Pemex: Headed For a Messy End?

Petroleos Mexicanos, the state-owned oil and gas company of Mexico, isn’t known for aggressive spending or resource development. Yet it has newly budgeted over $12 billion for exploration during 2009-12, and plans to spend $19.5 billion this year alone on exploration, refining and chemicals, according to Bloomberg.

The company is attempting to offset rapidly dropping reserves at its main fields, which were once among the world’s largest. It has discovered some smaller fields which may help give it a buffer, and is hiring outside companies to drill. So far, so good. But all is not well.

Rather than tapping into the cash that it made in the years leading up to the price spike of 2008, Pemex is instead tapping debt markets for about $10 billion, and is issuing bonds at home for more. Unlike private companies like Exxon or Shell, Pemex doesn’t keep much cash of its own on hand; the Mexican government instead treats the company, Latin America’s largest, as a sort of giant piggy-bank for social spending.

That’s hardly unusual for state companies, but in Mexico the state takes the lion’s share, in turn driving much of its own spending. As a result, debt levels at Pemex have been growing over the years. Although its debt fell 6 percent last year, its latest issues will boost the total well over $50 billion, at a time when revenues, slightly higher at over $70 billion, are falling yearly.

Unwise operating practices are also standard at Pemex. The company’s aggressive injection of nitrogen into existing fields has made production shrink even more quickly than it would have otherwise, some contend; overall, output from the company’s fields is dropping much faster than government estimates.

All of that adds up to trouble. Mexico is already grappling with a nastry contraction due to the recession. The government, traditionally dependent on oil and gas revenues, will almost certainly try to wring Pemex for every cent it has in order to avoid nasty short-term consequences — without a view to the longer-term picture. A protracted downturn could make this picture even worse.

Over at Energy & Capital, author Chris Nelder (who I interviewed here) warns that Mexico may be on the precipice, pointing to a “state of undeclared war” between the government and drug cartels. Civil unrest resulting from the bad economy and idle migrant workers won’t help. Pemex itself was already attacked by rebels in 2007, and one of its facilities was the stage for some recent cartel killings .

The worst-case scenario is Mexico’s government toppling, a frightening scenario that the United States, with its thousands of miles of border, would almost certainly try to prevent. But even if the state survies in its current form, Pemex, caught between social demands and the realities of its reserves, looks to be in for some unpleasant times.