Pemexproa In Sight

If companies go out of business, their owners must take responsibility, and there will be no bailouts, said President López Obrador. But the case of Petróleos Mexicanos (Pemex) is different. Soon, there will need to be—the Ministry of Finance and Public Credit knows—a financial rescue by the federal government, although the President does not want to recognize it as such. Pemex is perfectly insolvent, and its owners—127 million Mexicans—will have to assume the cost.

López Obrador, shaped by his activism against the Fobaproa, abhors financial bailouts. But the operational infeasibility of Pemex’s oil fields and refineries, as well as its negative equity (2.3 trillion pesos), its constant losses (1.7 trillion pesos in five years), its debt (105 billion dollars), and its labor liabilities (77 billion dollars) already make its rescue by the Nation urgent. Its revenue will not even remotely cover its liabilities and payment obligations in the short and medium term.

The Mexican government, as the sole shareholder representing all Mexicans, will have to make its support for Pemex explicit, formalizing the sovereign’s solidary obligation towards the oil company’s debt. The government will have to support and guarantee the payment of some part of Pemex’s debt, in addition to injecting massive resources to maintain its operation.

Perhaps the healthiest choice would be to liquidate  Pemex and structure it for a bankruptcy process. But that is not an option for López Obrador, who, awkwardly, placed Pemex at the center of his government project. His advisers never told him that, for all intents and purposes, Pemex’s best oil fields are depleted and its refineries are outdated, complicating the profitability of its operations. Or he did not listen.

The blame, according to the president, lies in the oil mismanagement of previous “neoliberal” governments. In part, he is right. But a regime change occurs precisely to correct inherited problems, which is not happening.

The López Obrador government, unfortunately, has shown that it does not know how to implement a better oil policy. The ideology prevails and unfeasible strategies are applied: the development of small “priority” fields with little potential and the construction of a new refinery. Pemex, between low petro-prices and the pandemic, has already reached the precipice.

This government, like the previous one, does not make a serious effort to slim down the company, close unprofitable wells and plants, reduce payroll, labor liabilities, and bureaucracy, solve union problems and disincorporate non-essential activities such as medical services. The executives of Pemex, also blind in their adherence to the president’s ideology, do not propose solutions based on strict financial and operational discipline.

Pemex has options, such as alliances and synergies of all kinds with private sector companies, including other oil operators, or the development of unconventional fields and the strengthening of industrial chains in the country, for example, together with fuel distributors and companies in the chemical industry.

But López Obrador and his team do not want to. Instead, they are trying to revive the monopolistic myth of autonomous sovereignty, they treat their suppliers unfairly, and see most businessmen not as partners in a national project, but as mercenaries and merchants.

López Obrador has said that his government will rescue Pemex, and the time has come to do so. But it will not be a productive rescue based on higher revenues, instead, a financial rescue through strong capitalization, injecting public resources that belong to all Mexicans. There is no other way. Pemex was a great company and it did not deserve to end like this, but one administration after another has failed.

The Pemexproa is already an inevitable fact. It will imply enormous capital contributions to the detriment of the public budget, but it will be necessary if the country wants to maintain its investment grade.

The article was originally published in Spanish in Reforma. 

The opinions expressed here are solely those of the author.