• Tom Bradley

Pemex in Crisis?

Mexico’s state-owned energy giant Petroleos Mexicanos (Pemex) has often been lauded as the solution to Mexico’s economic problems with a belief that it can alleviate the poverty that has plagued the country. However, despite the ambitions of president Andrés Manuel López Obrador (AMLO) to make Pemex an engine of growth for Mexico the company has suffered a multitude of crises – financially with the firm suffering a c. $25bn net income loss in the first half of 2020 and spiralling debt alongside a corruption scandal with former CEO of the group Emilio Lozoya standing trial over alleged money laundering and bribery.

Following his landslide election win in 2018 AMLO promised an end to the free-market, neoliberal strategy that had dominated Mexican policy for the previous 36 years. He claimed the neoliberal years were the most inefficient for the Mexican economy in the nation’s history and has been enacting a radical shift that will return Mexico to a state-directed closed economy that mirrors the economy he grew up in during the 1960s. As part of AMLO’s vision Pemex has become a flagship project for the Mexican economy with it being viewed as the cornerstone of Mexican economic policy. AMLO has a personal connection to Pemex – hailing from the oil-state of Tabasco he is desperate for Mexico’s resources to drive their future economic growth.

Upon assuming office AMLO added the motto ‘for the recovery of sovereignty’ to the Pemex logo – a sign of his intentions with the firm. AMLO is openly considering reversing the previous governments decision to open up Mexico’s oil reserves to private investment and it is expected he will push this in 2021, backtracking on the 2014 pro-business decision. The government has said they will respect the 100+ contracts agreed since the reform but are set to block further private investment and have state-control over Mexico’s resource wealth. However, the pledge to respect existing contracts is already coming under scrutiny. In 2017, a private consortium discovered the potentially 2bn barrel Zama field, one of the biggest discoveries in recent years. However, the consortium are still awaiting the Mexican government’s decision on how to split the resource and there is a fear Pemex will move for a de facto expropriation of the field despite their weak finances and lack of experience in deep-water oil.

AMLO. Source: Al Jazeera Whilst most firms in the oil & gas sector are curbing production and slashing costs as a result of the collapse in oil prices fuelled by both a supply-glut and reduced global demand Pemex are pushing ahead with $8bn in capital expenditures. AMLO is determined to restore the levels of production seen earlier in the century, which peaked at 3.4m barrels a day (b/d) in 2004 but has since declined and was at just 1.7m b/d in 2018. As part of increased investment 6 refineries are being repaired and a new one built in the state of Tabasco by the Dos Bocas port. Upgrades to refineries has enabled Pemex to upgrade their production capacity – although under pressure from OPEC they will cut back on production over the coming months, down to 1.68mb/d. Despite AMLO’s vision of a Pemex that drives Mexican growth the state-owned firm have seen a bleak financial performance since the 2018 election. Pemex currently have debts of $105bn making them one of the most indebted companies globally. This mountain of debt has led to ratings agencies cutting the firms credit rating with Moody’s following Fitch in April in cutting Pemex’s rating to junk levels. As well as the negative connotations associated with the fall to junk the decision will raise future financing costs for Pemex. Alongside the incredible debt burden is the heavy losses the firm has been recording. In Q1 2020 Pemex reported a loss of c.$23bn, one of the largest losses for a single quarter in corporate history. This was followed by a c. $2bn loss in Q2 which has further raised concerns over the financial health of the firm. 2020 looks set to become the worst year yet for Pemex and comes after losses doubled to reach $18bn for 2019. AMLO’s election claim that he would rescue the group is now coming under fire, but the state appear to be in denial with Pemex CFO Alberto Velázquez claiming that “little by little, Pemex is achieving solid results” in spite of the groups dire financial record. Due to centrality of the firm to Mexico’s economy the financial performance of Pemex is having an effect on the entire nation. Moody’s and Fitch have both downgraded Mexico’s sovereign credit rating, which is now dangerously close to slipping into junk territory. S&P have also hinted they will follow in the downgrading and have raised the possibility that Mexico will fall into junk as a result of rising Pemex debts which take Mexico’s debts to 60% of GDP. This highlights the real risk that Pemex’s debt burden will begin to weigh on the Mexican economy as the group’s financial situation looks likely to restrict the long-term prosperity of Mexico. This scenario is far from the one envisioned by AMLO upon his transformation of Pemex. Alongside the financial woes Pemex are also enduring a corruption scandal with ex-chief of the group Emilio Loyoza extradited from Spain to go on trial in Mexico over charges of money laundering and accepting bribes in exchange for political favours. The money laundering allegation accuses Loyoza of ordering the purchase of a plant from steel firm Altos Hornos de México at $200m over its fair value in exchange for a payment made to his sister. The bribery charges allege Loyoza took $10m in bribes from disgraced Brazilian construction firm Odebrecht which has already admitted to paying large sums across Latin America for political favours. Loyoza denies the charges and has stated he will work with authorities and testify against senior figures who took bribes – a move that could implicate key figures from previous administration. Whilst this is damaging for Pemex’s reputation it acts a mere distraction to the more serious financial issues that face the firm.

Cantarell oil field, Gulf of Mexico. Source: Upstream Online The future of Pemex looks far from AMLO’s roseate vision as they remain a long way from financial and production targets once set. Pemex have claimed they could hit 3m b/d of production by 2026, which according to analysts is highly unlikely as it would require a very quick discovery of vast new reserves that even the most profitable supermajors would struggle to deliver. The touted development of a series of new small oil fields will barely cover the depletion of the major Cantarell and Ku-Maloob-Zaap reserves and will be a long way from adding the additional 1.3bn barrels needed. Claims on costs also diverge from analysts estimates. In March AMLO bragged of a $4 a barrel production cost for Pemex, raising hopes of future profitability, however analysis from energy consultancy firm Welligence estimates a far higher cost of $47 barrel once drilling, operational and tax costs are factored in.

With oil prices historically low in light of a supply glut and weakened demand this is unlikely to be profitable and hence Pemex’s struggles look set to continue. AMLO however appears set on using the oil giant to drive Mexico’s economic growth and continues to cut costs elsewhere to pump more money into Pemex. This has raised concerns that Pemex could mirror the performance of PDVSA, the Venezuelan state oil company which has played a key role in dragging the country into an economic collapse. As Pemex’s finances deteriorate it is likely AMLO will continue to intervene and risk implicating the wider Mexican economy.

A possible solution would to be reintroduce the private sector and carry out joint projects to cut Pemex’s costs and ensure a more efficient production of the natural resource. However, there appears little appetite for this within AMLO’s government and the continued downfall of Pemex seems inevitable.