Mexico’s Pemex faces crucial budget cuts aimed at increasing profits

Mexico’s state-owned oil company Petróleos Mexicanos (Pemex), which has been restructured under the government’s far-reaching energy reform, will face one of the most crucial periods in its history next week when board members try to decide how to apply around $4.1 billion in cuts.

The cutbacks, which represent 11.5 percent of Pemex’s budget, will serve as a test for the claimed independence of the new management and force incoming administrators to juggle finances without affecting the company’s already battered production investment policies.

The sudden drop in oil prices over the past few months has set off a chain reaction that has affected all of Mexico’s public finances.

Under President Enrique Peña Nieto’s energy reform, Pemex will retain its public status but will no longer hold a monopoly on energy exploration and production and must open its doors to private investment.

The cutbacks represent 11.5 percent of Pemex’s budget

Pemex’s new strategy will center on negotiations with private companies, which will begin bidding this year for concessions at hundreds of oil fields across the nation.

Mexico’s strong dependence on crude, which brings in around half of state revenue, also made officials careless in they way they invested money for new energy exploration projects. More than 90 percent of Pemex’s investments go to maintaining current oil fields, with little money spent on exploring new wells.

“In this area, Pemex is falling behind, above all in the area of financing,” said Alma América Porres of Mexico’s newly created National Hydrocarbons Commission (CNH), the body overseeing the oil company’s restructuring.

The backers of Peña Nieto’s energy reforms have always maintained that “the oil bonanza days are over” in view of the number of once overflowing wells that are now drying up across Mexico.

One of the country’s prized fields, Cantarell, which was discovered by a fisherman in 1971, today only yields about 300,000 barrels a day. Ku-Maloob-Zaap, located on the coast of the Bay of Campeche, produces 863,000 barrels while Litoral Tabasco pumps 333,000.

Oil production has declined by more than 30 percent during the past decade and in the last six years, with the exception of 2012, Pemex has clocked up losses. During the third quarter of 2014, Pemex suffered a 50-percent drop in profits compared to the same period the previous year.

The decline can be attributed to many factors, including the fall in oil prices; drops in imports, especially to its largest customer, the United States; devaluation of the Mexican peso; and the high 70-percent tax rate the Mexican government collects on Pemex revenue.

In order to keep the state from meddling further in the petroleum giant, Pemex has been given more autonomy in managing its budget and resources. Board seats are now equally divided between government officials and independent members.

The new board will decide where to make the $4.17 billion in budget cuts ordered by the government. Among the options under consideration is for the Mexican government to take on as public debt the $88 billion that goes to pay pensions and other benefits to retired Pemex workers.

But the government has to convince STPRM – the powerful Pemex workers union that for 70 years has been historically linked to the ruling Institutional Revolutionary Party (PRI) – to agree to some flexibility in the employees’ collective contracts. Some of the proposals include raising the minimum retirement age from 55 to 65 years and reducing the number of retirements each year.

One cost-cutting option may allow the government to take on the $88 billion that goes to pay Pemex pensions

The average age of Pemex’s 130,000 workers is 45, and the oil company predicts that in the next 10 years around 40,000 employees will qualify for retirement.

Experts agree that hammering out an agreement with the union is essential, given the budgetary austerity the company is being forced to face. “This would free Pemex to invest and improve its position as a partner with foreign companies,” says Ana Lilia Moreno, a researcher at Mexico’s non-profit CIDAC think tank.

It is still unknown where the budget ax will fall. The company has already announced the cancellation of outsourcing contracts, which will affect 15,000 workers.

The size of the cuts seem to go beyond the savings in current expenditures. But the greatest fear is that the ax may reach Pemex’s already battered production investment policy.