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Source: http://www.businessinsider.com/pemex-cant-cover-mexican-governments-debt-2015-7
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July 18:
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As
the world’s attention is transfixed by every new development in Chapo
Guzman’s latest audacious prison break, something much more important –
and potentially more dangerous – is happening in Mexico. Yesterday the
country held its first auction of offshore oil leases, bringing to an
end 77 long years of state control over energy.
Until yesterday,
Petróleos Mexicanos, A.K.A. Pemex, the state oil company, ran all oil
and gas production in Mexico. But that has now changed. With it a new
age has begun, one in which Mexico’s energy sector will finally get the
funds it needs to extract the vast hydrocarbon resources it has at its
disposal. It will also get the technology it needs for deepwater
drilling in the Gulf of Mexico as private companies, in particular from
the US and the UK, provide essential know-how and best practices. In
short, it is a perfect win-win for all concerned…
Or at least it
was supposed to be, until the bottom fell out of the global oil markets.
Now the stagnant market is overwhelmingly in the buyer’s favor and
yesterday, as Bloomberg reports, the buyers weren’t interested in buying:
Mexico’s
first auction of offshore oil leases fell short of the country’s
expectations as several majors decided not to participate.
Only
two of the 14 shallow-water blocks released on Wednesday received
qualifying bids. Exxon Mobil Corp., Chevron Corp. and Total SA passed on
the country’s sale of territory in the Gulf of Mexico, 77 years after
the country nationalized crude. The 14 percent success rate was less
than half the 30 percent to 50 percent goal that the government said
would be its minimum for judging the event a success.
The autopsy has already begun. According to The Economist,
the problem is that old habits die hard: while Mexico’s government is
still “having trouble letting go of the old mindset of full control,
rather than letting the market decide,” oil majors still instinctively
distrust Latin American governments, especially with the memory of
Argentina’s expropriation of YPF from Spanish oil giant Repsol in 2012
still fresh in their minds.
According to some accounts, the
Mexican government had set the minimum bids too high. According to
others, the major problem is Mexico’s weak institutional environment.
Investors are often loath to do business in a country with weak
institutions and an “extremely vulnerable” rule of law, said
petrochemicals analyst Miriam Grunstein. “Everything depends on just
how promising the fields are: the bigger the opportunities, the greater
the tolerance of weak rule of law.”
REUTERS/Edgard Garrido
Whatever the reasons for yesterday’s flop, Mexico has little time to put things right.
“The
big worry is what will happen to our state company (Pemex), because it
is the only one we have,” said Grunsteain. “Whatever problems or
dysfunctions it might suffer from, it is all we have… we still have no
clear idea how we are going to guarantee our own energy security, and
that is an issue of vital importance for the survival of this country.”
In
2014 ,Pemex’s oil revenues accounted for 33% of the national budget.
However, the energy reform will drastically reduce that amount – and
quite possibly very quickly. What’s more, some experts fear that the
sudden jolt from functioning for over seven decades as a national oil
monopoly to having to survive and thrive as a private company in a
fiercely competitive global oil market could be so severe that Pemex’s
very existence may well be on the line.
El Financiero
columnist Dolores Padierna reported that the current odds are
overwhelmingly against Pemex. While foreign companies are given huge
fiscal incentives to invest in Mexican oil fields – including the
possibility of 100% deductions on their operations – Pemex is being
massively overburdened with taxes, precisely at a time when its revenues
are shrinking. In 2016 the company will have to pay an additional
one-off state dividend of roughly 30% while its competitors pay nothing.
At the same time the company’s budget will be further slashed while its
investment funds and liquid assets continue to shrink.
As
operational conditions deteriorate, Pemex’s dependence on debt grows. In
2014 alone the company’s total debt expanded by $26 billion, with
annual interest payments alone of over $3 billion. Meanwhile its total
investments languished at around $17 billion – money it desperately
needed to operate fields that could soon belong to foreign competitors.
Mexico’s
public finances have already started to feel the pinch from the
government’s energy reform, with a staggering 40% drop in first-quarter
revenues compared to the same period last year, Padierna warns. Granted,
the spectacular drop in oil prices played a major part in this but so,
too, did the government’s new restrictions on Pemex’s ability to invest.
In
the worst case scenario, Mexico’s sugar daddy of the last 77 years
could become a financial deadweight. If the company goes into
insolvency, it will be taxpayers (of course) that will have to pick up
the bill – a bill that currently stands at a whopping $176 billion.
Even
if the company doesn’t hit the walls, but rather slowly diminishes in
size, performance, and market share – the more likely scenario – one
can’t help but wonder just how and where Mexico’s current and future
governments will find the funds to plug the gaping hole left behind by
Pemex’s dwindling contributions. In such an event, Mexico may find that
life without its fiscal sugar daddy is no easy thing.
Source: http://www.businessinsider.com/pemex-cant-cover-mexican-governments-debt-2015-7
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