Mexico’s Pemex needs to follow key industry practices, Baker Institute experts say

Mexico’s state-owned oil and gas company could complement the country’s energy plan and help recognize areas of opportunity by implementing some key industry practices, according to experts in the Mexico Center and Center for Energy Studies at Rice University’s Baker Institute for Public Policy.

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The experts – Benigna Cortés Leiss and Adrian Duhalt – outline their insights in a research paper, “Laying the Groundwork for the Strengthening of Pemex,” The paper examines Pemex’s circumstances and analyzes factors that shape how oil and gas companies weather market volatility.

“A best-case scenario would involve a healthy and thriving national oil company in Mexico that leads to strong development of the oil and gas industry and encourages the injection of capital and expertise from multiple private companies,” the authors wrote.

As a candidate and now as president of Mexico, Andrés Manuel López Obrador has vowed to strengthen Pemex, the authors said. “Since taking office on Dec. 1, López Obrador’s policy decisions have made clear that Pemex will be the lead actor in the country’s energy sector,” they wrote. “The government’s recently announced capital injections to Pemex and the cancellation of oil and gas auctions, the latter of which were the venue for companies to enter the Mexican upstream industry during the previous administration, are oriented to serve López Obrador’s goals for Pemex.”

But López Obrador’s recent signals on foreign direct investment in Mexico’s upstream raise questions about whether the country can reverse a decline in domestic production, the authors said. That’s particularly true if it means Pemex and private firms won’t pursue a concerted joint effort, the authors said.

“Regardless of Pemex’s influence on the domestic hydrocarbon industry, the situation in Mexico cannot be delinked from the dynamics of crude oil prices, investment flows and production in the global arena,” the authors wrote. “After all, Pemex profits from — and is affected by — its participation in international energy markets.”

Strengthening Pemex requires developing a robust portfolio of projects as well as significant capital injections, the authors said.

“Partnerships with private companies could facilitate this process,” they wrote. “Pemex does not need to allocate funds for 100% of projects nor does it need to bear 100% of the project risk. Pemex could effectively diversify its portfolio by participating in multiple projects with different partners, benefitting from technology transfer and having a more efficient capital allocation.”

A diversified portfolio would allow Pemex to be better prepared to hedge oil price volatility like its peers including BHP, BP, Chevron, Equinor, ExxonMobil and Shell, the authors said. “The recent downgrade of Pemex debt renders access to capital more expensive and difficult, while private companies that are willing to join as partners in farmouts, participate in bid rounds and/or take equity interest in projects can reduce the cost of entry for Pemex and ultimately increase Mexico’s production and proved reserves,” they wrote.