The Big-Oil Bailouts Begin

The hundred-billion-dollar question.

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

Low oil prices continue to sow fear, uncertainty, and mayhem across the emerging market complex. On Wednesday, it was leaked that the IMF and World Bank would dispatch a team to oil and gas-dependent Azerbaijan to negotiate a possible $4 billion emergency loan package in what threatens to become the first of a series of global bailouts stemming from the tumbling oil price.

In Latin America’s largest economy, Brazil, the government has refused to rule out bailing out Petrobras, once the jewel of the nation’s crown but now a scandal-mired shadow of its former self, weighed down by $127 billion in debt, most of it denominated in dollars and euros.

If it is unable to sell the $15 billion in assets it has targeted by the end of this year – a big IF given how the prices of oil and gas assets have deteriorated – Petrobras might need some serious help from Brazil’s Treasury. According to Citi, that help could reach $21 billion – just enough to plug the company’s cash hole and fix the capital structure on a sustainable basis. That’s a big payment for a government that has on its hands a widening budget gap, a 4% economic contraction, and double-digit inflation.

Brazil is not the only Latin American economy entertaining a bailout of its national oil company. The government of Mexico just announced that it quietly injected 50 billion pesos ($2.7 billion) of public funds into the coffers of state-owned oil company Pemex.

The timing of the announcement could not have been more convenient, coming just a day before Pemex was due to launch a $5-billion bond issue, which was predictably gobbled up by investors. In all likelihood, it will be the first installment of what could end up being a very large, very costly bailout of Mexico’s oil sector. Pemex is the world’s second largest non-publicly listed company, with $416 billion in assets. But things are looking decidedly grim.

The company reported a record $9.9 billion loss in the third quarter of 2015 alone, and its towering debt mountain is expected to top $100 billion this year. Standard & Poor’s has just downgraded Pemex’s debt one notch deeper into junk to BB. Its reasoning: despite Pemex’s efforts to reduce costs and “reconsider” some of its investments, these measures will not be enough to offset the pressure from weaker oil prices.

In this new global reality of dirt cheap oil and increasingly expensive US dollar-denominated corporate debt, Pemex faces a maelstrom of ugly pressures: a plunging domestic currency, a mountain of dollar-denominated debt, declining output, now at its lowest point since 1990, and rising dividends to the state.



For the last 70-odd years, Pemex has almost single-handedly bankrolled Mexico’s public spending. The money it has generated has helped fund roads, subway systems, bridges, schools, universities, Olympic stadiums, fire fighters and police forces, hospitals and airports. It has created — and maintained — millions of jobs, paid (admittedly very meager) state benefits, and filled offshore bank accounts for many of its executives, contractors and well-connected politicians; and during the Tequila Crisis hangover years in the mid-1990s, it helped bail out a fair number of Mexican (and now largely foreign-owned) banks and Wall Street investment firms.

In 2008, Pemex provided 4.4 of every 10 pesos of public revenue. By 2015 that figure had more than halved, to 2 out of every 10 pesos, partly due to crumbling oil prices but also because of the company’s newfound status as a semi-privatized entity having to fight for scraps in a highly competitive, buyer’s market.

For Mexico, the hundred-billion-dollar question, as WOLF STREET pointedly asked in July last year, is whether or not it is ready for life without its sugar daddy. More to the point, how will its government, which has for decades used a state-owned company as a finance vehicle to fund 30% of its budget, begin bailing out that same company with funds that no longer exist?

By hiking direct and indirect taxes across the board? This has already been tried, and while it may have increased government revenues somewhat, it will almost certainly not be enough to plug the growing fiscal gap, especially with poverty sharply on the rise and the country’s super rich who own almost half of the nation’s entire wealth avoiding taxes with embarrassing ease.

What about government spending cutbacks, mass redundancies at Pemex — which began this week with an announcement of over 10,000 layoffs, with more expected — and the divestment of some of its prized assets, at a time of collapsing oil prices? Will they make up the difference? It’s unlikely. More to the point, as Pemex continues to tighten its belt, many of its beneficiaries will start dropping like flies, with brutal knock-on effects for local economies. Some heavily oil-dependent regions like Tabasco are already feeling the pinch.

