Pemex, World’s Most Indebted Oil Company, Gets Government Bailout as Suppliers Gripe About Unpaid Bills

“Once. Only this year. Later on, that’s their problem”: Finance Minister. $3.4 billion in fuel was stolen in 2018, including by insiders. Crackdown now underway.

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

After years of falling production, compounding losses, and plunging credit ratings, Pemex, the world’s most indebted oil company, is not in a fit enough shape to issue new debt. That’s the dire assessment of the Mexican government, which on Friday announced that it was extending its embattled state oil company yet another financial lifeline, this time worth 107 billion pesos ($5.7 billion).

It’s a drop in the ocean compared to the $106 billion of total debt Pemex owes its creditors. But it should be enough to tide the company over at least for the rest of this year, allowing it to finally pay providers, many of whom complain they haven’t been paid since December.

Pemex has not issued any debt so far this year, fearful that recent downgrades by Moody’s and Fitch to just one notch above junk may have hurt investor appetite. To lend a helping hand, the government dipped into Mexico’s budget stabilization fund, which was set up ostensibly to cushion the effects on public finances if there are sudden variations in international oil prices. The fund’s coffers are now roughly a third lighter, having lost 106 billion pesos of the roughly 300 billion pesos they held.

The government insists that this is the very last time it intends to bail Pemex out, although no one seriously believes it. “What we want to do is to allow Pemex not to go to the market if they don’t want to go to the market,” Finance Minister Carlos Urzua said at an event at the IMF World Bank meetings in Washington. “Take off part of its debt. Once. Only this year. Later on, that is their problem.”

Urzua also sought to placate concerns that Mexico’s government was effectively taking on part of Pemex’s debt:

“There are some people who believe that we should assume as federal government the debt of Pemex and make it sovereign debt, but we don’t like that. That would contaminate our own debt. But we are aware that in the short term Pemex needs some help and we will provide that help.”

Until relatively recently, Pemex bankrolled much of Mexico’s public spending, providing four out of every ten pesos the government raised. But now the shoe is on the other foot. Now, it’s Pemex that needs the government’s money.

The bailouts began in 2016, with a one-off payment of $4.2 billion. Wall Street was briefly thrilled but Pemex’s losses and debt pile continued to grow. In December 2018 Mexico’s new president, Andres Manual Lopez Obrador (AMLO), increased Pemex’s budget for 2019 by a whopping 19% to over $23 billion. Then, in February AMLO pledged to pour a further $3.9 billion into Pemex to bolster its finances and forestall a further credit downgrade. But even that wasn’t enough.

“The government’s financial support, in order to restore credit fundamentals, falls well short of the company’s multi-annual capital investment needs,” S&P said in a statement in March, adding that to avoid “further deterioration” of its credit rating, Pemex may require at least $20 billion over multiple years. The message appears to have sunk in.

Pemex is also making savings by reducing administrative costs and cutting back on executive expenses.

But most importantly, it’s cracking down — or trying to crack down — on fuel theft, or huachicoleo, which cost Pemex 31 billion pesos in 2016 ($1.7 billion at the prevailing exchange rate on Dec 31 of that year), 50 billion pesos in 2017 ($2.5 billion) and $66 billion in 2018 ($3.4 billion), working out at a grand total of $7.6 billion.

That’s a lot of money for any company to lose to theft over a three-year period, particularly one that is already buckling under the combined weight of shrinking output, rising losses, and growing debt. Most of the theft is internal in origin, with control-room personnel at PEMEX HQ coordinating with thieves in the field, many of whom are PEMEX engineers moonlighting for criminal gangs, to keep them abreast of shipments heading down the pipelines that crisscross the country.

In recent months, Mexico’s oil thieves — or huachicoleros — have had their work cut out following the AMLO government’s decision in December to send the army in to secure Pemex facilities, including rigs, refineries, supply terminals and pumping stations, as well as close off pipelines that had been by huachicoleros and transport the gasoline where necessary by tanker truck or train.

There are also tentative signs that the legal noose is finally tightening around Carlos Romero Deschamps, the longtime hyper-connected boss of the Mexican Oil Workers’ Union who was prominently featured in Forbes’ 2013 ranking of the 10 most corrupt people in Mexico and has been accused by Pemex workers of involvement in oil theft. A group of workers has even set up a new workers’ syndicate to compete with the scandal tarnished union whose senior officials have been bleeding Pemex — and by extension, Mexican taxpayers — dry to the bone for years.

