“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.