Pemex CEO faces tough road to fix world’s most indebted major oil producer

(Bloomberg) — National oil companies tend to be more bloated and less efficient than their private-sector counterparts. Yet Petroleos Mexicanos, with a workforce of about 128,000, stands out even among its state-owned peers. 

The amount of crude Pemex pumps per employee has slipped to just under 14 bpd, less than any other Latin American state producer except Petroleos de Venezuela. Brazil’s state oil company pumps nearly 48 bpd per employee. Colombia’s cranks out about 27. On the other side of the globe, Saudi Aramco — with a similarly sized workforce to Pemex — pumps more than 92.

It points to a massive challenge for new Chief Executive Officer Victor Rodriguez, tapped by President Claudia Sheinbaum to rescue the world’s most indebted major oil producer. And the implications extend beyond just the company and its bondholders. Pemex’s finances are deeply intertwined with Mexico itself, which means Sheinbaum’s efforts to fight crime, grow the economy and advance the rest of her agenda will hinge, in part, on fixing Pemex.

“Pemex needs someone to come in with a big broom to clean things up, but there’s no power to do so,” said Luis Maizel, a longtime Pemex bondholder and senior managing director at LM Capital Group in San Diego. “You need somebody who’s a good negotiator and a good politician, and in that regard Victor Rodriguez is really an unknown.”

Aside from a bloated workforce, the company’s woes include $100 billion in debt, drilling platforms that leave huge oil deposits in the ground, abysmal records on safety and the environment and refineries that bleed cash. Pemex declined to comment for this story.

Former President Andres Manuel Lopez Obrador dumped up to $80 billion into the company via capital injections and tax breaks over his six-year term. But little, if anything, improved, underscoring just how much of a drag Pemex’s inefficiency has become on the nation’s bottom line. 

Pemex’s problems make it all the more difficult for Sheinbaum, who is inheriting the widest public deficit in 40 years, to keep her promises to slash the shortfall and continue financial support for the state oil company.

Chief among the new CEO’s challenges will be slimming down its workforce, which hasn’t shrunk amid the company’s two-decade slide in production. 

Powerful unions have mostly kept Pemex from initiating mass layoffs. Over 80% of employees are unionized, according to company documents, and growing pension payments are adding to its financial burden.

There’s also been a raft of safety problems and production losses. A massive explosion at an offshore well last year left two dead and hundreds of thousands of barrels lost after a facility went offline for months. 

That was only one accident in a string of deadly mishaps, including a recent one at a Texas refinery. The company had nine worker fatalities in 2022, according to the most recent data available to Bloomberg. There were 12 the year before, including five people killed in an offshore platform accident. Exxon Mobil Corp. and Chevron Corp., which both produce more crude, recorded two deaths each last year, the data show.

Pemex’s financial troubles remain its overriding concern. Three months ago, the company posted its worst loss since the start of the pandemic. It’s scheduled to release its third-quarter earnings on Tuesday. As of the second quarter, Pemex owed a total of $99.4 billion to creditors. 

Given payment delays, “Pemex easily pays 30% to 40% above market rates for everything,” said John Padilla, managing director of IPD Latin America, an energy consultancy. “It’s just one more thing they have to stop the bleeding on.”

Thanks to aging equipment, Pemex leaves the majority of its oil reserves in the ground. For every 100 barrels it pumps in the Gulf of Mexico, it leaves about 77 behind while its competitors on average leave 40 to 50, according to data from upstream consultancy Welligence. 

Pemex’s production has been sliding for years. It produces about 1.8 million barrels of crude and condensates per day, around half its peak two decades ago. In a bid to reverse the decline, AMLO, as the former president is known, proposed a $13.8 billion plan to boost production at 23 new wells. 

While a few of those helped marginally increase output, the majority of the effort was a flop, Welligence co-founder Pablo Medina said. “Pemex is in a tough situation because its portfolio of assets is very mature — and only a few of them truly move the needle.”

Pemex’s Xikin offshore field near Tabasco state, for example, was estimated to hold around 190 million recoverable barrels in 2018. Since then, the company has slashed its estimate for how much it can pump from that field by 60%, to just 76 million barrels, according to data from Mexico’s national hydrocarbon regulator.

It’s not just in exploration and production that inefficiency is rampant. The company’s aging refineries — most of which were built in the 1920s and 1930s — are bleeding cash.

“You can’t expect a 100-year-old refinery to perform like a 20-year-old refinery,” said Adriana Eraso, a Fitch Ratings analyst in New York. “The number one thing the new administration needs to do is cut its number of refineries.”

While the average profit margin for refiners across Latin American is $2 to $5 per barrel, Pemex’s refining business costs the company about $9 in lost profits for every barrel produced on an annualized basis, according to Eraso.

Meanwhile, the former president’s bid to rescue Pemex’s downstream business by building a new flagship Gulf Coast refinery has all but imploded. The Dos Bocas facility is more than three years behind schedule and $11 billion over budget. 

Despite AMLO’s repeated promises that Mexico would produce all the fuel it consumes by the end of his term, it still imports more than half the gasoline it uses, according to Mexico City-based consultancy EMPRA. Dos Bocas only processed crude at 25% of its 340,000 bpd total capacity in August, processed zero barrels in the first half of October because of technical issues, and went offline entirely last Monday.

The state company’s many woes pose a hurdle for Rodriguez and Sheinbaum, who have suggested broadening Pemex’s scope to include new ventures in renewables and lithium exploration. Analysts say it should do the opposite: slim down and focus on the onshore and shallow water drilling it does best. Everything else, they argue, should be outsourced or offloaded.

“Pemex doesn’t have the cash to be spending on developing its efficiency,” Medina said. “There’s so much hidden value that can be extracted by working with the private sector.”