Big-oil bailout already under way.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
These days, the trend is not Pemex’s friend. Mexico’s loss-leading, debt-swamped, state-owned oil giant company announced that in July it had imported 554,000 barrels of oil a day — its highest monthly volume of imports since public records began in 1990.
In total, two-thirds of all the oil Mexico consumed in July was imported — a staggering statistic for a country that until not so long ago was home to one of the largest oil fields in the world, the Cantarell. Pemex also acknowledged that its crude production fell a further 5% in July while its natural gas production shrunk 9%.
The export figures were just as ugly. In 2011, when the price of Brent crude averaged over $100, Pemex’s export revenues hit a historic peak of $49 billion, a monthly average of $4.11 billion. In the first quarter of 2016 the monthly average was just $893 million. That’s a plunge of 78%.
As Pemex’s exports dwindle, Mexico’s imports of oil and gas continue to grow. Petroleum accounted for two-thirds of last year’s $14.5 billion trade deficit, which was the widest since 2008. During the same year, Pemex managed to rack up $38.5 billion in losses, its biggest ever.
If anything, the company’s decline is accelerating. This could be bad news not only for Mexico’s fiscally challenged government, which has grown comfortably dependent on the once bountiful proceeds from the oil business, but also for many of Mexico’s biggest banks, which have lent vast sums to the oil major and its huge network of suppliers. As Moody’s warns, if Pemex’s financial health continues to deteriorate, it could be a major source of risk for the banking sector in the months and years ahead.
This is all happening at a time that Mexico’s economy is showing ominous signs of stagnation. In the second quarter, GDP fell 0.2%, on a drop in industrial output. At the beginning of the year its most important export sector, the automotive industry, began suffering the consequences of gradually softening demand, particularly in the U.S. On Tuesday, Standard & Poor downgraded the Mexican economy’s outlook from stable to negative as the country’s weak growth continues to disappoint.
Hours later Moody’s did the same. One of the biggest causes for concern is the recent explosion in public debt, which at close to 45% of GDP may seem tiny by comparison with other OECD economies. But it is more than double what it was in 2008.
Serious questions are once again being asked about how much support the government will have to, and be able to, provide Pemex in its hour of need. According to Moody’s sovereign debt analyst for Latin America, Jaime Reusche, over the next year and a half, Pemex will need to raise somewhere in the region of $20 billion from the markets just to roll over its maturing debt. But in light of current conditions, “it’s unlikely to raise more than $10 billion.”
In other words, a very large taxpayer-funded bailout of Mexico’s oil giant is in the cards, especially now that the financial sector is also at risk. The bailout is already underway. In early April, Pemex was given a $4.2 billion cash injection to help tide it over. But that’s a tiny fraction of what will ultimately be required, especially if losses continue to pile up at anywhere near the rate experienced in 2015, by the end of which Pemex owed its creditors a staggering $86 billion. If you include the company’s pension liabilities its debt already exceeds €100 billion.
The more the fiscal capacity of the government weakens, the greater the risk for Mexico’s banks, many of which are foreign owned. At Moody’s Annual Seminar banking analyst David Olivares warned that if the government does end up bailing out Pemex, its capacity to put out fires in the financial sector in the event of contagion will be significantly diminished.
Given the banks’ acute level of exposure to Pemex and its suppliers, this could be a very serious problem. That, added to the fact that the same banks have increased their lending to consumers and businesses at a time of sluggish economic growth, was the main reason behind Moody’s decision on Tuesday to downgrade its outlook for Mexico’s banking sector from stable to negative.
The agency also downgraded the credit ratings of seven Mexican banks — Bancomer, Santander, Banorte, Scotiabank, BanBajío, Banobras and Bancomext — as well as the Institute for the Protection of Bank Savings. Most at risk of exposure to a sudden deterioration in Pemex’s financial health are Mexico’s state-owned development banks, Banobras and Bancomext, which earlier this year were forced by the country’s Treasury Secretary to take on part of the debt Pemex owes to its suppliers.
It was yet another stealth bail out of Mexico’s now much diminished oil giant. There will no doubt be more to come, but their effects are likely to be little more than palliative. For Pemex the degeneration has already gone too far. Many argue that it was all by design. Successive governments in Mexico have sought to weaken Pemex, first by overtaxing it and then by starving it of investment, until the only option left is to completely privatize the company and sell off its most valuable assets.
