It's been 20 years since Mexico's state oil company, Pemex, saw its crude oil production begin a steady decline from its peak of 3.4 million barrels per day. Its output is now nearing 1.4 mbpd -- 1.7 mbpd if condensates, a lighter type of hydrocarbons associated with oil production, are included -- with little indication of a rebound next year. While this is hardly good news for Mexico, it is a welcome non-contribution for its OPEC+ partners as they strive to keep discipline and maintain their aggregate production stable amid weak global demand.
Mexico joined OPEC+ in December 2016, agreeing to align with the group's production goals on the condition that it would not cut output beyond the natural decline of its oil fields. At the time, Pemex was producing 2.1 mbpd and had been losing an average of 100,000 barrels per day annually since its 2004 peak. Cutting production further was a non-starter, but supporting OPEC+ as it worked to rebalance the market after a two-year price war made strategic sense. Pemex's output was already 200 tbpd lower since the oil price war began in 2014 and its debt had ballooned 50%, from $64 in 2013 to $96 billion in 2016. For Pemex and the Mexican government, market stability offered a chance to improve the company's finances and address the country's fiscal challenges.
Last month, Mexico's Energy Minister, Luz Elena González Escobar, introduced the National Oil and Gas Strategy that, while light on specifics, outlined a new framework for Pemex's operations:
1. Pemex's mandate will prioritize social objectives over profitability, and domestic supply over exports.
2. Its corporate structure will be streamlined, eliminating functional divisions.
3. It will operate under a simplified, stable, and lower "welfare tax" regime, replacing three separate taxes.
4. Pemex will be allowed to partner with private companies on select projects.
In theory, a stable tax and the opportunity to bring private capital into its projects should improve Pemex's performance. However, the company's new social mandate -- which keeps oil products prices from increasing beyond inflation -- might conflict with its ability to increase production. And if history is any guide, these reforms are insufficient to reverse Pemex's production decline in the near term, unless it makes a major discovery.
Three previous administrations have tried reforming Pemex, to little avail. President Felipe Calderón Hinojosa (2006-2012) gave the company more control over its corporate structure and introduced "incentivized" contracts with service providers. President Enrique Peña Nieto (2012-2018) restructured Pemex again, endowed it with the mandate to be profitable, allowed it to take on more debt, and opened the door for partnerships with private companies as part of sweeping energy reforms. President Andrés Manuel López Obrador (2018-2024) provided tax relief and encouraged limited collaboration with private firms. The three administrations embarked Pemex on ambitious spending programs. None of these measures succeeded in reversing the downward trend in oil production, though Pemex has mitigated losses by increasing condensate output.
The core issue may not be geology, technical expertise, corporate structure, taxes, or even capital -- though all are critical -- but governance. Pemex operates less like a private company and more like a government ministry. Its CEO is a cabinet member who reports to the president. The Ministry of Finance sets oil products prices and controls Pemex's financial strategy, intertwining the company's goals with political objectives. Without greater autonomy to pursue its mission, Pemex will have a tough time achieving the operational and financial turnaround it needs.
For 2025, Mexico is unlikely to contribute with more barrels to global oil supply. Non-OPEC+ countries like Brazil, Argentina and Guyana are expected to increase their output, overcompensating for Pemex's declining production, and presenting a greater challenge to OPEC+'s efforts to stabilize oil prices.
Mexico's Pemex has great potential, which the new administration of President Claudia Sheinbaum (2024-2030) will seek to leverage. However, the company's inward orientation is unlikely to make 2025 the year of its stellar return to global oil markets. Within OPEC+, Mexico will continue to play a limited role.