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Oliver L Campbell :  Accumulated Losses of PEMEX

 

 
PEMEX does not prepare its accounts in accordance with the Generally Accepted Accounting Principles (GAAP) that US companies use, nor with International Accounting Financial Reporting Standards (IFRS) adopted by many companies outside the US, including PDVSA. Mexico has set its own standards. The auditors write the following in their Opinion (translated from the Spanish):

We conducted our audits in accordance with auditing standards generally accepted in Mexico. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and are prepared in accordance with Mexican Financial Reporting Standards (FRS).

It is both unusual and surprising that the auditors make no reference in their Opinion to the large losses incurred each year. This is only mentioned briefly in the notes to the accounts.

PEMEX report their financial results in pesos but provide US dollar figures in their Annual Report. PDVSA report their financial results in US dollars. The big difference is in sales--in 2011, PEMEX sold US$ 55.7 billion in the domestic market and US$ 55.3 in the export market, while PDVSA sold

US$ 1.7 billion in the domestic market and US$ 122.3 billion in the export market.

As regards the accounts, the rules for establishing royalty payments (hydrocarbons extraction duties) and income tax are the most complicated I have ever seen, and I doubt anybody, except PEMEX'S accountants and the external auditors, understand them.

I believe the rules are complex and frequently changed so the government can leave PEMEX with minimal net profits--in fact, the rules have left the company with large losses. However, PEMEX is a state company and the government can make the national take as high as it wants. But It could just as easily make the rules simple and, if this left PEMEX with a higher net profit than it considered adequate, then government could just take any excess in the form of dividends.

The problem is that the royalty, calculated according to the complex rules, works out greater than the pre-tax profit so that PEMEX is left with a net loss. PEMEX'S royalty for 2011 was US$ 62.3 billion as against a gross profit before royalty of US$ 56.1 billion. In contrast, PDVSA has a royalty rate of 30% and this leaves the company with a substantial pre-tax profit which the government then appropriates as a contribution for social projects.

PEMEX National Take
Figures in millions of US$

 

2011

2010

2009

Income before taxes and duties

56,076

49,096

34,611

Less:

 

 

 

Hydrocarbons extraction duties

62,306

52,598

41,534

Hydrocarbon income tax

50

199

192

Income tax

259

140

134

National take

62,615

52,937

41,860

Net loss for the year

(6,539)

(3,841)

(7,249)

Royalties (hydrocarbons extraction duties) are the main source of the government's income. For several years it has been decapitalising PEMEX by taking out more money, as royalties, than it has made. During the last three years royalties have been 50 percent or more of total sales--see the following table.

Figures in millions of US$

Sales

110,945

103,322

83,058

Hydrocarbons extraction duties

62,306

52,598

41,534

Percentage duties to sales PEMEX

56.2%

50.9%

50.0%

In 2011, the percentage of royalties to sales in PEMEX was four times that in PDVSA where the government's main source of income is the contribution for social development.

Figures in millions of US$

Sales

123,942

94,144

73,282

Royalties

17,671

13,904

12,884

Percentage royalties to sales PDVSA

14.3%

14.8%

17.5%

What I like about PEMEX'S accounts is that they show gross profit before royalty. This highlights the fact that royalty is a duty and, as such, is part of the national take. I wish PDVSA would follow this treatment which, incidentally, I have been using since 2004 in order to show the national take.

A comparison between PEMEX and PDVSA for 2011 is given below.

Figures in millions of US$

Year 2011

PEMEX

PDVSA

Profit before royalty and social development

56,076

53,826

Applied as follows:

 

 

Royalty

62,306

17,671

Social development contributions

-

30,079

Income taxes

309

1,493

 

62,615

49,243

Net profit (loss)

(6,539)

4,583

It is notable that income taxes in both companies are only a small part of the national take.

It is strange income tax is payable on a negative gross profit, but the charges emanate from some of PEMEX'S subsidiaries.

At the end of 2011, the shareholder's equity is a negative figure of 193,919 million pesos. In any company, other than a state company, the capital would have to be replaced or the company be liquidated, but a note to the accounts states:

Pemex has recorded negative earnings in the past several years. However,under the Ley de Concursos Mercantiles (“Commercial Bankruptcy Lawof Mexico”) decentralized public entities such as Petróleos Mexicanosand the Subsidiary Entities cannot be subject to a bankruptcy proceeding.

The table below shows how the shareholder's deficit equity has been steadily increasing.

