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The situation in Mexico’s oil industry continues to rapidly disintegrate
as falling oil production and rising costs resulted in an $18 billion
fourth-quarter loss for the state-run oil company, PEMEX. Part of the
reason for the huge financial loss at PEMEX was the fall in the value of the
Mexican Peso. While PEMEX’s costs are in Pesos, it sells crude oil and
purchases petroleum products in Dollars. Because the Mexican Peso
declined 8% versus the Dollar, it put a huge strain on the company’s year-end
financials.
Regardless, Mexico’s oil production continues to fall due to the natural
decline from resource depletion. However, as Mexico’s oil production
falls, its net oil exports have dropped significantly as well.
Thus, falling net oil imports translates to less revenue for PEMEX.
According to BP’s 2017 Statistical Review, Mexico’s net oil exports hit a low
of 587,000 barrels per day (bd) in 2016, down from 1,867,000 bd in 2004:
While Mexico’s oil production declined from a peak in 2004, its domestic
consumption has remained basically flat. Which means, Mexico’s
net oil exports have fallen by more than two-thirds in just 12 years.
Unfortunately, it looks like Mexico’s oil production will be down another 10%
in 2017.
The next chart from Mazamascience.com shows Mexico’s net oil exports since
1960:
Mexico’s total oil production is shown in the grey area, while consumption
is displayed by the black line. The green area reveals the country’s
net oil exports. As we can see, Mexico’s net oil exports peaked in 2004
at 1.86 million barrels per day (mbd) and are now likely below 0.5 mbd.
Falling net oil exports are a death-knell to the Mexican government because
it receives a lot of its revenue from PEMEX.
Furthermore, the United States has received a lot of its oil from Mexico
over the past three decades. However, this has all changed in the past
two years as Mexico has switched from being a net exporter to a net importer
of crude oil and petroleum products from the United States:
Mexico’s net oil and petroleum product exports to the United
States peaked in 2006 at 1.6 mbd and had turned into net imports of 603,000
bd in December 2017. Again, this is terrible news for PEMEX
and the Mexican economy. While the United States can print Dollars to
its heart’s desire, as it is still the world’s reserve currency, Mexico does
not have the same luxury.
If we take a look at PEMEX’s financial statements, we can spot the
unfolding trouble:
As mentioned at the beginning of the article, PEMEX suffered an $18
billion net income loss in the fourth-quarter of 2017. Not only did
PEMEX’s cost of sales increase significantly, but it also suffered a $7.6
billion Foreign Exchange loss due to the depreciation of the Peso.
Now, the next table shows PEMEX’s Cash Flow. There are two important
highlights in the table below:
PEMEX’s interest expense was $5.9 billion for 2017. However, their
total net interest expense was $5.4 billion. That is one hell of a lot
of money to pay those who hold your debt. The second important figure
is the cash flow from operations of $2.9 billion was less than the $4.3
billion in capital expenditures. PEMEX spent $1.4 billion more money in
producing their oil and gas than they received from operating cash. Their
negative free cash flow and other items pushed PEMEX’s long-term debt to a
record $95 billion in 2017:
The more debt PEMEX adds to its balance sheet the higher will be its
annual interest expense. And, to make matters even worse, Mexico’s oil
production will continue to decline right at the time its debt is
exploding. It will be impossible for PEMEX to pay back its debt, so it
is logical to assume that the state-run oil company will likely go bankrupt
in the future causing extreme difficulties for the Mexican Govt and economy.
Now, I am not singling out PEMEX or Mexico’s oil production as what’s
going wrong in the global oil industry. ALL public and state-run oil
companies will go belly-up… it’s just a matter of time.
We must remember when Egypt switched from being a net exporter to net
importer of oil; the Arab Spring occurred the very next year:
With the rising food costs during the 2008-2009 inflationary period in
Egypt and on top of the country becoming a net importer of oil in 2010, the
government was powerless to deal with the crisis.
Lastly, as Mexico’s oil production continues to decline, its state-run oil
company, PEMEX, will likely default on its debt. This will cause severe
problems for the government and the domestic economy. However, what
happens in Mexico as it pertains to oil, will not stay in Mexico. The
U.S. and global oil industries are in serious trouble. While these
problems won’t impact the world this year or next, it will become a disaster
over the next decade.
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