Mexico’s struggling oil sector is in ‘the eye of the hurricane’

Lourdes Melgar Mexico oil ministry
Lourdes Melgar, Mexico’s subsecretary for hydrocarbons, at an event in December. Lourdes Melgar/Twitter

Mexico’s oil industry has been hit especially hard by the global downturn in oil prices.

And according to one Mexican official it seems likely that conditions will get worse before they get better.

In an interview with Radio Formula earlier this week, Lourdes Melgar, the subsecretary for hydrocarbons at the Mexican energy secretariat, said that the immediate future for the country’s oil industry was bleak.

“Mexico is entering a complex situation, where we are entering the deepest phase of the fall of petroleum prices,” she said on Tuesday. “It’s very probable that in the next days we could see even lower prices.”

Mexico’s crude oil mix hit its lowest price in 12 months this week, falling to $21.50 on Tuesday, down $0.67 from Monday. (The major benchmark crude prices, West Texas Intermediate and Brent, both dropped below $30 this week and seem poised to go lower.)

“We are entering the eye of the hurricane, and, without doubt, the next months will be complicated; we hope that this period passes quickly and that we are able to begin to see better prices toward the middle of this year,” Melgar said.

The downward spiral in oil prices has put the hurt on Pemex, Mexico’s state-run oil company.

According to El Daily Post, the company said a year ago that oil-production costs amounted to $23 a barrel. When prices sunk below that threshold this week, the company clarified that actual operating costs were about $10 a barrel on average.

However, El Daily Post notes, total costs per barrel produced (including capital expenses) for Mexican oil are, on average, higher still, at $29.

When asked if Pemex was losing money producing oil in the current environment, Melgar said that was “a simplistic way of of seeing things.” She noted that the company’s shallow-water petroleum production evened out losses it might be taking on deep-water production.

Crisis mode

However, the disparity between what Pemex is getting for its oil and what it costs to get it to the market has brought on what appear to be severe measures.

On Wednesday, the company announced that it would cut about 70 billion pesos (about $3.9 billion) from its budget (though it did not specify what would get cut) and get rid of 13,000 employees, many of whom are retiring workers who won’t be replaced.

Melgar said in her Tuesday interview that she foresaw an environment in which uncompetitive projects were closed, which some have interpreted as a sign that Pemex’s deep-water projects will bear the brunt of those cuts.

Slumping oil prices present more than an economic challenge to Mexico’s energy policymakers.

President Enrique Peña Nieto pushed through sweeping energy reforms at the start of his term in 2013, arguing that the partial denationalization of the oil industry would bolster the economy.

As conditions in the oil market have worsened, those reforms seem to have left Pemex in a predicament, caught between competing political forces within the Mexican government.

So while everyone can see the conditions in Mexico’s energy sector worsening, Pemex has been unforthcoming about exactly what cuts it will make.

“By acknowledging the company’s troubles it is undermining the Peña Nieto administration’s rhetoric about the expected benefits of energy reform,” argues El Daily Post’s Dwight Dyer.

“And that is why Mexico’s energy sector officials are in crisis mode.”

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