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As most oil producers cut back, Pemex soldiers on with drilling plans

The company remains steadfast in spite of lower oil prices

The recent slump in global oil prices as demand declines due to the coronavirus pandemic has led most producers to reduce spending and in some cases their output. But Pemex is taking a different approach.

The state oil company is aiming to almost double drilling this year to 423 wells, the news agency Bloomberg reported.

It also intends to accelerate development of 15 recent recent discoveries despite warnings that many of them are unprofitable due to the current low price for Mexican crude.

Bloomberg also noted that Pemex hasn’t announced any change to its goal of producing an average of 1.87 million barrels of crude per day this year – an 11% increase compared to 2019 – nor has it flagged any reduction in its planned investment of 270 billion pesos (US $11.4 billion) in exploration and production.

Mexico’s steadfastness contrasts with the flexibility shown by Brazil’s Petrobras and Colombia’s Ecopetrol, which have both slashed their capital spending.

Ruaraidh Montgomery, research director at oil consultancy Welligence, said the path chosen by Pemex – as demand for oil and prices remain low – “will most certainly” result in the company burning cash.

“Petrobras is genuinely run as an independent entity that is there to generate profits, but with Pemex, the government’s priority is production growth,” he said.

President López Obrador, who has pledged to rescue the heavily indebted state oil company, wants to boost production to reduce Mexico’s reliance on fuel imports, mainly from the United States. He announced on Sunday that Pemex would get a 65-billion-peso tax break as part of measures to mitigate the economic impact of the coronavirus pandemic.

Nevertheless, Anne Milne, a strategist at Bank of America, predicts that the state oil company will have negative cash flow of US $20 billion in 2020 if Mexican crude trades at $30 a barrel, well above Wednesday’s closing price of just under $18 and almost triple the 21-year low of $10.37 recorded in the last week of March.

Her dire prediction comes even though Mexico is expected to make a profit from its large oil hedging program. The government has locked in a price of $49 per barrel in its annual hedge that usually covers between 200 and 300 million barrels, while Pemex has its own hedging program that will apply to 85 million barrels this year.

CEO Octavio Romero hasn’t disclosed the price Pemex locked in but the state-run company announced in March that it had received its first payment from the program.

The government’s decision to build a new oil refinery on the Tabasco coast has also been questioned by experts who warn that the investment will divert funds from Pemex’s more profitable exploration activities. There is speculation that the cost of the project could increase significantly from the $8 billion estimate due to the slump in the value of the peso against the United States dollar.

According to Welligence’s Montgomery, Pemex should concentrate on cost control, becoming more efficient and protecting its bottom line by not spending money on growth for growth’s sake.

“You can only keep funding your operations through debt for so long,” he told Bloomberg. “The worst is yet to come.”

Source: Bloomberg (sp) 

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