Pemex CEO: Govt Tax Reform is Key to Company's Revenues

NEW YORK May 07, 2007 (Dow Jones Newswires)

Mexico's state-owned oil company, Petroleos Mexicanos, or Pemex, needs the government to advance its tax reform plans to alleviate some of the firm's spending pressures, Chief Executive Jesus Reyes Heroles said Friday.

"The money left for Pemex after taxes has been clearly insufficient," Reyes Heroles said.

If the government can raise tax revenue from other sources, "then you establish a program to reduce resources from Pemex. Pemex cannot keep paying the amount of taxes that it is paying and at the same time going out to borrow," the official added.

The government took 54% of Pemex's revenues in taxes in 2006, down from 64% in 2005 after some minor changes in the tax system, but the tax take is "still too high, we need to reduce more," Reyes Heroles said.

Oil and related taxes and royalties account for 38% or 39% of federal government revenues.

The government is preparing a tax reform to be presented to Congress later this year that would increase tax collections from other areas of the economy that aren't related to Pemex.

The government's tax reform envisages increasing tax revenues by between 3% and 4% of gross domestic product over several years, which would lower the amount of revenues taken from Pemex by 1.2% of GDP, Reyes Heroles said.

This is the direction in which the government and Pemex are moving now, but "a lot of convincing has still to be done in Mexico," he said.

The tax take from Pemex is set in the government's budget, regardless of how actual performance pans out. That contributed to the net loss of 10.14 billion pesos ($931 million) reported in the first quarter.

Pemex had "two terrible months" in December and January, when the weather was really bad, including eight full days in January when offshore production was halted, Reyes Heroles said.

Longer-term, President Felipe Calderon, who took office Dec. 1, has ruled out privatizing Pemex, and plans to work within the existing constitutional framework to give the company more autonomy, Reyes Heroles said.

The company's tax burden means Pemex hasn't been able to invest sufficiently. Its oil production is falling, primarily as a result of a decline at the giant but aging Cantarell field, which has been the backbone of Mexico's production for many years.

Reyes Heroles said he wants Pemex to have more financial autonomy, allowing the firm to invest its revenues as it sees fit, and to see parts of the oil industry opened to more competition.

Previous attempts to widen the scope for private activity in Mexico's state-run energy sector have been quashed by Congress. Pemex's monopoly on all upstream and much downstream oil and gas activity is seen by many in Mexico as a question of sovereignty.

Reyes Heroles said the attitude of the current Congress is "very positive."

Some lawmakers are already talking about opening up transportation and refining industries to competition, or at least allowing Pemex to establish joint ventures such as the one it has with Shell at the Deer Park refinery in Texas.

Others have discussed allowing Pemex to sell shares equal to 30% of its capital.

"That's the kind of talk that we hear" from Congress, Reyes Heroles said.

Exploration and production, however, is a trickier issue.

"Very few (people) are really thinking that opening up in exploration and production is possible," Reyes Heroles said.

Much of the progress that Calderon can make will depend on what happens in mid-term elections and what margin of negotiations he will have for the second part of his administration, Reyes Heroles said.

The company needs to invest $33 billion per year, of which about one third would be operating costs and two-thirds would be investment.

That includes $2.2 billion investment in exploration per year to maintain production at 3.1 million barrels a day, achieve 100% reserve replacement ratio by 2012 or 2013, and bring the ratio of reserves to production to 10 years from the current 9.3 years, the executive added.

This year, Pemex's actual budget includes about 17 billion Mexican pesos ($1.6 billion) for exploration, out of a total budget of MXN138 billion.

Despite it's decline, Cantarell will continue to be one of the largest of Pemex's oil fields, with production declining to 877,000 barrels a day by 2015, Reyes Heroles said.

He estimated that the decline at Cantarell will average about 11% a year over the next six years, then slow to around 4%-5% per year.

"It is extremely important to manage this decline in the best possible way," Reyes Heroles said.

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