Whether AMLO’s crackdown on oil theft will work, it’s still too early to tell. But the initial signs are promising. According to Pemex’s managing director, Octavio Romero Oropeza, the average daily amount of fuel being stolen has slumped from around 81,000 barrels in November to just 5,000 barrels today. Pemex forecasts that the fight against oil theft will produce cost savings of around 32 billion pesos ($1.7 billion) this year alone.

It also reported a slight rise in production, from 1.62 million bpd in January, its lowest output since records began, to 1.71 million bpd in February. But that’s still just half the number of barrels it was producing at its peak in 2004.

In the hope of recapturing at least some of that glory, AMLO has set a production target of 2.5 million bpd by the end of his six-year term in 2024. But unless he’s able to steady Pemex’s finances, meaning averting further credit downgrades, and reverse the rampant plunder of Mexico’s hyrdrocarbon resources, he’s going to have his work cut out. By Don Quijones.

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  17 comments for “Pemex, World’s Most Indebted Oil Company, Gets Government Bailout as Suppliers Gripe About Unpaid Bills

  1. HR01
    Apr 15, 2019 at 1:54 pm

    Don,

    Thanks again for the continued updates on Pemex.

    Pemex bonds have been rallying of late. AMLO granted the company some modest tax breaks over the next six years.

    Doubtful indeed that AMLO sees his production targets reached. Pemex likely defaults before his term expires. Global recession will see to it.

    • WES
      Apr 15, 2019 at 7:39 pm

      HR01: Pemex like all nationalised oil companies has never been left with enough of their cash flow to be able to explore nor update their infrastructure so your prediction is 100% guaranteed!

      Cutting their pipeline losses only buys more time before death sets in!

      • MC01
        Apr 16, 2019 at 3:26 am

        Aramco, Sonatrac, Statoil etc are all State-owned and all manage to both act as cash cows and to have enough funds to keep on investing. NIOC even manages to do so in face of international politics.

        Pemex is in the same bracket as PDVSA in that it’s so amazingly mismanaged as to defy belief.
        It’s not merely a matter of political cronies being appointed to positions of power or criminal cartels stealing refined fuel and crude oil: the corruption extends everywhere.
        Pemex runs several chemical plants which are the stuff of legend for having three, four or even five times the number of employees similar plants in countries like Algeria, India and Malaysia have. What are all these people doing? Not a whole lot more than getting a paycheck.
        In States with a large number of Pemex plants like Veracruz it’s an open secret that Pemex employees, starting from the rank and file, can easily get their friends and relatives a cushy job. Originally this was a political ploy: I, politician, will tell the plant manager to hire you, but in return you and your family must vote for me at the next State/City elections. Classic exchange vote.
        But over the last decade, and with Mexican politics becoming more chaotic as PRI’s, PAN’s and PRD’s hold on power liquefied, this situation took a life of its own and no Mexican government, not even the present one, seems to have any real interest in shutting down plants and laying off people.

        This deeply ingrained corruption has also resulted in a veritable “brain drain”, as highly capable and well trained Pemex personnel has jumped ship after seeing their career derailed by what Italians would call “raccomandati”,”recommended” or simply because they got fed up of fighting an uphill battle with windmills. This is exactly the same that is happening to PDVSA and what happened in the recent past to Petrobras and YPF. All these people were welcome with open arms by oil companies ranging from Talisman to Petronas. It’s a veritable diaspora of highly capable people that would be sorely needed to rebuild Pemex.

  2. Lemko
    Apr 15, 2019 at 2:04 pm

    Pemex is done with… It became a Net Oil Importer in End 2018, Consumption will keep growing higher while Production keeps decreasing.

    Honestly tough times ahead for Mexico, they need to setup EV’s asap, keep Oil for manufacturing and not transportation . Mexico cannot afford at all to become a Net Importer

    • HR01
      Apr 15, 2019 at 2:50 pm

      Consumption is not the issue. Production is.

      The road to becoming a net importer started years ago when the U.S. relaxed restrictions on the export of energy. Mexico has been getting much of its gasoline from the U.S. for a number of year now.

      Pemex is too far behind the curve on exploration and drilling. This huge debt load has to be repaid which leaves insufficient capital for exploration.

      Pemex has about $15B in debt maturing this year and next. Gets worse 2021 thru 2023.

      The next credit downgrade will be all it takes to turn out the lights. Junk status will force funds to sell the bonds. Moody’s likely serves as the executioner, they’ve been earliest on recognizing the deteriorating credit condition of the company.

    • clay
      Apr 15, 2019 at 3:56 pm

      They certainly can’t afford to become a net importer, but I am not so sure about the EV’s. Since they don’t have much hydro, nuclear or coal for power , a giant electrical vehicle fleet is probably not in the cards. It is probably more practical to move towards what worked before the discovery of the Cantarell super giant oil field and bring back the burros for transportation and the dried burro dung for heat.