At 31 December

2011

2010

2009

Equity

21,088

23,158

22,182

Accumulated losses:

 

 

 

From prior years

(28,410)

(28,525)

(20,051)

Net loss for the year

(6,539)

(3,841)

(7,249)

 

(34,949)

(32,366)

(27,300)

Total equity (deficit) Million US$

(13,861)

(9,208)

(5,118)

The accumulated losses brought forward from prior years have been restated for accounting changes PEMEX has made.

If the government continues making a royalty charge in excess of pre-royalty profits, the deficit will keep growing. This may not matter much in a state company but, if Mexico is going to invite private investment (see my article Mexico: the price of nationalism ), it will have to modify both the royalty and income tax rules for application in the joint ventures. The rules cannot be subject to frequent change--see below-- as private investors object to the goal posts being moved.

On December 21, 2005, the Mexican Congress approved a new fiscal regime for Petróleos Mexicanos and the Subsidiary Entities, which was published in the Official Gazette of the Federation, effective January 1, 2006. This regime was modified on October 1, 2007, on November 13, 2008 and again on November 27, 2009. 

The complexity of the royalty calculation arises because, as oil prices increase, a windfall profit is created which the government then wants to siphon off. The different duties are summarised below.

Ordinary Hydrocarbons Duty (DOSH). D uring 2010 and 2009, the applicable rates of this duty were 73.00% and 73.50% respectively. The computation of this duty is based on the value of the extracted total production of crude oil and natural gas minus certain permitted deductions.

 Hydrocarbons Duty for the Stabilization Fund . PEMEX- -Exploration and Production must pay this duty when the weighted average Mexican crude oil export price exceeds US$22 per barrel. The applicable rate varies between 1% and 10%, depending on the weighted average price of crude oil exports, with the maximum rate of 10% applying when the price exceeds US$310 per barrel.

Extraordinary Duty on Crude Oil Exports . This duty is calculated by applying a rate of 13.1% to the value resulting from multiplication of (i) the difference between the annual weighted average Mexican crude oil export price and the budgeted crude oil price as provided for in the Federal Income Law (US$59 and US$70.00 during 2010 and 2009 respectively), times (ii) the annual export volume.

Sole Hydrocarbons Duty. This duty is applied to the value of the extracted crude oil and natural gas from abandoned fields or fields that are in the process of being abandoned.

The rate fluctuates between 37% and 57%, depending on the weighted average Mexican crude oil export price.

Extraction of Hydrocarbons Duty . This duty was modified effective January 1, 2010 and is applied to the value of the crude oil and natural gas extracted from the fields in Paleocanal de Chicontepec and in deep waters in the Gulf of Mexico, at a 15%rate on the weighted average price per barrel of Mexican crude oil exports.

Additional Hydrocarbons Duty . This Duty became effective on January 1, 2010 and is determined by applying a 52% rate on the amount realized in excess of US$60 per barrel of crude oil extracted from fields located in the Paleocanal de Chicontepec and the deep waters in the Gulf of Mexico.

Hydrocarbon Income Tax (IRP). This tax is applicable to Petróleos Mexicanos and the Subsidiary Entities other than Pemex--Exploration and Production and is calculated by applying a 30% rate on the excess of total revenues minus authorized deductions. 

The Mexican government needs more funds from the oil industry to run the country. One recourse, as production began to fall, was to take money from PEMEX which it previously provided as capital.

Another was to obtain funds through third party financing and, at the end of 2011, PEMEX'S long term loans stood at US$ 56 billion. But decapitalising PEMEX is a finite recourse that must end at some time. As an impartial observer, it seems to me the government needs to seek private investment to increase production which is particularly costly in the deep waters of the Gulf of Mexico. Investors can be attracted provided there is an adequate return on investment and the rules are not changed without negotiation. Mexico can still run its oil industry with private investors as minority partners.

Oliver L Campbell

14.05.11

P.S. I found the acronym DOSH to be particularly apt!


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Oliver L Campbell MBA, DipM, FCCA, ACMA, CGMA, MCIM was born in 1931 in El Callao, Venezuela where his father worked in the gold mining industry. He spent the WWII years in England, then returned to Venezuela in 1953 and worked with Compañía Shell de Venezuela (CSV) where he became the Financial Controller. Upon nationalisation of the oil industry, he went to Petróleos de Venezuela (PDVSA) as its Head of Finance. In 1982 he returned to England and became the Finance Manager of the British National Oil Corporation prior to its privatisation. He then worked as an oil consultant and retired in 2002 after fifty years in the oil industry. Petroleumworld does not necessarily share these views.

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Petroleumworld News 05/15/2011

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