Is Mexico Ready For Life Without Its Sugar Daddy?

The autopsy has already begun.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

As the world’s attention is transfixed by every new development in Chapo Guzman’s latest audacious prison break, something much more important – and potentially more dangerous – is happening in Mexico. Yesterday the country held its first auction of offshore oil leases, bringing to an end 77 long years of state control over energy.

Until yesterday, Petróleos Mexicanos, A.K.A. Pemex, the state oil company, ran all oil and gas production in Mexico. But that has now changed. With it a new age has begun, one in which Mexico’s energy sector will finally get the funds it needs to extract the vast hydrocarbon resources it has at its disposal. It will also get the technology it needs for deepwater drilling in the Gulf of Mexico as private companies, in particular from the US and the UK, provide essential know-how and best practices. In short, it is a perfect win-win for all concerned…

Or at least it was supposed to be, until the bottom fell out of the global oil markets. Now the stagnant market is overwhelmingly in the buyer’s favor and yesterday, as Bloomberg reports, the buyers weren’t interested in buying:

Mexico’s first auction of offshore oil leases fell short of the country’s expectations as several majors decided not to participate.

Only two of the 14 shallow-water blocks released on Wednesday received qualifying bids. Exxon Mobil Corp., Chevron Corp. and Total SA passed on the country’s sale of territory in the Gulf of Mexico, 77 years after the country nationalized crude. The 14 percent success rate was less than half the 30 percent to 50 percent goal that the government said would be its minimum for judging the event a success.

The autopsy has already begun. According to The Economist, the problem is that old habits die hard: while Mexico’s government is still “having trouble letting go of the old mindset of full control, rather than letting the market decide,” oil majors still instinctively distrust Latin American governments, especially with the memory of Argentina’s expropriation of YPF from Spanish oil giant Repsol in 2012 still fresh in their minds.

According to some accounts, the Mexican government had set the minimum bids too high. According to others, the major problem is Mexico’s weak institutional environment. Investors are often loath to do business in a country with weak institutions and an “extremely vulnerable” rule of law, said petrochemicals analyst Miriam Grunstein. “Everything depends on just how promising the fields are: the bigger the opportunities, the greater the tolerance of weak rule of law.”

Whatever the reasons for yesterday’s flop, Mexico has little time to put things right.

“The big worry is what will happen to our state company (Pemex), because it is the only one we have,” said Grunsteain. “Whatever problems or dysfunctions it might suffer from, it is all we have… we still have no clear idea how we are going to guarantee our own energy security, and that is an issue of vital importance for the survival of this country.”

In 2014 ,Pemex’s oil revenues accounted for 33% of the national budget. However, the energy reform will drastically reduce that amount – and quite possibly very quickly. What’s more, some experts fear that the sudden jolt from functioning for over seven decades as a national oil monopoly to having to survive and thrive as a private company in a fiercely competitive global oil market could be so severe that Pemex’s very existence may well be on the line.

El Financiero columnist Dolores Padierna reported that the current odds are overwhelmingly against Pemex. While foreign companies are given huge fiscal incentives to invest in Mexican oil fields – including the possibility of 100% deductions on their operations – Pemex is being massively overburdened with taxes, precisely at a time when its revenues are shrinking. In 2016 the company will have to pay an additional one-off state dividend of roughly 30% while its competitors pay nothing. At the same time the company’s budget will be further slashed while its investment funds and liquid assets continue to shrink.

As operational conditions deteriorate, Pemex’s dependence on debt grows. In 2014 alone the company’s total debt expanded by $26 billion, with annual interest payments alone of over $3 billion. Meanwhile its total investments languished at around $17 billion – money it desperately needed to operate fields that could soon belong to foreign competitors.

Mexico’s public finances have already started to feel the pinch from the government’s energy reform, with a staggering 40% drop in first-quarter revenues compared to the same period last year, Padierna warns. Granted, the spectacular drop in oil prices played a major part in this but so, too, did the government’s new restrictions on Pemex’s ability to invest.

In the worst case scenario, Mexico’s sugar daddy of the last 77 years could become a financial deadweight. If the company goes into insolvency, it will be taxpayers (of course) that will have to pick up the bill – a bill that currently stands at a whopping $176 billion.

Even if the company doesn’t hit the walls, but rather slowly diminishes in size, performance, and market share – the more likely scenario – one can’t help but wonder just how and where Mexico’s current and future governments will find the funds to plug the gaping hole left behind by Pemex’s dwindling contributions. In such an event, Mexico may find that life without its fiscal sugar daddy is no easy thing. By Don Quijones, Raging Bull-Shit.

