Mexico Cuts 10,000 Oil Service Jobs as Pemex Funds Fall

More than 10,000 people working at Mexican oil service companies were laid off this week as state-owned Petroleos Mexicanos cut contracts in the face of the global slump in crude prices. More job losses are expected.

Most of the companies are based in Ciudad del Carmen, on the Campeche Bay in the Gulf of Mexico, and were told this week that contracts wouldn’t be renewed with Pemex, as the world’s ninth largest oil producer is known. Job losses could rise to 50,000, Gonzalo Hernandez, secretary at the Ciudad del Carmen Economic Development Chamber, said in a phone interview.

“The city is in shock,” Stuart Hill, managing director of Xperto Offshore in Mexico, said in an interview from Ciudad del Carmen. “We were told it was based on Pemex’s budget reductions.”

While a Pemex official said the contract cancellations won’t reduce oil output, they come as some U.S. producers bail out of long-term contracts for drilling rigs as prices slide below $50 a barrel. Oil is trading near the lowest levels since April 2009 amid concern that a global supply surplus will persist this year.

Oil production at Pemex fell for the 10th straight year in 2014. The company posted a net loss of about $4.4 billion in the third quarter, its eighth consecutive quarterly loss.

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The slump caused its tax payments to drop, prompting the finance ministry to withdraw 50 billion pesos ($3.4 billion) from Pemex on Dec. 26. This was to “make management of public-sector finances more efficient,” according to a filing from the company at the Mexican Stock Exchange.

Some contracts weren’t renewed because the services are no longer required, according to a Pemex press official, who asked not to be named, citing company policy. The cuts, the number of which has been exaggerated, aren’t related to company finances and no Pemex employees were laid off, according to the official.

An internal Pemex memo issued Jan. 2 and obtained by the Mexico City-based El Financiero newspaper called for the termination of all outsourcing and technical personnel because of cost cuts.

“Without question there will be some temporary readjustment,” Economy Minister Ildefonso Guajardo told reporters today in Mexico City.

Rig Terminations

Pemex drilled 19 exploratory wells through the first 10 months of last year, less than a quarter of the target, according to the National Hydrocarbons Commission.

Share prices of oil service companies have plummeted in recent months as crude fell and contracts were canceled. West Texas Intermediate crude fell below $50 a barrel this week, the lowest since April 2009.

Weatherford International Plc, which does business with Pemex, has slid 56 percent since July 25.

Helmerich & Payne Inc., the biggest rig operator in the U.S., said it had received early termination notices for four contracts there, while Pioneer Energy Services Corp. said four U.S. rigs have been canceled early.

President Enrique Pena Nieto passed legislation in 2013 to open Mexico’s energy industry to private investment and allow foreign drillers to pump Mexican crude for the first time since 1938.

Pemex responded by reforming its exploration and production division in November to improve efficiency.

The layoffs “seem to come from a combination of falling oil prices and the effects of the energy reform,” Xperto Offshore’s Hill said.

“Everyone is scared” of further cuts, he said.

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