The global oil crisis, challenges and opportunities for Petroleos Mexicanos

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PANEL 6 WEDNESDAY MAY 6, 2020 "THE GLOBAL OIL CRISIS, CHALLENGES AND OPPORTUNITIES FOR PETROLEOS MEXICANOS"

PARTICIPANTS Moderator:

Engineer

Abelardo

Sánchez

Founding

Partner

José

Araiza -

-

TOPICS

Tanis

Technology & Services Lic.

Rosanety

Independent

Barrios

Analyst

of

the

Energy Sector Engineer Consultant

Ramses and

Pech

-

Analysts

of

Energy and Economy - Grupo CARAIVA Engineer Consultant

Gonzalo in

Energy Sector

the

Monroy

-

Mexican

1. Global oil crisis 2. Which are the challenges and

opportunities

for

Petroleos Mexicanos?

3. Which is the best scenario for Petroleos Mexicanos?

"THE GLOBAL OIL CRISIS, CHALLENGES AND OPPORTUNITIES FOR PETROLEOS MEXICANOS" At the beginning of April, oil reached an all-time low, at around 2 dollars in the market and on April 12, OPEC promoted an agreement to reduce world production to 10%, causing companies to report equipment losses worldwide. Economists

estimate

that

the

fracking

industry

could

be

reactivated when oil can reach a minimum of 30 dollars, but there are fields whose production costs exceed 46 dollars, the breakeven point is believed to be around 51 dollars.

There were already a series of important pressures since last year, especially due to the issue of global warming, where there were structured protests by the financial sector on the conditions that the industry was required to finance.

At the end of 2019 crude oil production in the United States represented 18% of the total, which is located above the two main producers that are Russia and Saudi Arabia in terms of supply, a report by the International Energy Agency was that the Asia and Oceania region represent the driver of energy demand in the world.

At the arrival of the COVID-19 pandemic, the world begins to take security measures and therefore the Agency estimates that by April the global demand for crude oil had decreased by 30%, after the agreement of the OPEC in the reduction in production is reflected in the month of March since there is an increase in production, especially in Saudi Arabia, which worsens the situation of the industry causing the increase in prices.

"The world still depends on fossil hydrocarbons for the next 20 years, until the year 2035, according to projections, the demand for oil will stabilize and the consumption of natural gas will increase, this is important because 33 percent of energy globally depends on hydrocarbons", said Engineer Ramses Pech.

The world realized that it needs the economically active population for it to have growth and for a business to exist, now that it is in confinement there is no flow causing the economy to stop. Given the confrontation of COVID-19 in energy demand, fuels contracted between 40 and 50% and in Mexico it is between 55 and 70% in projections, this identified that Mexico depends on geopolitics in terms of storage, as well as of the nation's strategic reserves compared to China, Japan, the United States, and other countries. The OPEC trade agreement is for countries not to deepen into an economic recession due to the disadvantage it may have when letting China out, but China today reports an increase in exports of 3.5% and imports a decrease of 14.2 %, The United States reported that from April 24 to May 1, 200 thousand barrels decreased, which was producing at the beginning of this year 13 billion barrels and today is below 12 billion barrels, they sent 165 thousand barrels to the Refinery, 4 million of storage decreased and gasoline inventories have already decreased by 6.8, indicating that the United States economy is reactivating, however Mexico has a 45-day lag and there is no money circulation, if the money is not circulating, how long will there be to maintain the country's economy?  The economy is not reopened by a presidential decree or a statement by any political leader from anywhere in the world, but the question that arises is whether this is a destruction of demand, taking into account the numbers that are already reflected, also there is talk of a destruction of supply where companies will be liquidated, assets will be selected and surely much production will no longer be registered.

On the other hand, you can see how a bottleneck is brewing in refining, speaking of Mexico, it was observed that in the second week of April, diesel consumption had fallen by 60% and this helps to understand industrial activity, especially in the economic heart, mainly in the shallows and in the north of the country.

The world's refineries are lowering their production, several refineries are being closed due to the excess that exists, an essential part is inventories at the land level, since they are reaching the top, if demand does not rise in a sustained way this will cause a great uncertainty which would lead to prices not rising much, having prices of 30 dollars maximum, between now and the rest of the year.

"The great illusion of the OPEC agreement was that with 30 million they reached the demand, and it was not so, the demand continues to fall. Still today entering the second week of May, the demand continues to drop, it seems that it stabilizes with some stirrups of some promises of vaccines, but we are still far from having the security of returning to the streets�, said Engineer Gonzalo Monroy.

The oil industry worldwide is contracting, however Mexico does not seem to look like this, in a country it is not about energy sovereignty being self-consumption, that does not make any sense in a globalized world, which you must do is create the availability of energy on the spot and at affordable prices.

Today there is no natural gas policy in Mexico, as this country is going to be profitable in a price environment that exists today, this is an opportunity where Pemex could carry out many activities that would help it generate value.

It is convenient for the nation to have Pemex as a partner, because the primary balance, which determines the contribution of the company to the expense of the federation. During the first quarter of 2020, Pemex delivered a total of 177,722 million in fiscal contribution to the federal government, as a result of its substantive activity.

