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Mexico’s Budget Assumes an Oil Output Surge Not Seen Since 1982

Published in Oil Industry News on Thursday, 12 September 2019

Graphic for News Item: Mexico’s Budget Assumes an Oil Output Surge Not Seen Since 1982

Mexico’s balanced budget for next year depends in part on its oil company boosting production by about 17%, something that the country hasn’t achieved in almost four decades.

Pemex, as the Mexican national oil producer is known, is expected to increase its output to 1.951 MMbpd on average next year, according to the 2020 budget plan that Mexican President Andres Manuel Lopez Obrador sent to Congress on Sunday evening.

That increase from July levels of 1.671 MMbbl means Pemex would have to reverse almost 15 years of consecutive production declines. In fact, the last time the embattled company managed to reach growth of that magnitude was in 1982, after the start of Cantarell — a giant deposit in the Bay of Campeche that propelled oil production in Mexico for decades and is now almost depleted.

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The government said the forecast is realistic because Pemex managed to stabilize its decline now and it was producing about 2 MMbbl just two years ago. The proposal includes 86 billion pesos ($4.4 billion) to help Pemex via tax breaks and other measures.

The budget is the first that Lopez Obrador, known as AMLO, sends to Congress with his full imprint. The government had just two weeks to prepare this year’s budget after he took office in December, which also left Congress with little time to debate it. Mexico’s lower house has until Oct. 20 to approve the revenue law, which must then be passed by the Senate by Oct. 31. The spending law, which only needs lower house approval, must be passed by Nov. 15.

Declining Output

Finance Minister Arturo Herrera said at a morning press conference on Monday the reason why he’s projecting oil output will pick up extensively is because after falling for years “that trend has been stopped, resources are being increased, and we’re adding funding of 86 billion pesos.”

Yet analysts warn the estimate is too optimistic and risks a shortfall in revenues next year. “The production target is highly optimistic given the maturity of Pemex’s portfolio and the execution risk of their new field developments,” said Pablo Medina, vice president of Welligence Energy Analytics in Houston.

Oil revenue accounted for about 16% of federal government income in the second quarter, according to finance ministry data. That’s down from more than 30% at the start of the presidency of AMLO’s predecessor, Enrique Pena Nieto, before a tax overhaul and an acceleration in the tumble for production.

“The risk is that oil income is below expectations, in a very similar fashion to what is happening so far this year,” said Juan Carlos Alderete, economist at Banorte. “Additional spending cuts would be implemented before increasing debt, so the drag to GDP that we have seen so far this year could extend further, particularly regarding public investments.”

It would cost about $4 billion in revenue, about 0.3% of GDP, if Mexico doesn’t increase output from current levels, said Barclays chief economist Marco Oviedo. The budget forecast a total deficit of 2.6% of gross domestic product and a primary surplus, which excludes debt interest payments, that’s equivalent to 0.7%.

Last month, BBVA estimated that Pemex would need an additional $20 billion in private investment each year in addition to the government’s rescue package of incremental tax breaks and cash injections, which has failed to impress investors.

A major concern is that the Dos Bocas refinery, an $8 billion project to be managed by Pemex, could distract it from its core business of drilling as oil production has halved from a 2004 peak and its debt has risen to $104.4 billion, the highest of any oil company in the world. Pemex has said it will not raise new debt this year or next. It risks a second downgrade after Fitch Ratings cut its bonds to junk in June.

“If Pemex missed the target, the government would have to adjust the fiscal plan for the year,” said Ociel Hernandez, an economist at BBVA. “Depending on the average oil price, Pemex revenues would fall, and thus risks of downgrades would persist.”

Oil production is not the only assumption in the budget that some observers see as too optimistic. It also forecast the country to grow between 1.5% and 2.5% next year. Analysts in a Bloomberg survey on average see an expansion of 1.5%, with none expecting growth to exceed 1.9%, which is also the International Monetary Fund’s forecast in July.

Source: www.worldoil.com

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