MEXICO CITY (Dow Jones Newswires), December 22, 2008
Oil firms from offshore Louisiana to Middle Eastern deserts are cutting back during the price collapse, but oil-hungry Mexico is spending as if the boom is just starting.
Cash On Hand
Thanks to wise risk management and a political consensus to revamp the troubled industry, Pemex will not have to scrounge for funding. This month, the Energy Ministry said 2009 Pemex investments will rise 24% from 2008 to 209 billion pesos ($15.5 billion).
Back in July, Mexico used a series of put options to hedge the equivalent of two-thirds of its 2009 exports at $70 a barrel. The Finance Ministry says the institutions on the other end of these contracts are well established and will pay up, shielding Pemex's budget from spending cuts.
"The funding the (Finance Ministry) sends the state oil company for capital investment is protected," said local bank Banamex in a recent research report.
Pemex didn't reply to a request for an update on its 2009 spending plans.
The government also plans to spend up to $5 billion it had stashed during the oil boom on new infrastructure, including an oil refinery, to help keep the economy afloat during the global slowdown.
Furthermore, Pemex's tax rate declines as oil prices do, easing the blow of the price collapse. The company actually posted quarterly losses in 2008, partially due to expensive gasoline imports and a higher tax rate amid the price rally.
With cash on hand, Pemex is swinging into action as an administrator of massive oil-service contracts. The new drilling at the geologically complex Chicontepec basin will start in June, and last around three years.
"The fact that prices have fallen should not impede us from making these investments," said Carlos Morales Gil, Pemex's head of exploration and production, speaking on local radio last week.
In 2009, Pemex plans to drill 61% of new wells at Chicontepec, a major part of its strategy to get production back to 3 million barrels a day by 2015.
The new contracts at Chicontepec and elsewhere come as a relief to drillers, who have watched privately traded companies in such other markets as Canada trim spending to shore up balance sheets.
State oil firms in profligate countries, including Russia and Venezuela, also face spending cuts as export revenues dwindle.
"Pemex needs that production desperately. They are far behind in terms of production from what they had hoped to get to," said Weatherford International (WFT) CEO Andrew Bacnel during a recent conference call with investors.
In May, Weatherford won $870 million in contracts to drill 600 wells at Chicontepec. During the same call, Bacnel expressed concern about the company's projects in Venezuela and Russia, also top oil producers, but said the Mexican operations don't face any cuts.
Mexico stands to benefit from waning demand for the services and materials needed to get oil from the subsoil to export terminals. Many small- to mid-sized privately traded firms are cutting back amid low prices to calm nervous shareholders. This has pushed down day rates for the rig operators that Pemex hires.
Weatherford's 2008 drilling contract, for example, was much cheaper than a $1.4 billion contract for 500 Chicontepec wells that Schlumberger Ltd. (SLB) had signed with Pemex in 2007.
Politicians Back Pemex Budget
The risk of going from oil exporter to oil importer within a decade has shaken Mexico's lawmakers out of complacency. This fall, the country's three main parties agreed to give Pemex more money and autonomy under an energy reform led by President Felipe Calderon.
Copyright (c) 2008 Dow Jones & Company, Inc.
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