• Mexico's oil producer recorded $32 billion in 2015 losses
  • Suspending development offshore will further hurt output

Mexico’s state-owned oil company is taking deepwater development off its plate for now.

Driven to rip $5.5 billion out of its budget this year to cope with a lengthening market downturn, it makes sense that Petroleos Mexicanos would look first to its riskiest and most expensive operations. The company reported its 13th quarterly loss on Monday, bringing its total losses for 2015 to $32 billion.

By delaying offshore development, Pemex joins major producers around the world in canceling or postponing their most expensive projects until prices rebound. But for Pemex, which has seen its production decline for 11 straight years and faces another 5 percent drop this year, it could be an especially perilous strategy.

“It’s very possible that Pemex’s production will fall this year and, when you go into 2017 after not investing in 2016, declines could snowball and fall more," Pablo Medina, oil and energy analyst at Wood Mackenzie Ltd., said in a phone interview from Houston.

13th Loss

Mexico’s biggest company reported a $9.3 billion loss in the fourth quarter. It hasn’t recorded a profit since 2012. The company had more than $87 billion in debt at the conclusion of the third quarter and owes an estimated $7 billion to service providers.

On Monday, Pemex pledged to meet the government’s demand that it trim its 2016 budget by 100 billion pesos ($5.5 billion) by increasing efficiency and focusing on its most profitable projects. The producer will strive to maintain crude production, despite the budget cuts, "to the extent possible," said Jose Antonio Gonzalez Anaya, the company’s new chief executive officer, in a call with investors.

Pemex plans to shave $2.6 billion from its oil exploration and production budget this year, which includes deferring investment in deepwater, Gonzalez Anaya said. The company will also reduce investment plans in onshore and unconventional or shale fields, he said.

Falling Production

Pemex’s crude production averaged 2.28 million barrels per day in the fourth quarter, a 3.5 percent decrease from a year earlier. Given the reduction in Pemex’s investment in fields where production costs are high, output could fall as much as 100,000 barrels a day in 2016 if crude prices don’t rebound and the company is unable to partner with other companies to share costs, Gonzalez Anaya said.

“Pemex has been facing declining production over the last several years and our costs of production have also increased," Gonzalez Anaya said on a call with investors. “For every $5 that the price of oil falls, Pemex’s income falls by 20 billion pesos.”

The company expects the price of oil to be close to $25 a barrel this year, compared to the $50 they’d previously planned, according to the report. Pemex is capable of continuing to produce more than 2 million oil barrels per day at a profit with $25 oil prices, Gonzalez Anaya said.

Offshore Partnerships

Pemex says it’s not abandoning its ambitions offshore, it’s only deferring projects while crude prices remain near $30 a barrel. It still sees deepwater wells as a key part of its production growth in years to come.

The Mexican producer’s deepwater oil development projects, which were not expected to produce crude for as many as 10 years, will be key areas where the company seeks assistance in the form of private partners or investment, the CEO said. Mexico’s recent economic reforms allow private investors to help develop the nation’s energy resources.

"It doesn’t make much sense for Pemex to go to deepwater alone," Gonzalez Anaya said. "It makes more sense for Pemex to use all the flexibility that the energy reforms provide."

“What we are looking for is to use a new contract or joint venture or another method so that the exploration and production in deepwater that we are deferring, does go online within 10 years, but using a different method,” he said.

Pressure on Pemex’s budget this year will be exacerbated by the compounding debts owed to service providers yet to receive payments for work performed. Pemex owed a record 147 billion pesos to service providers at the end of 2015 and is working with Mexico’s Finance Ministry to find a resolution to the outstanding debt, Gonzalez Anaya said.

“I don’t want to minimize this process," the CEO said. "It’s going to be a difficult process. It is going to be a complicated process. But without question, it is going to be a process in which Pemex will come out of stronger in the future.”

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