Mexico to continue world’s largest oil hedge for 2021

By Nacha Cattan and Amy Stillman on 2/19/2020

MEXICO CITY (Bloomberg) - Mexico plans to lock in prices for the country’s crude output for next year, continuing the world’s largest sovereign oil hedge, Finance Minister Arturo Herrera said.

Herrera said in an interview on Monday that “of course” the oil hedge will continue, but that Mexico needs to keep details of the trade private in order to prevent the market from front-running the transaction.

The Finance Ministry, or Hacienda, hedge is considered one of Wall Street’s most secretive. Historically, the ministry buys put options -- contracts that give it the right to sell crude at a predetermined future price -- from a small group of investment banks and oil firms.

“We need to be very careful about operating throughout time in a very discreet and disciplined manner so that no one knows the Mexico government is operating and they can’t identify the periods we are covering,” Herrera said. “Because if not, we’ll have problems the following year.”

Herrera also said that Mexico is willing to adjust tax levels to make new exploration and production integrated service contracts more attractive for companies. The hope is that the contracts, known as CSIEE, will allow Pemex to incorporate private companies in fields where it has marginal operations, he said.

CSIEEs are expected to contribute $5.8 billion over four years, according to Pemex’s business plan, which analysts say is not enough to move the needle on 15 years of oil production declines and debt that is now the highest of any major oil company.

“If they’re not attractive, they’ll have to be reviewed,” Herrera said, referring to the contracts. “What we need to do is make changes to the tax treatment for the fields that need them. And this will change the profitability of these fields.”

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