      • char
        Apr 20, 2019 at 8:01 pm

        Solar.

  3. Kasadour
    Apr 15, 2019 at 2:44 pm

    Pemex has never broken above 4 MMBPD and there is no reason to believe it ever will.

    A lot of that stolen oil ended up in American oil refineries reminiscent of the Kuwaiti theft and sale of Iraqi oil to American oil refineries that led to the Iraq invasion of Kuwait.

    The only way PEMEX can be saved is by a substantial rise in price but if oil goes too high it causes demand destruction. To wit: Pemex’s glory days of 2.5 MMBDP output are in the rear view mirror.

  4. WES
    Apr 15, 2019 at 7:21 pm

    Clay: I agree going EV would just make a bad situation much worse!

    People drive ICEs because they are the most efficient use of available energy.

    An ICE only has to convert it’s primary energy sort 2 times to move itself.

    An EV has to convert it’s primary energy source 7 times to move itself.

    I suspect most EV system losses exceed ICE system losses.

    Then there is the limited working life and expense of replacing batteries.

    Only the rich can afford to own both EVs and ICEs at the same time.

    • Apr 16, 2019 at 1:20 am

      WES,

      This is getting really old. Five years ago, maybe OK. But now, still? Automakers in China will sell 1.6 million vehicles this year whether you think they’re efficient or not. People love them. Electric motors have a flat torque curve. They’re ideal for transportation. Electric motors are simple, they’re light-weight, they’re small but very powerful for their size and weight. The weak link is the battery, but the batteries have been getting a lot better every year. Look, you won’t ever have to buy an EV. But other people are buying them, no problem.

  5. Javert Chip
    Apr 15, 2019 at 9:04 pm

    Having done my share of (successful) operational turn-arounds, it’ll be interesting to see Mexico attempt three levels of purges (aka firings):
    1) Eliminate the bulk of the management crooks & thieves
    2) Eliminate featherbedding
    3) Swap out a minimum of 30% of remaining management to pump in new (perhaps even qualified) leadership.

    Then the new management can right-size the work force. Yea, that’ll be fun.

    Good luck with all the above. I’m betting Mexico can’t even get half-way thru #1.

    Interesting that Mexico appears to be pouring in the new $5.7B before the bulk of thieves & crooks have been eliminated. No bueno. The bad guys will now steal new $5.7B, along with computers, laptops, company cars, copper, pencils, etc, not to mention barrels of oil.

    Note to DQ: save this article; you’ll be able to reuse it in 2 years just by changing dates and increasing the dollar amounts that have been stolen.

  6. Peter Starr
    Apr 15, 2019 at 10:07 pm

    Apparently folks would rather demonize socialism etc. then accept simple limits. Cantarell was one of the great giant oil fields. It is now in precipitous decline, and no ownership or policy change will bring it, or us back. Too many people, not enough earth is an unsolvable predicament not a solvable problem.

  7. Rosebud
    Apr 16, 2019 at 1:16 am

    Aztecs first chronicled the arrival of HERNAN CORTEZ horses, April 21, 1519.

  8. Cobah.
    Apr 17, 2019 at 8:42 am

    More… Most unfavourable news for PEMEX and Mexico.
    Proven crude reserves dwindled to just over 6 billion barrels
    for 2019.(Reservas 1p AL 1 ENERO 2019)
    https://www.reforma.com/aplicacioneslibre/articulo/default.aspx?id=1653611&md5=d582ee1690f6504876350b1da103bbb2&ta=0dfdbac11765226904c16cb9ad1b2efe
    CNH (comision nacional hidrocaburos) had an oral announcement last friday.
    The report hasn’t been presented in a PDF format yet, as is customary.

  9. Matt Keprta
    Apr 19, 2019 at 3:45 pm

    What do you expect from this illegitmate child of Spain? Responsibility? Accountability? Read Jorge Castaneda’s “Manana Forever?” He is an apologist. But he spells the truth out about Mexico and Mexicans in the nicest terms possible of course. Mexico is a Republic in name only.

  10. yngso
    Apr 21, 2019 at 4:59 am

    The main problem is AMLO, who’s as obsessed with power as Chavez was. The latter started to destroy PDVSA shortly after coming to power.
    Fixing Venezuela isn’t easy. Mexico will be a doozy…

  11. yngso
    Apr 22, 2019 at 7:00 am

    AMLO is rolling back the energy reform, letting private companies work together with PEMEX. That was just about the only good thing his predecessor Peña Nieto did. AMLO also cancelled the badly needed new Mexico City airport. Venezuela all over again, in Latin America’s second largest economy, not good!

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