula and Salamanca, was scrapped, with officials citing the projects' "lack of profitability." In addition, an announcement, planned for Mar. 18, of a decision to proceed with modernization projects for the refineries at Minatitl n and Salina Cruz, failed to materialize.

"This (decision) will depend on the availability of resources in the international markets and on the government's financial plans for 1999 and 2000," Lajous said.

Where will cuts hit?

But, if the principal investment projects are not to be touched, the cuts will have to fall on operating costs, which were already slashed three times last year in successive rounds of budget-cutting.

Lajous would not say specifically where the cuts would fall, beyond that they would be across all areas of Pemex, starting with the director's office, and that some layoffs could be expected.

Lajous added that some wells, particularly in more mature fields such as those around Tampico, could be shut in, because production costs there are higher and not economic at current prices.

Juan Quintanilla, a researcher with the National University Energy Pro- gram, said he expects Pemex to temporarily reduce spending in areas that would not affect major projects.

"From what my contacts in Pemex have said, the big investment projects are going ahead, and cuts will be made in other areas, such as environmental protection, water treatment, things like that," Quintanilla said.

Modest debt level

Pemex plans to take on an additional 1.1 billion pesos to help finance its regular spending and investment budget for 1999, which does not include the pidiregas financing.

Lajous said the level of debt being taken on by Pemex in 1999 was "relatively modest" for a company of its size and does not put Pemex in any financial danger.

Asked if Pemex would have any difficulty meeting its financing needs this year, due to the difficult international situation, Lajous said, "There's no doubt that conditions in the international finance markets will be difficult this year, but because of the profitability of the projects and also because we are part of the Mexican government, it has been easier to cope with this situation."

Pemex receives its financing from two principal sources: bonds issued directly by Pemex on the international debt market and loans from export-import banks of countries that have companies working on Pemex projects. One example of the latter is a $1 billion loan from Japan's Export-Import Bank on June 29, 1998, for work on the Cantarell nitrogen project.

Taking Pemex off budget?

Deputy Sergio Benito Osorio, president of the energy committee in the lower house of Congress, agreed that the debt level of Pemex in 1999 "doesn't present any dangers."

However, Osorio said he favors taking Pemex off the federal budget and allowing it to operate more as an independent company.

"What we, as congressmen, should have is an ability to review Pemex's ability to complete its broader goals on petroleum policy," Osorio said. "We don't need to authorize Pemex to buy a color printer or give its workers Christmas turkeys."

Pemex currently pays about 60% of its income to federal coffers and is authorized each year by Congress to retain a certain amount of its profits. "Pemex should have the ability to determine spending and investments not for 1 year, but for a period long enough to develop its investments," Osorio said. "No company of this size in the world has to find out each year how much it can invest, and during what period."

Quintanilla agreed: "People say that Pemex is not profitable, but they don't seem to remember that it could be profitable, if the government weren't siphoning off all its money," Quintanilla said.

Osorio said many other politicians, independent academics, and Pemex officials agree with the need to take Pemex off the budget, but that the federal Finance Secretariat is resolutely opposed. "The Finance Secretariat plays with Pemex's finances for its own macroeconomic goals, like keeping inflation down," Osorio said. "While the federal government can't get resources in other ways, the petroleum policy will continue to be hostage to the country's fiscal difficulties. We need to resolve this, or Pemex has no future."