Pemex Budget Slashing to Continue as Minister Signals Austerity

  • Finance Minister sees possible cut around 100 billion pesos
  • Pemex budget cuts continue to exacerbate oil production losses

Mexico will continue to hack into the budget of its oil producer next year, a move likely to mean further financial duress and continued output declines for Petroleos Mexicanos.

It’s “reasonable” that the 2017 budget reduction for Pemex, as the state-owned company is known, will be around the same amount as the 100 billion pesos ($5.4 billion) cut this year, Jose Antonio Meade, the country’s newly appointed Finance Minister, said in an interview with Radio Formula.

“It is natural that the adjustment is maintained, given the fall in international oil prices,” Meade said, when asked if the government could repeat a similar reduction. “It is a reasonable deduction and in-line with what other oil companies in the world are doing given the complicated environment.”

Further subtraction by the Mexican government of Pemex’s already diminished budget would exacerbate the company’s challenge to reverse declining oil production, which has plummeted to less than 2.2 million daily barrels from a high of nearly 3.4 million in 2004. The company’s output may fall to about 1.6 million barrels a day by 2020 because it lacks the technology and funds to revamp aging fields, Morgan Stanley analysts led by Martijn Rats said in July. Pemex was forced to trim a planned $3.6 billion in investments for oil exploration projects this year following the budget cuts in February.

‘Significant Implications’

“It has significant implications for the company’s long-term viability,” Lucas Aristizabal, Senior Director at Fitch Ratings, said in a phone interview from Chicago. “Most budget cuts come from capital expenditure reductions, and if the company lowers its investment, it’s going to see a significantly lower reserve-replacement ratio and its production could continue declining.”

Pemex is working with the Finance Ministry on the final details of the 2017 budget and nothing is yet defined on a possible reduction, the company said in an e-mailed response to questions. The company is committed to continue making its spending more efficient given the fall in international oil prices, according to the statement.

Meade, who yesterday replaced outgoing minister Luis Videgaray, will submit the country’s 2017 budget proposal to the Chamber of Deputies today at 5 p.m. in Mexico City, he said. The budget package, which will require approval from Congress, will call for an important cut" to the country’s spending, he said.

“The package sends signals of responsibility” and “recognizes the difficult moment that we are facing in the global economy,” Meade said. “It is the package that we need in this difficult moment.”

Mexico’s economic growth is forecast to be between 2 to 3 percent next year, with an average exchange rate of 18.2 pesos per U.S. dollar, he said. That would represent an appreciation of about 2.4 percent from current levels.

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