Unless global oil prices stage a strong, sustained recovery soon, Pemex’s growing financial pains could end up triggering surging unemployment and a full-blown fiscal crisis. Mexico’s government already runs a persistent 2% current account deficit and a 3.2% budget deficit. Doesn’t sound so bad, you say, compared to the public deficits in other countries these days. The problem is that it doesn’t take into account Pemex’s massive and mounting losses. By Don Quijones, Raging Bull-Shit.

These sorts of bailouts are just too juicy to stop. Read…  Who Gets to Pay for the Italian Banking Crisis? (Well, the missing capital buffer).



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  26 comments for “The Big-Oil Bailouts Begin

  1. LG says:

    Makes me wonder if all this is actually by design!
    Inflate , deflate then finance to re inflate.
    Rinse and repeat!

    • walter map says:

      “Makes me wonder if all this is actually by design!”

      That’s what booms and busts are for. They’re not really much good for anything else.

      Most people don’t just give away their money to the banksters. The magic of banking is that it is not that hard to create circumstances where people will do it very happily.

    • Vespa P200E says:

      It’s a global domination (satanic) schemes by the banksters to RULE the world by forcing the people and companies alike DEBT SLAVES. Debt is easily given to all and many unable to pay back become slaves. Banksters in essence have more power than the sovereign governments and CBs are mere extension of banksters with more clout than elected politicians who are also on the banksters’ payroll via campaign donations.

      BTW – IMF and World Bank are both CONTROLLED by US and its bankster handlers.

  2. Kevin Beck says:

    More evidence of why the results can be bad when national revenues are so closely tied to certain business operations.

    Since the governments of Mexico and Brazil cannot have much influence upon the pricing of oil, they are going to have to rely upon their central banks to get out of their holes. It is very difficult for either of them to cut services, since they each have large portions of their populations very reliant upon the government for basic survival. That is, before we consider the portions of their economy that are engaging in illegal activities. And both Pemex and Petrobras have major corruption issues entangled within their operations.

    But how does a government that needs these businesses to be productive eliminate the corruption that is so rampant within their cash cows? The people at the top of these organizations got there through political appointments, and if they are involved, how do they get fired? If they operate in any way similar to America’s bureaucracy, I would say that it’s close to impossible to fire them.

    This is not going to be easy for either of these nations for the next few years. And maybe longer.

    • John Doyle says:

      It wouldn’t matter so much if they were competent. But politics doesn’t work by competence. Most competent people would choose to keep out of politics, with its endless brown nosing and corruption.

      It looks like the only solution would be to nationalise these troubled companies, just as happened for GM. They need to avoid splitting them up and selling off the most valued parts. Keep the banksters hands off that route. [unlikely!]

      The private debt morass could be resolved by Steve Keen’s proposed private debt jubilee. Since loans today are all fiat, from thin air, the banks could be forced to wipe them. It’s not a loss of real assets to do that so the banks would survive. They would lose the interest income stream, but taht wouldn’t bankrupt them.

  3. walter map says:

    I still think it was a bad idea to legalise loan-sharking. Banksters have the morals of a famished barracuda.

    Fortunately they cannot put a lein on your kidneys, but maybe I shouldn’t be giving them any ideas.

    • Vespa P200E says:

      Worse than loan sharking as bankster’s losses are socialized (via bailouts) and profits are privatized (QE, ZIRP to “invest” in Treasuries for guranteed returns and rip off the middle class with exorbitant car and credit card loans, etc).

      And they use the slimeball collection agencies to shakedown the debtors and who knows maybe IRS in the future.

  4. Liza says:

    Pemex’s losses are partially offset by $6 billion in derivatives. The derivatives were issued by a number of banks, including JP Morgan, Citi, Goldman and HSBC. The Mexican government has paid $1 billion to hedge oil at $49 this year. (Perhaps the $2 billion injection was needed in part to cover this).

    Of course, this raises a fundamental question: what will be the total derivatives losses to the major banks as a result of the oil price collapse ?

    http://www.bloomberg.com/news/articles/2015-11-23/oil-deal-of-the-year-mexico-set-for-6-billion-hedging-windfall

  5. del says:

    “I wish someone would f-cking ..bail me out!

    ‘del..

