OTC: Pemex’s financial, operational outlooks improving, CEO says

May 4, 2017
Turning around a company whose sales are comparable to Uruguay’s gross domestic product is no small task, especially when the company itself remains a primary source of revenue for its government owner.

Turning around a company whose sales are comparable to Uruguay’s gross domestic product is no small task, especially when the company itself remains a primary source of revenue for its government owner.

While “certain idiosyncratic issues” still exist within Petroleos Mexicanos SA (Pemex) given that it’s a national oil company, there’s been a growing emphasis on profitability amid energy reform, said Jose Antonio Gonzalez Anaya, Pemex chief executive officer, during a May 3 topical lunch at the Offshore Technology Conference in Houston.

When Gonzalez was appointed to his position in February 2016, he was directed to “get Pemex’s finances in order” while accelerating energy reform implementation, he explained. “I think today we can say Pemex has stable finances—improvable, but stable.” He noted the spread between Pemex’s and Mexico’s sovereign bond has shrunk to about 120 basis points from 320 in February 2016. “If you had asked me last year whether we would have that reduction in Pemex risk in a year, I would have said probably not.”

The company will record a primary surplus in 2017 for the first time since 2012, he said, marking an “inflection point” for the company. “Running a primary surplus when the price of oil is $40[/bbl], it’s a challenge.” Pemex’s price projections indicate that it can return to profitability by 2020.

Crucial to achieving stable profits will be a reversal of course in companywide oil production, which has been falling steadily over the years. In 2004, Pemex produced 3.4 million b/d, of which 2.1 million came from Cantarell field. Today, Pemex produces about 200,000 b/d from the field. “The challenge is to replace Cantarell’s dropping production,” Gonzalez said. However, he noted non-Cantarell production has increased by 54% during the same time period.

“The new reality—the new geology—is that we have to invest a lot more on getting the oil out like everybody else,” he said. “We used to invest 50 billion pesos in 2000 and we now have to invest around 350 billion pesos to get the oil out—like everybody else does. The new geology is here to stay.”

More farmouts coming

Pemex’s emphasis on partnerships with international firms—and gaining access to those firms’ knowledge and technological expertise so that it can boost production and efficiency—is slated to continue in October when farmouts are scheduled to be awarded for the shallow-water Ayin and Batsil fields along the coastline of Tabasco as well as for the onshore Cardenas, Mora, and Ogarrio fields in Tabasco.

Ayin and Batsil cover 1,096 sq km and hold total 3P reserves of 300 million boe, according to Pemex estimates. The 104-sq-km Cardenas and 64-sq-km Mora are 62 km from the city of Villahermosa and together have estimated total 3P reserves of 94 million boe. The 153-sq-km Ogarrio is in the municipality of Huimanguillo and contains estimated 3P reserves of 54 million boe.

Announcement of the Ayin and Batsil farmout result was previously slated for June 19 alongside winners of the first phase of Mexico’s second-round bidding, or Round 2.1, which involves 15 shallow-water fields in Tampico-Misantla, Veracruz, and the Southeastern basin.

Pemex in April also approved the eventual farmout of the ultradeepwater Nobilis-Maximino block in the Cinturon Plegado Perdido area of the Gulf of Mexico. Located 230 km off the Tamaulipas coastline and 15 km off the maritime border with the US, the 1,524-sq-km block holds estimated total 3P reserves of 500 million boe. It lies in 2,900-3,100 m of water.

Nobilis and Maximino fields were discovered by Pemex in 2016 and 2013, respectively. Five wells—two in Nobilis and three in Maximino—have been drilled on the block. Pemex says the block’s proximity to Trion block, awarded to BHP Billiton Ltd. in Pemex’s very first farmout last December, offers future operating synergies (OGJ Online, Dec. 5, 2016). The company estimates production of 300,000 boe/d could be reached from Nobilis-Maximino in the next 8 years should the fields be consolidated.

Gonzalez believes there’s plenty of “profitable oil” in Mexico given the presence of oil offshore and in neighboring Texas. “The oil industry in Mexico was not born in Campeche or Tabasco. It was born in Tamaulipas, close to the border with Texas. We left those fields in the late ’50s, early ’60s. Imagine if you had left the fields in Texas in the late ’50s and early ’60s. If you bring today’s technology to those fields [in Tamaulipas], the resources are there.”

Midstream, downstream, and beyond

Mexico’s midstream segment has its own deficit to overcome, Gonzalez noted, explaining the US has 27 times the pipeline density and 40 times the storage capacity as Mexico. “We’re clearly underinvested in pipelines in Mexico.”

The country’s new effort to make up ground on that front came with the May 2 announcement that Pemex Logisita awarded US refiner Tesoro Corp. 3-year contracts for refined fuel pipeline and storage capacities in Baja California and Sonora. Twenty-two companies submitted bids in the first open season public auction, which had suffered from delays.

The Baja California system covers the 155,281-bbl Rosarito, 8,997-bbl Mexicali, and 16,628-bbl Ensenada terminals; and 2,300-b/d Rosarito-Mexicali and 2,350-b/d Rosarito-Ensenada pipelines. The Sonora system covers the 108,377-bbl Guaymas, 7,814-bbl Ciudad Obregon, 7,479-bbl Hermosillo, 2,784-bbl Magdalena, 11,534-bbl Nogales, and 1,785 Navojoa terminals; and ​2,571-b/d Guaymas-Hermosillo and 2,314 Guaymas-Ciudad Obregon pipelines.

In its downstream business, Pemex runs six refineries in Mexico and one in the Houston area. “We lost a lot of money in refining and it’s interesting because people don’t lose much money in refining,” Gonzalez said, citing unplanned shutdowns that occur much more frequently than the industry average.

He believes refining partnerships—including the first one, announced in February, in which Air Liquide Mexico SA will supply hydrogen to the Miguel Hidalgo refinery in Tula for the next 20 years—as well as the elimination of gasoline subsidies in Mexico and a crackdown on fuel theft will help lead the business back to profitability. Also in Tula, the company is seeking a partner to develop and operate a new coking unit, a $2.1-billion project.

As for the importance of trade to Mexico’s energy sector, Gonzalez asserts, “Trade in oil and gas is win-win—it’s not win-lose. We import, more or less, 500,000 [b/d of gasoline], mostly from Texas. Somebody here [in Texas] is happy. We export to be refined, more or less, 1 million [b/d of oil], mostly to Texas. Somebody in Mexico and somebody in Texas [are] happy.”

He’s optimistic about trade in the future and believes Mexico will become “more and more integrated” with the US and abroad as more companies do business in the country. “Before, when you did business with Mexico, you did business with Pemex. In the future, if you do business with the Mexico energy sector, you may be doing business with Chevron or Exxon or BP,” Gonzalez said.

Contact Matt Zborowski at [email protected].