Mexico to cut $8.4 billion from budget due to low oil prices

It’s been six years since oil prices have plunged below the $50 mark and is proving to be untimely for Mexico who, just last year, opened their oil-sector for private company investments.

The energy move was an attempt to boost the country’s revenue by allowing Mexico to explore undeveloped fields and adopt newer forms of technology to increase production.

Instead of enjoying increased revenue, the drop in oil prices has forced the Mexican government to cut $8.4 billion from this year’s budget with most of the cuts being in the energy sector. Analysts are predicting that any potential energy partnerships made possible due to the new reform will likely still attract bids, but that they will be lower than expected.

It’s also anticipated that many exploration projects will be delayed and that Pemex will suffer a severe cash crunch which will slow the growth of employment. The length of time the price of a barrel remains low will have a direct hand-in-hand effect with private bidding on exploration, development and optimization this year.

Jorge Pinon, an oil and energy analyst at the University of Texas explains, “If we continue for the next year in the scenario that we’re currently in today, it will have an impact because Pemex, i.e. Mexico, will not be getting the same revenues that it’s getting out of their current production. That’s simple arithmetic.”

Pinon says in order for some Mexican oil projects to be profitable, the price of a barrel needs to be around $77, however, there are numerous deep-water projects in the Gulf of Mexico that are of interest to outside companies.

Deep-water exploration generally takes between three to five years to begin production and can still prove attractive to major operators. National Hydrocarbons Commission, the company that oversees bidding processes, says that there are 16 companies currently interested in 14 of Mexico’s shallow-water offshore projects that are up for bid this spring.

Mexican Treasury Secretary Luis Videgaray recently stated that bidding on unconventional projects would most likely be delayed. The Mexican government based their 2015 spending budget on $79 per barrel, however, due to the price drop, approximately $8.4 billion has been cut, mostly from major infrastructure projects including Mexico City’s high-speed rail system.

In reference to the government’s position, Dwight Dyer, a senior analyst for Mexico and the Americas at Control Risks in Mexico City says, “Given the very mediocre performance of the economy in the last two years, they were hoping for a better showing in order to arrive at the ballot box with something to show. This puts significant pressure on the PRI electorally.”

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