Mexico’s president Andrés Manuel López Obrador is set to allow the struggling state oil company to resume joint ventures with the private sector next year, a senior government official said, in what would be a reversal of his previous fierce opposition to the country’s energy reform. The leftist president, who has put Pemex at the heart of his energy policy, is also set to revive private company exploration in the deep waters of the Gulf of Mexico, in an effort to kick-start investment and production and stave off the threat of a credit rating downgrade for the oil company. But while those two moves — potentially the biggest policy U-turn to date by a president who prides himself on his stubbornness — would be welcomed by investors, the government has yet to decide if it will fund an annual hedging programme that typically costs about $1bn and is used to shield public finances from oil price fluctuations, said the official with direct knowledge of the policy plans. With economic growth down to zero in the second quarter after a 0.2 per cent contraction in January to March, and business investment on hold, Mr López Obrador is under pressure to appease investors. A fierce critic of the historic 2013 energy reform which opened Mexico’s oil sector to private investment after eight decades of state control, the president stopped joint ventures with Pemex and put oil block auctions on hold when he took power last year. He argued that private companies had not met expectations. In a sign that his attitude to private oil investors may be softening, Mr López Obrador on Wednesday met Claudio Descalzi, head of the Italian oil company Eni, which last month began production in Mexico. But even with the prospect of what the government official said were “important discoveries” set to be announced shortly, heavily indebted Pemex is struggling to boost 15 years of production declines. The oil company’s weak finances and policy concerns put it at risk of a second ratings downgrade to junk that could force institutional investors to sell billions of dollars of debt. Analysts say it is increasingly obvious that Pemex cannot go it alone. “We are working with the president so farm-outs [joint-ventures] can start up in 2020,” said the official, who asked not to be named. “For deepwater, it would all be for the private sector,” he said, adding that that included Trion, in which Pemex has a partnership with BHP. Investors see Mexico’s largely unexplored deep waters as highly attractive, although they are risky and expensive. “If he makes this announcement [on joint ventures] soon, it could be like a one-two punch in boxing after the approval of the pipeline deal,” said Mario López, an analyst at consultancy Empra, referring to a row over gas pipelines that was finally settled this week. “It would be the perfect combination, sending the right signals to the world that he is more open to the private sector. It could clearly reduce the risk of a downgrade if he manages to announce it before the end of the year.” Government officials remain concerned about a potential downgrade for Pemex that could have a knock-on effect on sovereign ratings.
Mexico is hoping to renegotiate a new flexible credit line with the IMF: its current $86bn facility expires in November and the IMF has said it wants to phase out the credit line gradually. “The IMF doesn’t want to give us one any more but we think that because of the world environment, not having one would expose us too much,” the official said. Mexico is under pressure to unveil a market-friendly budget on September 8. The official said it would slash 2019 GDP growth forecasts to a similar level to the Bank of Mexico’s latest target of 0.2 per cent to 0.7 per cent, and could set a 0.5 per cent primary surplus goal for next year after this year’s 1 per cent target. As part of the budget sums, Mexico has typically hedged oil production as an insurance against price fluctuations — something that could put strained state finances under additional pressure. But no decision has yet been made on whether or not to go ahead with the trade — which has happened annually since 2001 — this year, and is usually under way by now. “It’s still being considered as the final adjustments [to the 2020 budget] are made. There is an analysis of past years, of what it cost. You could think it’s too much money [for a hedge] that you may not use,” said the official. Despite the internal debate, however, the official said that “what seems to be winning is that we will go ahead with it”.