  6. del says:

    “But I guess we could all do with a f-cking bail out!

    ‘del.

  7. Jonas says:

    Mexico should have never privatized, even in part, the main driver that has allowed its citizens to advance into the middle class. This is turning into a disaster as schools etc get defunded, robbing an entire generation of chances to succeed.

    While I personally wish for the country to return to its former successful, more socialist ways, there are no signs it will be allowed to do so. So what remains? Cheap labor, cheap currency and good infrastructure in a country close to the US. My guess is China could soon have a lot more competition within its economic niche, but only if Mexico makes sure to focus on product quality and maintains transparent legal and banking systems to safeguard foreign investments in assembly halls etc.

    But Mexicans are proud people (with great food to:) and won’t like their country turning into a sweat shop. I hope they don’t forget that forced asset sales at highway robbery prices can be undone in a sovereign country. Punishments would be severe, but at some point present conditions can be worse than any sanctions.

    Through my macro lens I’m witnessing a gradual break down of globalization, where the ultra powerful use capital and debt to now force entire nations to act against the best interest of their citizens. Previously, this led to radicalization, then tariffs, then war. Now, with a-bombs, it’ll just lead to radicalization, unrest and unhappiness.

    As to oil specifically, if scientists finally invent cheap batteries it would be a heavenly gift. Fossil fuels are just bad for the planet all around. With cheap solar and batteries, the world could be a different place than anyone now expects!

    • Lee says:

      Socialism has never worked anywhere and Mexico is a perfect example.

      Add in a heavy dose of corruption and you get the constant cycles of failure seen there.

      • Jonathan says:

        Socialism has always worked, if you are part of the financial elites and their cronies. A boot to the your face rugged capitalism for everyone else.

      • ucde says:

        You could say that the depredations of predatory capitalism caused WWII, insofar as the treaty of Versailles was an exploitative debt-contract enforced on the loser of WWI. Reading the history of those times, that word ‘Versailles’ was on everyone’s minds and tongues at the time. Interesting that people in the blogosphere tend to remember ‘Weimar’ much more. People remember a three year hyperinflation event which was partly deliberately induced, and swiftly ended via policy change, more than they remember the debt-peonage contract which caused 100 million people to lose their lives, by its consequences. Versailles was the cultural event that made german men want to join the SS. The Troika is currently ruining Greece by enforcing an unrepayable debt contract in very similar fashion.

        Its generally impossible for Americans to have a balanced discussion about “Socialism”, or even to use the term properly in a sentence, because we are the cultural heirs of McCarthyism, which was a neo-fascist witchhunt successfully carried out at the core of our cultural world. Government successfully silenced independent media, academics, and successfully curtailed independent thought and the flourishing American socialist sphere of days gone by. In our ignorant acceptance of the persecution of our other-minded brethren, we laid the foundation for the bullying American Empire’s neoliberal consensus model, which translated pretty directly afterwards to wars of foreign (corporate) conquest. Our freshly lobotomized cultural sphere could not accept anything to the left of Hayek or Friedman, so we lost the ability even to have an intellectual public discussion about possible downsides of “the market”, or of “the market forces” which were putting their hand up our government’s backside and learning to work its mouth like a puppet. What followed were 30 or 40 years of “The market’s” reign, backed up by military weapons when resource-rich nations refused entry or land use rights to our corporations. As a consequence of that we have a mixed and murder-filled legacy, as everybody’s favorite fun-loving Coca Cola fascists. We export Hollywood movies, cheeseburgers and fries, and also guns, soldiers and ruin. After enough years of this, the ruin runs deep enough that even we are looking at one another on blogs and websites, in panic, saying “whats gone wrong?”. Surely, losing access to the rich tradition of Marxist/Socialist/contrarian/anarchist thought was *Very Bad* for America in ways that are more concrete than theoretical at this point. Once we lost all those viewpoints and traditions and possible avenues of thought and discourse, there were few options open aside from fascism light a.k.a. “Go markets Go!”.

        • Yoshua says:

          The Versailles and the Weimar created a destruction that led to the rise of Socialism in Germany, to National Socialism.

          The Eurozone crisis, the Troika and the Austerity imposed on Southern Europe is turning the Southern Europe into Socialism.

