Mexico Has Oil. Why It Isn’t an Energy Powerhouse.

State-owned Pemex is $100 billion in debt. Here, a Pemex oil platform off the coast of Mexico. (Cesar Rodriguez/Bloomberg)

National oil companies are meant to be cash cows for their governments. Not in Mexico.

Fully state-owned monopoly Petróleos Mexicanos lost $30 billion last year. Production has dropped by half over the past 20 years to about 1.6 million barrels a day. The company is $100 billion in debt despite serial cash injections from the Mexican treasury.

President Claudia Sheinbaum lately unveiled a recovery plan aimed at getting Pemex off the state dole by 2027 and adding 200,000 barrels of output by 2030. It will probably fail, as Sheinbaum clings to the nationalist philosophy of her predecessor and mentor, Andrés Manuel López Obrador.

“People were hopeful for Sheinbaum’s energy policy when she was elected last year,” says Duncan Wood, senior advisor at the Inter-American Dialogue. “A lot of that optimism has faded away.”

Mexico has rich potential petroleum resources to replace the dwindling elephant fields it struck last century. But they are either in deep water in the Gulf of Mexico or in a belt of shale reserves that stretches south from the U.S. border. Exploiting either will require capital and expertise, on a large scale, from private oil giants outside Mexico.

López Obrador’s predecessor, Enrique Peña Nieto, opened the door to such collaboration in 2013-14, with promising results, says Carlos Ramirez Fuentes, a partner at Mexican consultancy Integralia. “All the majors came into the country and committed billions,” he says.

López Obrador, elected in 2018, slammed it shut. “We are suffering from a perverse energy reform, which was approved for looting and theft,” he declared. He reined in Pemex’s own exploration in deep water and shale, too.

Sheinbaum has hinted at a more moderate tack, floating what she calls “mixed public-private contracts.” Such a mechanism would be “absolutely, entirely insufficient to attract big market participants,” Fuentes asserts. “It’s not the way this is done anywhere in the world.”

López Obrador further damaged Mexico’s attractiveness for investment with the “judicial reform”—allowing for the replacement of all the country’s judges by 2027—that he rammed through toward the end of his term, says Nuria Jorba, a debt analyst who follows Pemex for Vontobel Asset Management. This constitutional shift, which Sheinbaum has vociferously defended, will see all of Mexico’s judges elected, challenging the rule of law from investors’ point of view. “Investors with very long time horizons will be careful before engaging in this institutionally complex environment,” Jorba says.

Sheinbaum’s government did buy Pemex some time with slick financial engineering in late July. The finance ministry issued $12 billion in so-called pre-capitalized securities through an off-balance-sheet vehicle, funneling the cash into the ailing oil monopoly. Fitch Ratings upgraded Pemex debt by two notches to BB in response, while Moody’s put the company on review for an upgrade. The price of Pemex bonds maturing in 2047 has climbed 10% since mid-July to 77 cents on the dollar.

“This government vehicle provided much cheaper financing for the company,” Vontobel’s Jorba observes.

That Band-Aid won’t staunch Pemex’s bleeding for long without a path to increased production, which runs through cooperation with Big Oil. “The government is telling Pemex we will help you with your debts until 2027; then you’re on your own,” Fuentes says. “It’s not going to happen.”

Sheinbaum has won high marks globally, and a 75% approval rating at home, through her deft diplomacy with U.S. President Donald Trump. She isn’t using that political capital to shift from the worst parts of López Obrador’s legacy.

That’s a problem.