The challenge will be doing so in something approaching an orderly manner, when the company owes more than $100 billion to national banks and international creditors! Somehow Mexico’s government must stop Pemex from crumbling completely under the weight of its compounding losses and massive debt burden while not increasing its own debt, at a time of slowing economic growth. An unenviable, or impossible, task. By Don Quijones, Raging Bull-Shit.
Out-of-money, felled by debt and shady accounting, Abengoa faces reality. Read… Did Moody’s Just Sever Energy Giant’s Last Life Line?
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I was pleasantly surprised to see Mexico’s public debt was only 45% of GDP. That was quickly wiped away by learning PEMEX debt is $100B – that’s about $3,200/household in a country where median income is $10,200/household. AND THAT’S JUST ONE (big) COMPANY!
Looks like some serious theft and mis-management been going on. I am shocked!
Shocked ? Really?
Pemex could even Hillary lessons in corruption. They have been at it so long that it should be part of their name.
Peak oil is a beotch!
Once you start ‘going down’ you never go ‘back up’. Ever, as in 100 million years. What you get from your moment of fun is a lifetime (geological period) of entropy.
It doesn’t feel pity …
https://www.youtube.com/watch?v=zu0rP2VWLWw
‘Bailout’ is pointless. Who is to ultimately bail? There is no possibility of GDP growth that can be deployed to replenish the funds that are bailed … it’s good money after bad, good money shoveled down a bottomless pit.
Mexico is on its way to becoming Venezuela … right next door. If you think there are problems with migrants in the US and Europe now, you ain’t seen nothing yet.
Of course, there is a solution but it is immensely unpopular but it is guaranteed to work, 100%:
… get rid of the damned cars. All of them. Now!
Guess what? Do nothing and the cars are gone anyway! Peak Oil is a beotch!
Within our lifetimes, the collapse will not be a straight line process. It will be marked by ebbs and flows. To counter the reality of oil field depletion, countries will be shifting towards autonomous vehicles. Singapore has already announced a pilot project towards autonomous vehicles and a goal to reduce the number of cars within the city by 2/3rds in a few years. Uber is launching driverless cars in Pittsburgh in September and the Chinese government is funding driverless car projects by it’s local manufacturers to the tune of billions of dollars plus state espionage of course.
The reality of course is that we are in deep overshoot, with humans using up far more resources than what is sustainable but that doesn’t mean with some potentially intelligent fore-action that the worst can’t be averted. The financial system is fundamentally an inter-subjective reality, those paper/electronic tokens only exist in the minds of humans. No chimpanzee would accept 10 US dollars for it’s banana. A human would gladly accept the same trade. Creating a new money system linked to annual energy credits debited to a person’s bank account or a basic income is certainly an available option if the politics allows for it. You are correct in your assessment that the current monetary structure is just good money chasing Ponzi money but monetary systems can be overhauled, they are merely figments of our imagination.
We are going to have to reduce our global resource usage by 80% overall, now whether this is done intelligently or by chaos that ratchets higher is what remains to be seen. Right now both forces are at work.
In order to reduce global resource usage by 80% you’ll have to exterminate at least 80% of the global human population and there’s no two ways around it. ALL the problems on this planet is the result of too many humans consuming too much stuff. Refer to the Georgia Guidestones.
Let’s start by eliminating you and your family
Americans will never voluntarily give up their F350 pickup gas guzzlers especially in places like Texas
But wait… imagine an F350 with twice the torque of the 6.7L POWER STROKE V8 Turbo Diesel – and a nearly FLAT torque band!! It would be a marvel for pulling a big trailer.
You just need a battery that’s big enough (and that’s the problem, not the electric motors).
Not so far off, maybe. Electric motors are instantly at full power, and indeed batteries are the problem. But see this, which will filter down to transport needs IMO:
https://www.sciencedaily.com/releases/2016/08/160826142023.htm
I’m afraid this might be of use to the Donald- and although I certainly don’t agree with his anti- Hispanic rants, the fact is a Mexican crash or even severe recession will have a spill- over affect in the US.
Things only get so bad before people say f*ck it- I’ll take my chances like the folks washing up on Lampedusa (thought I spelled it right) the island off Greek coast.
It’s fashionable up here in Canada to roll our eyes at a lot of US stuff, but re: the border I tell our guys, hey it’s not our southern border- it’s not a problem for us.
