Economics: Reform A Success Minus Pemex
As we reach the third anniversary of Mexico’s energy reform, the goal of producing the strongest possible results in the shortest time possible remains a key objective, and one on which it is clearly delivering.
That success is apparent in the extent to which Mexico has convinced both international and domestic investors of the potential of the Mexican energy market and the country’s hydrocarbon reserves, and shown the public at home that the energy reform can constitute an important source of private investment, lead to greater job growth, and, perhaps most importantly, constitute a strong revenue stream for the Mexican government.
The bidding results have been very positive from Round One, as the government quickly learned the importance of offering investors attractive blocs to explore and exploit. And as the process proved transparent, enthusiasm grew among the companies and consortia that wound up competing for those resources and contracts. Companies have quickly uncovered deposits, and some even began to produce. The resulting revenue stream into government coffers and Mexico’s Oil Fund has quickly accelerated even at this early stage, with 30 billion dollars in royalties and 819.69 billion pesos from profit-sharing contracts booked so far.
But the one glaring weak spot in the entire plan remains state-owned Pemex. The company recently boasted that it was celebrating its third consecutive profitable quarter, a successful 5 billion dollar bond placement with which to “cover its financing needs” for the duration of the government of President Enrique Peña Nieto, and a series of ratings upgrades. But these results were achieved based on a plan to deliver short-term results at the expense of the company’s medium and long-term viability, as it continues to slash payrolls and, most importantly, its investment budget. The company has enjoyed greater revenues this year, but mainly as a result of exogenous impacts (stronger prices for crude, gas and gasoline) rather than any effort to expand sales volume, which would entail more investment spending. In fact, its production and sales volume are sharply down from levels of even two years ago, and the company’s future becomes less certain as the company encounters more and more competition from the industry's opening.
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