No Cure for Crippled Latin American Crude Giants

Pemex has nearly $100b in debt.Pemex has nearly $100b in debt.

For the three titans of Latin American oil -- Pemex, PDVSA and Petrobras -- last week’s OPEC-driven price rally will not be enough to halt a slow descent from the ranks of international crude heavyweights.

Even as news of the group's 1.2 million-barrel-a-day output cut spurred the steepest three-day oil gain in 15 months, the biggest Latin American producers remain hobbled by financial, political, technical and structural problems, Bloomberg reported.

Mexico and Brazil have been turning to outside investors to help boost output, with Mexico on Monday offering up stakes for the first time to drill in its deep waters.

“Higher prices are always a good thing but these are state-owned quasi-companies that have tremendous social obligations to their countries and little freedom to take rational cost-cutting steps,” said Thomas McNulty of Navigant Consulting Inc. 

Unlike North American explorers who were free to fire workers and abandon costly, high-risk projects as crude collapsed, the Latin companies operate under close bureaucratic controls that hinder their ability to respond to market forces.

“US companies have to pay taxes, sure, but they don’t have to build schools.”

Petroleo Brasileiro SA said it is not changing its business plan in response to OPEC’s production agreement. Mexico’s Energy Ministry said it will not change its auction plans because of OPEC. 

Once the world’s third-largest oil producer, Mexico now pumps less than the US state of Texas, thanks to dwindling output from the once-gargantuan Cantarell field and lack of investment in new drilling technology.  Pemex, whose nearly $100 billion in debt is more than twice that of Exxon Mobil Corp., needs crude to fetch $80 a barrel to $100 a barrel to escape it downward spiral.

PDVSA, facing $6.4 billion in debts coming due next year, will not get much relief from its liquidity crisis, despite the nascent crude rally.  Petrobras, which has been enmeshed in Brazil’s biggest corruption scandal, is in a better position to take advantage of rising prices than it was in 2011 when crude surged past $100 a barrel. The previous Brazilian administration of Dilma Rousseff pressured the state-controlled company to keep domestic gasoline and diesel prices below international levels in an effort to contain inflation, costing an estimated $35 billion in fuel subsidies in the middle of a commodities boom.

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