So what is to be done? First of all a physical barrier probably won’t work- especially a wall. It’s not the Berlin Wall -it would be thousands of miles.
You wouldn’t build a wall anyway- a deep high tech fence, actually a series of fences about a hundred yards or more thick would be better and cheaper. The Commies built a wall in Berlin because they didn’t want to surrender that much real estate in the middle of the city on their side. An un-garrisoned wall is easier to get over than row after row of barbed wire
At a hostile border or a military front, this would be mined with anti-personnel and anti-tank mines, trip wired flares etc. Surely to God that isn’t happening.
A modern ‘smart’ fence would detect incursions and signal for back- up.
Still, although this wouldn’t be as expensive as pouring as much concrete
as several Hoover dams- it would still be expensive. The idea that it could substitute for border guards is crazy. It would need a mobile garrison of many thousands to be effective.
And it could always be defeated here and there.
Maybe the money would be better spent improving conditions in Mexico. By this I mean not an ongoing charity as much as moral suasion combined with SOME easy loans. The suasion would be aimed at the Mexican government and its governance, because obviously something
is missing/ wrong.
I’ve spent some time in Uruguay-what I would call a second world country ( the prob with the PC- ‘Developed- Developing’ is you lose one category, when you need maybe 5. )
I saw lots of poor people but not desperately poor- and unlike Mexico it has no oil, and doesn’t manufacture much except beer. Toasters are advertised with three easy payments.
I’ve only been to the resort parts of Mexico, but from what I’ve heard
the poorest elsewhere ARE desperately poor, for no necessary reason.
I lived in Mexico City twice. the first was with family and I graduated from high school there. The second time was to work with the opening of an American company. I learned as a teen and had verified as an adult, that NOTHING official happens in Mexico without a bribe. It is so customary that, as a company cannot afford to pay bribes due to bad press, you hire an expeditor who handles your paperwork for you for a substantial fee.
Giving money to Mexico for any reason is too simply putting it into the pockets of some government functionary.
Mexico’s corruption has been embraced by our own govt. It seems to be Mexico’s chief export to the US.
Or vice – versa. US corruption now far outweighs anything that is seen in a tin pot African dictatorship. The US elite are far more dangerous to the individual American than are poor Mexicans. It’s the US elite who set the laws of the land, not immigrants.
The health racket where a heart attack can render an individual bankrupt.
The war racket, where something like $6.5 Trillion is unaccounted for at the Pentagon. That’s bigger than the GDP of Japan btw.
The education racket, where young people are forced to pay absurd sums of money/debt for a piece of paper just to be able to get a job and step through the middle class door.
The financial Ponzi scheme where trillions are spent on banks just so that a few executives can earn millions of dollars in bonuses. It would be cheaper to pay off all the banking sector employees with one trillion as a one off payment and send them home where they can be less dangerous.
VK
You overstate some valid points about USA big government going bad (any system with lots of money & no accountability will soon have corruption).
Your statement conflating USA & African dictatorships (“US corruption now far outweighs anything that is seen in a tin pot African dictatorship”) demonstrates you know little about Africa’s dictatorships (most of which are world-class butchers – these guys tend to slaughter hundreds of thousands to millions when they hit full stride), seriously detracts from your credibility.
Correction Lampudusa is NOT off the Greek coast its south of Sicily Italia You must have slept through that geography lesson lol
True- I knew Greeks were getting lots of refugees and knew many had arrived on that isle- but Italy gets refugees too.
PS: I have a globe on hand but I’d like one about 3 ft in diameter
Thanks for info
What will the poor, poor Saudis do when their country follows the path of Mexico? So much oil, and so little demand. Maybe they’ll all get on boats to Europe to collect that sweet infidel welfare. Release the Sharks!
The wall is already there. It’s not like the Berlin wall but it is under heavy surveillance and they have a court system that takes illegals and incarcerates them for months before deporting them. With the Federal Government getting out of funding private prisons, there will be added room for captured illegals as they cross the border. Either way, we will be spending $$$ at the border for some time to come.
You can’t help others once you yourself are in deep trouble. Sooner or later it’s time to pay the bill so you’d better have a plan.
