Mexico Cuts Oil Spending to Nine-Year Low as Foreign Firms Enter

  • Pena Nieto proposed $17 billion in 2016 Pemex investment
  • Mexico not considering cutting oil output to boost price

Mexico plans to spend the least in nine years to explore for oil, relying instead on foreign companies to help reverse a decade-long decline in production.

Even as President Enrique Pena Nieto announced late Tuesday that Mexico would reduce its investment in Petroleos Mexicanos by 20 percent in 2016, Finance Minister Luis Videgaray said the company has no plans to pump less to support oil prices that have plunged by more than half in the past year.

The Mexican state-owned oil producer, which has lost money 11 quarters in a row, is for the first time in 77 years making room for foreign firms to bid for the right to drill in Mexican territory. The reduction of the investment, which was cut $4.1 billion this year amid depressed oil prices, “forces Pemex to accelerate the process of forming partnerships,” according to Alejandra Leon, Mexico City-based analyst with research firm IHS Energy.

“Pemex’s new framework forces it to consummate its independence and to generate its own resources,” Leon said. “This changes its investment strategy.”

Joint Ventures

Pemex contends that the formation of 10 joint ventures with private companies at declining fields this year will boost output that has fallen to its lowest levels since at least 1990. Mexico forecasts oil production of 2.25 million barrels a day in 2016 and a price of $50 per barrel, according to the budget proposal.

“The main challenge for economic growth is the fall in the oil price and oil production,” Videgaray told reporters after presenting the government’s 2016 budget proposal to lawmakers. Mexico’s energy policy “is destined to increase oil production,” he said.

The overhaul of Mexico’s energy industry ended Pemex’s production monopoly dating back to 1938. The approved legislation called for a transformation of the company to operate more like a private entity, which explains the budgetary cuts for 2016 as Pemex will be responsible for generating a greater part of its income, Leon said.

Pemex has $86 billion in debt as of June 2015, according to a company presentation posted to its website. The company is expected to announce a restructuring to its pension liability plan for unionized workers this week, a move anticipated to free up additional capital.

No Cuts

Mexico is not considering cutting production to boost oil prices, Videgaray said. Iran’s Oil Minister Bijan Namdar Zanganeh said Tuesday that Mexico is willing to work with the Organization of Petroleum Exporting Countries, or OPEC, if the group tries to stabilize crude markets amid a global supply glut and slide in prices, citing a conversation with Mexico’s labor secretary Alfonso Navarrete Prida.

“One of the fundamental purposes of this reform was precisely for Mexico to produce more oil, to take better advantage of its natural wealth that’s the property of the nation and all Mexicans,” Videgaray said. “That’s the objective of oil policy. It’s not foreseen that Mexico would participate in any mechanism to reduce production.”

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