This sort of thing shakes the whole foundation of investing internationally. Read… The Biggest Energy Crooks

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  12 comments for “Is Mexico Ready For Life Without Its Sugar Daddy?

  1. Whatever “vast hydrocarbon resources it has at its disposal,” Mexico has a lot less than it had 77 years ago. (It had less then than it had a hundred years ago. That’s how it works … less, less always less.)

    A lot less and what remains costs too much to extract otherwise it would have been extracted already.

    Each barrel remaining in the ground is the ‘more expensive’ kind. As the cheapest goes there is a … um … ‘winnowing’ process whereby those who can afford to buy the stuff shrink along with what petroleum remains.

    To see the future of Mexican oil consider Kashagan:

    • Wolf Richter says:

      Same in the US. Hence the fracking boom and soaring production (even if companies go bankrupt doing it).

    • CrazyCooter says:

      Cantarell was the big field in Mexico, but PEMEX screwed it up pretty bad (my indirect understanding of the situation) and the decline rates are very high.

      Now that the easy money is gone, the fact they don’t know how to manage oil fields/production is plain for all to see. They have to privatize, but only because that is their best option (they will get even less revenue if they leave it state run). And they set bids too high with these facts in mind (greed), which doesn’t bode well for how they will behave after a large oil company comes in and sets everything up for them.



  2. Tye says:

    Short term, I’d guess mex recession and panic immigration, resulting in right-wing political victory in US. Where that goes probably more global war and oligarchy here. Long term, fossils are finite and absent a climate event that is clearly linked to global warming, peak oil prediction of vast price increases and economic seismic shifts. Maybe Mex is better off keeping the hydrocarbons in the ground until shortages emerge.

  3. Lee says:

    How many of you have actually been to Mexico?

    If you have visited Mexico have you travelled around, been in the rural areas, or away from the famous resorts around the country?

    IMO the place is even corrupt and more dangerous than it was 35 years ago. How many companies and foreigners have been burned by doing business there?

    Here are a couple of articles about a visiting professor who was murdered on his way to teach at UAG in Guadalajara, Mexico.

    This happened three years after I attended UAG on an post graduate exchange program.

    (Page 10)

  4. Paulo says:

    re statement: “we still have no clear idea how we are going to guarantee our own energy security, and that is an issue of vital importance for the survival of this country.”

    Join the club. The US is in the same situation but the people just don’t realize it yet. many actually believe they produce what they use. When the petro-dollar is replaced by other banking options (Silk Road, etc.) the dollar value will not be able to sustain such cheap and profligate use of other people’s energy.

    • CrazyCooter says:

      I would go a step further and point out that most people haven’t a clue that their entire style of living is underpinned by oil. Its abundance and cheapness is what drives everything.

      PBS did a really fair, balanced documentary on it a number of years ago with just a touch of climate stuff at the end (but it was on topic and not overbearing). Worth a watch if you don’t fully understand what I mean.





  5. Petunia says:

    The Mexican govt will find a reason to blame the US for the mismanagement. Mexico is an extremely rich country with a low population for its size. They have everything, cheap labor, agriculture, oil, minerals, silver, and two oceans. They have a gateway to the rest of the world. The corruption is home grown and that is why they are poor. Some things really are simple.

  6. Julian the Apostate says:

    Hmm…steal high and sell low. Rinse and repeat.

  7. ERG says:

    If Exxon-Mobil and Chevron are holding their noses, you can bet there is something seriously wrong with the terms and conditions of the bidding process. Not a surprise, given the way Mexico does things. Don’t be fooled, however; by hook or by crook, Mexican oil will be coming out of the ground. Along with Iranian oil (now you know why the Saudi’s will not reduce output), and the US continental shelf. The price of oil has nowhere to go but DOWN.

  8. Bookdoc says:

    I lived in Mexico City twice – once as a high schooler with my family and then later to open a franchise store. The corruption in Mexico is endemic and never ending. NOTHING happens in business without the requisite bribes being paid. American companies use an “expeditor” to assist with permits, visas etc. and they get a big expense account. If I were a business now, I wouldn’t even think of bidding as the government can easily nationalize you whenever it seems politically feasible and the courts are just as crooked. I feel for the fools that try it as they will lose in the long run

  9. Jyatt7 says:

    Mexico is a failed country, who wants to put up withnthem.

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