April 21, 2020 / 4:38 PM / 4 months ago

UPDATE 4-Mexico to shut some oil wells, refine more as prices crater

(Adds analyst quote, Tuesday crude prices)

By Raul Cortes and Marianna Parraga

MEXICO CITY, April 21 (Reuters) - Mexico’s highly indebted state company Pemex will halt crude production at newly drilled oilfields and refine more as it tries to ride out a falloff in global demand that has pushed oil prices into negative territory, the country’s president said on Tuesday.

It was not immediately clear how much production would be removed by the closure of new fields and whether it would exceed a 100,000 barrels-per-day (bpd) quota already agreed with the OPEC+ group of producing countries.

Pemex last year announced a plan to reopen and develop about 20 oilfields that could produce around 50,000 bpd of crude. Production so far achieved in those areas is only about 5,000 bpd, according to market sources.

“Why does the fall in prices not affect us so much? Because we invested last year in well drilling in new oilfields,” President Andres Manuel Lopez Obrador said during his regular morning news conference.

“Those new wells, now that oil is worthless, we can shut their valves and they don’t lose pressure.”

Mature fields would be harder to close down because Pemex artificially creates pressure below ground to extract crude from many of them, while oil flows naturally from the newer fields.

The price of U.S. West Texas Intermediate and Mexico’s flagship Maya crude closed on Monday in negative figures for the first time ever, reflecting lack of space for storing oil around the world as demand keeps falling.

The U.S. benchmark bounced on Tuesday with the June contract settling at $11.57 per barrel while Brent futures fell 24% to $19.33 per barrel.

Mexico’s Energy Secretary Rocio Nahle earlier this month said the nation would not cut output, but weeks later Mexico joined the OPEC+ pact by agreeing to a 6% production cut.

Consultancy Welligence earlier this month wrote in a report that by agreeing to a very small reduction, Mexico lost an opportunity to cut uneconomic output, mostly concentrated in its mature fields.

Such unprofitable output could lead to a record loss for Pemex this year.

“At a 20-dollar Brent, there is not a single oilfield in Pemex’s portfolio that remains profitable after costs and taxes,” said Welligence’s Pablo Medina.

MORE REFINING

Lopez Obrador said his strategy of boosting national refining was already paying dividends and that almost half of the country’s crude output was now being processed domestically.

He said Pemex is sending about 800,000 bpd of a 1.7 million-bpd production to domestic refineries, which would be able to process 1 million bpd next month.

“In May, we will be processing 1 million barrels per day,” Lopez Obrador said. “We will be able to produce more gasoline in Mexico and stop purchases of foreign gasoline. That will help us overcome the crisis produced by the price fall.”

Pemex data for February, the most recent month available, showed Mexico’s refineries were processing 580,400 bpd.

Experts have said that refining more of Mexico’s mostly heavy crude production would increase output of residual fuel so Pemex would end up with more fuel available for power generation, but not with more gasoline.

Pemex, which has more than $105 billion in financial debt, has been hit hard by the global oil price collapse, even though is among a reduced group of oil producers protected by hedging programs. Pemex’s hedge is this year covering about a quarter of its exports.

The company’s debt has been downgraded to junk status by two ratings agencies, and analysts expect the government will have to offer further financial support to keep the state firm afloat. (Reporting by Raul Cortes Fernandez; writing by Drazen Jorgic and Marianna Parraga; Editing Jonathan Oatis and Tom Brown)

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