I used to get excited when a 36 x 24 x 34 walked past, now I get excited reading about all these banking and corporate bail-outs, cause it tells me the elite are losing control. With all these “intellects and experts” with private education and silver spoon inserted, proves firstly that our education system is utter rubbish and nonsense, not to mention the distorted and twisted mentality of the people (our leaders) that has now developed. What happened to the days of a “middle-class” person with a wholesome education, a few children, and owned a 2 bedroom home raising a few chickens? The class of people coming out of University today is just appalling, and they themselves are brainwashed to believe they are “experts” because they have some shit bit of paper that says they are? For this bit of paper that has cost them 50 or 80 thousand, they also believe they are “above” those that have not been to higher education, and they believe they have better judgment and decision making, that they are “superior” to those less educated. Well, they are wrong, and the “proof” my friends is in the pudding!
How do you like the taste?
50 or 80 grand try again my sons 4 years at Georgetown(class of 2006) cost 180 big ones
Aussie
We have to get you back to getting excited when a 36 x 24 x 34 walked past, so here goes:
Sad to say, but your problem isn’t with elites & their education and issues with the university system in general, your problem is that the average Joe (YOU) no longer holds government responsible for much of anything, except delivering a benefit check.
Where was average Joe outrage at:
1) Lois Learner & IRS enforcement of political thinking?
2) VA massively failing our veterans?
3) Failing primary & secondary schools
4) Campaign contribution”bribes”?
5) Unpayable national debt?
6) Disastrous foreign policy/
7) $400M ransom recently paid to Iran?
In a government “of the people, for the people, and by the people,” Average Joe is responsible – and Average Joe has failed.
The peso has been hanging in the 18 range (to the USD) for a while now. Perhaps this will keep the USD rising against the peso.
And by the way, thanks to these elite scum-bag whores, these bail-outs are going to be on you and me, these filthy pigs that foreclose these entities such as Pemex, make sure their silver-spoon whores, benefit!
In support of my previous posts : ” Puerto Rico’s pension fund is underfunded by $43 billion, which is on top of $70 billion in various forms of Government debt. Puerto Rico is an “unincorporated territory of the U.S., which means that it probably harbors a lot of U.S. money hiding from the IRS. That explains why Congress is using other people’s money to bailout their own money plus the money of those who fund Congressional seats.” http://investmentresearchdynamics.com/puerto-ricos-collapse-foreshadows-a-total-u-s-collapse/
Taxpayers bailing out the banks? How ridiculous. Taxpayers were not on the hook with the GFC bailouts. They will be bailed out in Mexico the same way. Just ask Ben Bernanke.
You’re apparently not aware of the Tequila Crisis in Mexico, and how it was handled (by the IMF and the big US banks that were on the hook in Mexico). Spoiler alert: more debt for Mexico that Mexican taxpayers are still paying for today.
Hey Good folks. It has zero bearing on the ability of a monetarily sovereign government to bail out the banks. I’m sure The GFC stuff was just as convoluted as is Mexico’s. It was pure idiocy and ignorance combined with it for the government to take on Pemex debt. The Fed did likewise, but with the benefit of using its own money. The government can buy the debt and not a cent of taxpayer money gets spent. As I said ask Ben who admitted in 2009 to the Fed just marking up the numbers in the recipient accounts in the Fed. It’s all off balance sheet, although they try to disguise it[?].
I assume Andres’ point is that borrowing in a foreign currency, US dollars, is a recipe for disaster. Just ask Argentina. So I agree with him.
Mexico’s debt was in dollars back then. Much of Mexico’s debt today is in dollars, euros, and yen. Pemex’s debt today is in dollars. The monetary sovereign for these currencies is not Mexico. These are not peso-based bailouts that are needed. These are foreign currency-based bailouts.
Borrowing in pesos is very expensive because everyone knows that the peso loses its value rapidly, and so investors demand big interest rates to be compensated for the loss of the value of the peso. Hence, the government and big companies borrow in foreign currency. Because it’s a lot cheaper – until it isn’t.
If Mexico starts printing a bunch of money, as you would like, the peso would crash, rather than decline rapidly. See Argentina.
Any bailout in Mexico will be born by the Mexican taxpayer in form of more foreign-currency debt.
In the US, the costs of the Fed bailouts were born by those not holding a lot of assets as the dollar lost much of its value since then when it comes to buying those assets. When the same house now costs twice as much as it did in 2012, it’s not that the house has gotten twice as big, but that the dollar has lost half it value for asset purchases. That’s asset price inflation. That’s the cost of the Fed’s action.
You think that there is free wealth out there that the monetary sovereign can just hand out. Well, Zimbabwe, Venezuela, Argentina, and others tried that too.
