By Adam Williams

(Bloomberg) — Mexico’s state-owned oil firm is taking deepwater improvement off its plate for now.

Driven to tear $5.5 billion out of its price range this yr to deal with a lengthening market downturn, it is smart that Petroleos Mexicanos would look first to its riskiest and costliest operations. The firm reported its thirteenth quarterly loss on Monday, bringing its complete losses for 2015 to $32 billion.

By delaying offshore improvement, Pemex joins main producers around the globe in canceling or suspending their costliest tasks till costs rebound. But for Pemex, which has seen its manufacturing decline for 11 straight years and faces one other 5 p.c drop this yr, it could possibly be an particularly perilous technique.

“It’s very possible that Pemex’s production will fall this year and, when you go into 2017 after not investing in 2016, declines could snowball and fall more,” Pablo Medina, oil and power analyst at Wood Mackenzie Ltd., stated in a cellphone interview from Houston.

thirteenth Loss

Mexico’s greatest firm reported a $9.3 billion loss within the fourth quarter. It hasn’t recorded a revenue since 2012. The firm had greater than $87 billion in debt on the conclusion of the third quarter and owes an estimated $7 billion to service suppliers.

On Monday, Pemex pledged to satisfy the federal government’s demand that it trim its 2016 price range by 100 billion pesos ($5.5 billion) by growing effectivity and specializing in its most worthwhile tasks. The producer will try to take care of crude manufacturing, regardless of the price range cuts, “to the extent possible,” stated Jose Antonio Gonzalez Anaya, the corporate’s new chief government officer, in a name with buyers.

Pemex plans to shave $2.6 billion from its oil exploration and manufacturing price range this yr, which incorporates deferring funding in deepwater, Gonzalez Anaya stated. The firm may also cut back funding plans in onshore and unconventional or shale fields, he stated.

Falling Production

Pemex’s crude manufacturing averaged 2.28 million barrels per day within the fourth quarter, a 3.5 p.c lower from a yr earlier. Given the discount in Pemex’s funding in fields the place manufacturing prices are excessive, output might fall as a lot as 100,000 barrels a day in 2016 if crude costs don’t rebound and the corporate is unable to accomplice with different firms to share prices, Gonzalez Anaya stated.

“Pemex has been facing declining production over the last several years and our costs of production have also increased,” Gonzalez Anaya stated on a name with buyers. “For every $5 that the price of oil falls, Pemex’s income falls by 20 billion pesos.”

The firm expects the worth of oil to be near $25 a barrel this yr, in comparison with the $50 they’d beforehand deliberate, in response to the report. Pemex is able to persevering with to supply greater than 2 million oil barrels per day at a revenue with $25 oil costs, Gonzalez Anaya stated.

Offshore Partnerships

Pemex says it’s not abandoning its ambitions offshore, it’s solely deferring tasks whereas crude costs stay close to $30 a barrel. It nonetheless sees deepwater wells as a key a part of its manufacturing progress in years to come back.

The Mexican producer’s deepwater oil improvement tasks, which weren’t anticipated to supply crude for as many as 10 years, can be key areas the place the corporate seeks help within the type of personal companions or funding, the CEO stated. Mexico’s latest financial reforms permit personal buyers to assist develop the nation’s power sources.

“It doesn’t make much sense for Pemex to go to deepwater alone,” Gonzalez Anaya stated. “It makes more sense for Pemex to use all the flexibility that the energy reforms provide.”

“What we are looking for is to use a new contract or joint venture or another method so that the exploration and production in deepwater that we are deferring, does go online within 10 years, but using a different method,” he stated.

Pressure on Pemex’s price range this yr can be exacerbated by the compounding money owed owed to service suppliers but to obtain funds for work carried out. Pemex owed a file 147 billion pesos to service suppliers on the finish of 2015 and is working with Mexico’s Finance Ministry to discover a decision to the excellent debt, Gonzalez Anaya stated.

“I don’t want to minimize this process,” the CEO stated. “It’s going to be a difficult process. It is going to be a complicated process. But without question, it is going to be a process in which Pemex will come out of stronger in the future.”

© 2016 Bloomberg L.P