Latin America

Pemex cuts $4.2 billion from budget to deal with world oil price slump

Mexican state oil firm assigns less money to refinery upgrades and outside contracts

Jan Martínez Ahrens
A worker on a Pemex platform in the Gulf of Mexico.
A worker on a Pemex platform in the Gulf of Mexico.SAÚL RUIZ

The beleaguered Mexican state-owned oil company Petróleos Mexicanos (Pemex) on Monday announced it had agreed $4.2 billion in cuts that will delay upgrades at refineries, slash expenditures and affect outside contracts as the firm tries to cope with the global slump in energy prices.

Lesser cuts were made in production and exploration – the two key areas the Mexican government will open to private investment for the first time in nearly 77 years, after the recent decision to nationalize the country’s sector.

Adjustments in the firm’s finances were ordered by Mexico’s powerful Finance Secretary Luis Videgaray, who at the end of last month announced a $9 billion slash in public spending to deal with falling oil prices – oil accounts for a third of Mexican state revenue. Pemex is assuming around half of those cuts, which come on top of a withdrawal of $3.5 billion in financing last December to help balance Mexico’s public finances.

Pemex board said it would invite contractors to renegotiate their contracts because of market changes

Experts said the move by the Pemex board will help the Mexican government avoid introducing new taxes to make up for lost revenue from oil earnings.

For years, Pemex has been plagued by serious management problems and a lack of funds for investment, which has affected the company’s modernization.

But these latest cuts, which represent 11.5 percent of the Pemex budget, come at a time when the firm is especially vulnerable. Drilling for new wells has come to a near standstill while production has dropped from 3.3 million barrels a day to 2.5 million in just 10 years, with prices at a five-year low.

Contributing to this hostile environment are wary global investors who had originally pledged around $1 billion, according to Goldman Sachs, but now stand to go back on their commitments if oil prices continue their downward trend. In just one year, Mexico has seen the price of a barrel of oil drop from $104 to $37.

More information
Mexico ends 76-year-old state oil and gas monopoly
Mexico’s Pemex faces crucial budget cuts aimed at increasing profits
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Another area that has raised concerns are the cuts to outside contracts. According to the statement released on Monday, the Pemex board said that it would invite contractors to renegotiate their contracts because of market changes.

“This generates an enormous amount of insecurity in private industry,” said Mexico City-based oil expert David Shields.

But the thorniest issue has been the Pemex payroll. Oil giants such as BP and Shell have made gigantic reductions in their workforces, a move that is still considered taboo in Pemex. And the possibility of layoffs during a legislative election year appears remote.

“With 160,000 workers, Pemex is the biggest oil bureaucracy in the world after China and Russia,” says Shields. “It must be restructured.”

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