Hey John Doyle, as the Wolf Richter sort of points it, the broke banks in Mexico were rescued by the Government assuming a 30 year long debt. Furthermore, since the bankers own the Government, a law was passed to keep secret forever the names of the people who went away with the money.
Now, the looses of Pemex just constitute the last effort by these same people to grab the oil for themselves, they just pretend to run the Government when their only aim is to amass as much resources they can. This way the USA makes sure Mexico will never stand in a way they can oppose their designs. Forget the fact of the unsustainability of such actions, the will keep dancing until the ship sinks.
This gang of traitors, of course, was created and gets support from the USA, and the orders come from there. I see here in Mexico a bunch of puppets, there in the USA the monsters.
Is Mexico a net petroleum exporter or importer? If an exporter, why import petroleum products–decrepit refineries, a la Iran?
If Pemex is the federal government’s cash cow, isn’t its collapse like to trigger a geopolitical implosion, like the collapse of the Mexican state as we know it?
An Updated Version of the “Peak Oil” Story
https://ourfiniteworld.com/2016/08/08/an-updated-version-of-the-peak-oil-story/
A very good article… but to summarize… peak oil arrives not when we have used up 50% of the oil on the planet…
Rather it arrives when we have used up the oil that is cheap to extract.
Think of it this way….
Let’s say today Exxon discovered a sea of oil 10x larger than all the oil ever produced in Saudi Arabia.
Awesome right?
BUT…. let’s say that oil was in a single massive field — located offshore in a 3 mile deep ocean… further it was trapped another 3 miles below the sea floor.
Also let’s assume this oil is located in a part of the Arctic Ocean that is only ice free 3 months of the year… the rest of the year drilling is not possible due to shifting ice.
Let’s say we worked out how to extract this oil using the latest technology.
Let’s say the production costs for a barrel oil from this massive field would be over $400.
That would mean that to turn a profit oil must sell at over $400….
If oil were priced at that level it would obliterate growth :
According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices.
http://www.iea.org/textbase/npsum/high_oil04sum.pdf
Therefore the oil in that field will never get extracted.
That is an extreme example. But it demonstrates a point.
We have picked the low hanging fruit — the oil that remains to be discovered is too expensive to extract.
We are seeing how big oil and sovereign producers are getting hammered because the price of oil is not high enough to turn a profit.
We saw what oil over $100 did to the economy — it imploded.
We are seeing the central bankers desperately trying to mitigate the issues related to expensive oil (loss of growth) and cheap oil (bankrupt producers).
A 7 year old could be made to understand that these policies will fail.
1+1=2…. there is no way around that….
Oil Discoveries at 70-Year Low Signal Supply Shortfall Ahead
New finds at lowest since 1947 and headed even lower
Explorers replacing just 6% of resources they drill
Explorers in 2015 discovered only about a tenth as much oil as they have annually on average since 1960. This year, they’ll probably find even less, spurring new fears about their ability to meet future demand.
With oil prices down by more than half since the price collapse two years ago, drillers have cut their exploration budgets to the bone. The result: Just 2.7 billion barrels of new supply was discovered in 2015, the smallest amount since 1947, according to figures from Edinburgh-based consulting firm Wood Mackenzie Ltd. This year, drillers found just 736 million barrels of conventional crude as of the end of last month.
That’s a concern for the industry at a time when the U.S. Energy Information Administration estimates that global oil demand will grow from 94.8 million barrels a day this year to 105.3 million barrels in 2026. While the U.S. shale boom could potentially make up the difference, prices locked in below $50 a barrel have undercut any substantial growth there.
More http://www.bloomberg.com/news/articles/2016-08-29/oil-discoveries-at-a-70-year-low-signal-a-supply-shortfall-ahead
Alas … we have a problem….. oil producers need over $100 to break even…
http://static.businessinsider.com/image/55acfaa92acae7c7018b7e62/image.jpg
But oil cannot be priced that high because:
According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf
So oil producers are reacting as expected – they are slashing expenses – including looking for new oil…
Why look when you know the low hanging fruit has been picked… and what remains is too expensive to extract profitably.
Write something new.
Your repeat cut and pastes are simply boring oil industry propaganda.
As an oil industry shill, you need to get used to the fact that the oil industry is, no longer king, no longer in control, and you need to find another benefactor to leech from.