Something that is proposed is to stop using Pemex as petty cash or to withdraw from Pemex the reserve of tax rights so that it can pay the debt that it has accumulated from suppliers, since it is known that Pemex operates with financial debt.

"This is the challenge that Pemex has in this new world, with these demands that it is very difficult for it to meet, especially under the logic of only dedicating itself to producing without regard to financial results", said Lic. Rosanety Barrios.

In conclusion, Mexico must be inserted in the global conversation on Oil and Gas and have a long-term energy transition, ceasing to create external plans, since there are opportunities in petrochemicals as well as in renewables.

You must rethink what you want to get from

Pemex,

you

should

rethink

the

relationship between Pemex and the state, since it can be reborn in a different way from

what

is

already

known,

because

production is 1.7 million barrels of oil, but that loses 35 billion dollars, this is not a good

LIC. ROSANETY BARRIOS

Independent Analyst of the Energy Sector

business or a good value for the resources of mexicans and it is there that the question arises: What is best for us? A Pemex with 1.7 million that has losses or a Pemex of a million barrels that generates profits and that can finance itself, in this question is where much of what the feasible future of Pemex is hidden. There is a future for Pemex, there is a future for Mexico, only the business model must be changed.

ENGINEER RAMSES PECH Consultant and Analysts of Energy and Economy - Grupo CARAIVA

COMPLETE PANEL www.expoilandgasmx.com/expo-virtual *Replays of the panels are available on our

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and

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ENGINEER GONZALO MONROY Consultant in the Mexican Energy Sector

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NUEVO LEON STATE BUSINESS TABLE

Lic. Jorge Gorozpe - Director of Energy Development - Secretary of Economy and Labor of the State of Nuevo Leon Dr. Amado Villarreal - Director - Energy Cluster of Nuevo Leon A.C.

Since last year, it has worked with energy efficiency functions, since it is one of the most worrying issues for the state.

What is the role of the Directorate for Energy Development?

from the Energy Reform, the state of Nuevo Leon realizes that it is important to have an area that can contemplate the energy sector in the state and an energy direction

is

created

that

depends on the undersecretary of industry, commerce and service. The role of the Directorate is to promote the energy issue in the state, several initiatives have been developed

in

the

development

of

renewable projects, links with companies seeking energy projects.

hydrocarbon or renewable issues and promote business, in addition to local

The direction of energy promotion is born

promotion

They support projects of all kinds with

supply with national and local projects.

What is the Energy Cluster and its functions?

The Nuevo Leon Energy Cluster is a civil association

that

companies,

universities

brings

together and

the

government. It has a very important link with the government of the state of Nuevo Leรณn through the Directorate of Energy Development. The idea is to form an alliance of a cooperation scheme between the

private

universities.

public

sector

and

the

The Cluster is divided into three sectors: electricity, hydrocarbon and renewable energy sector, which is known as clean energy, this makes up the Cluster, but they are also made up of committees, in each committee there are only issues, problems, areas of opportunity and seek to increase the competitiveness and productivity of the energy sector of the state of Nuevo Leon.

They bet on projects that have to do with the strengthening of small and medium-sized companies, the work of innovation, entrepreneurship, all this together, currently has 64 incorporated companies, in addition to universities and research centers that go to a close level of 80 institutions that perform synergy.

Which actions should be generated for the energy sector?

The main problems that it faces in regulatory terms is with the federal government, since many of the policies on the subject of hydrocarbons and the electricity sector are not aimed at strengthening the market, since it is more inclusive, that is, there is participation of business.

Changing policies in favor of energy security inhibits investment, the fact that energy auctions are stopped sends signals to stop the participation of the private sector.

An agreement that CENARSE took out in terms of stopping the dispatch of the connection of renewable energy plants and connecting them to the national electricity system, with a justification in terms of instability in the production system of a fall due to the demand for the consumption of electrical energy at the national level.

This type of measures is something that primarily favors these two parastatal companies and limits the greater participation of the private sector, this is a huge challenge since it involves convincing the authority that there is greater participation of the private sector so that there is greater access to energy to more competitive costs and in the end who benefits the most from this are those who have the least.

Which are the actions that are generating or should be generated to boost energy efficiency in the state?

It is difficult to find to bring the baseline of energy consumption, there is not much information and it is where to work.

There is a project that was the winner in the Cluster of an application where they can know the energy consumption of a house or industry, with this we help to know where the point of failure is and that investments can be made to develop an efficiency project energy.

Which are the business opportunities or projects that you currently have?

In the state of Nuevo Leon they have been promoting the issue of energy efficiency, due to the current situation it leads them to reduce costs so that companies can see a window of survival and the opportunities are in the technologies and applications that allow the energy saving: Distracted generation On-site power generation Solar thermal energy projects Projects for residential use, where solar thermal energy is used Solar and photovoltaic energy projects Applications to make infrastructure performance Energy saving projects Energy storage Transition from gasoline to natural gas Which are the parameters to be a reliable supplier?

Among the parameters is the experience of the provider of previous projects, such as its performance in the applications and solutions it has developed. Also knowing the users to whom you have provided services, to identify a good provider has to do with previous experience and the quality certifications you have, these are essential elements.

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