          They have learned from history that it’s possible to repeat history. We are looking at the destruction of Democracy and Capitalism in Europe.

        • Petunia says:

          Your use of the term predatory capitalism to my mind is the same as socialism, the many supporting the few. When you exploit people through capitalism to benefit the rich, that is a form of extreme socialism. I don’t see the difference between socialism and predatory capitalism. It is simply a matter of direction of the flow of capital . If we look at American history through that lens, America was built on the ultimate form of socialism, slavery, the confiscation of liberty and earning capacity.

      • John Doyle says:

        What you write is not socialism. Selling essential services to the private sector, which is going on in all lands in thrall to neo-liberalism, is the opposite of socialism.
        The monetary sovereign government can pay without borrowing for any program it needs or wants. But neo-liberals want the bankers to do that as they earn fees etc for it. It can triple the costs to the citizenry.

        There is only one reason against having a government manage all the essentials, and that is corruption. But we have it as well in the private sector, and incompetence as well.

    • CENTURION says:

      Millions will just cross the border have have the Gringo pay for it all.

  8. Vespa P200E says:

    IMF and World Bank are both CONTROLLED by US and its handler banksters.

    So here we go again to bail out the TBTF as it really amounts to bailing out the banks that made the loans. Bankster’s losses are socialized and profits are privatized. And the CBs of the world will have to print more of FIAT currency this time around.

  9. Yoshua says:

    So is this the moment when oil companies and oil wells are taken away from emerging markets when they default on their debt ? Or is this the moment when oil companies in emerging markets default on their debt to financial institutions with a financial crisis as only compensation ?

    I heard that China is trying to take Ecuador’s oil wells as compensation for defaulting on debt to Chinese banks.

    • Vespa P200E says:

      Yes – banksters taking away and more like stealing assets, legally. Grand plan really as debt is either paid off or defaulted and should anyone have nerves to defaults then the banks will take over your house, car, land, oil fields or anything of value. Loan sharks in action…

      Even the sovereign governments are under the bankster’s 1-sided game as take look at Greece – in essence ruled by the EU banksters as they dictate how to govern. Yeah banksters should have know better about extending debt to basket case like Greece but not when the then can take over the whatever deflated assets there are and dictate how to govern as the debtors further sink into slavery…

    • d says:

      http://amazonwatch.org/news/2015/0113-racking-up-the-china-debt-and-paying-it-forward-with-oil

      http://www.reuters.com/article/us-china-ecuador-oil-special-report-idUSBRE9AP0HX20131126

      those are old, but probably outline what china can do.

      Until their is a coup and the deal is declared onerous and predatory.

      Than the fun starts.

      china is doing this sort of thing in Africa, a lot, it has to get seriously bitten by some of them soon.

  10. Thomas Malthus says:

    There are those who have questioned the assertion that the break even point on oil is $100+ for most producers:

    Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000.

    “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes.

    Nearly half of the industry needs more than $120,” he said

    http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

    ‘In 2008, Pemex provided 4.4 of every 10 pesos of public revenue. By 2015 that figure had more than halved, to 2 out of every 10 pesos, partly due to crumbling oil prices but also because of the company’s newfound status as a semi-privatized entity having to fight for scraps in a highly competitive, buyer’s market.’

    That paragraphs perfectly exemplifies why the $100+ price tag is necessary…..

    You cannot just look at the cost at the well head to get the oil out of the ground.

  11. nick kelly says:

    Good piece, clearly posted just too late to get in the latest- now Nigeria wants a 3.5 billion emergency loan- but NOT from the IMF. They want the World Bank and maybe some charity or other.
    The funny thing is- this is almost the same amount Azer wants, but for Nigeria 3.5 B is a drop in a bucket.
    I have to laugh (sort of) at all the ravings about banksters and capitalism etc.
    Why didn’t they succeed in conning Norway out of its oil wealth?
    Like Petrobras, Nigeria’s wealth was stolen, and the favorite cloak for such is too call it socialism. Nearly all the hopelessly corrupt African states claim to be the People’s something.
    But somewhere else- like with Bernie Madoff- the crook may call himself a free enterpriser.
    The Left-Right debate deserves better than to be tarred by crooks, whatever they call themselves.

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