Economics: Ineffective strategies to rescue Pemex

MEXICO - Report 20 May 2019 by Mauricio Gonzalez and Francisco González

Since international ratings agencies began downgrading Pemex debt late last year, the government has appeared to be flaying about in its efforts to placate critics, piling errors on top of contradictions and leaving the oil company even more vulnerable and devoid of prospects for improving conditions, even in the medium term. The last two weeks have produced a new barrage of official initiatives that are likely to underwhelm, while officials can only offer more promises that the missing piece in the larger policy puzzle, a long awaited Pemex Business Plan, will see the light of day in the next couple of months.

The new measures include plans for developing 20 “new” fields and related infrastructure based on 2.10 billion dollars worth of the sorts of sole-source contracts and restricted tendering that are becoming the new administration’s typical way of assigning projects. Pemex also revived an earlier form of E&P service contract that leaves the company shouldering essentially all investment risks and expenditures while providing it zero risk diversification.

Financial relief is now promised through plans to roll over up to 5.50 billion dollars in two revolving lines of credit, and refinancing 2.50 billion dollars at Libor +235 basis points (185bp above current bond yields). Moreover, under a new fiscal stimulus the government will pick up the tax tab for an additional 250,000 barrels per day of oil equivalent output in a move that will deprive a cash-strapped government of around 30 billion pesos per year in tax revenues. To compensate for that projected shortfall, the government has announced a new round of layoffs and employee logistical cuts that will deprive Pemex of even more essential personnel with the expertise to attend to daunting projects.

In short,these are more forms of marginal “support” that fail to solve the company’s structural problems, much less deliver new capital for E&P, or the technical and operational capacities with which to attend to any capex initiatives. This includes the improbable Dos Bocas refinery that Pemex and the energy ministry have been handed the job of building after four selected consortia apparently concluded that the timing and costs the government insists upon are non viable, even as the authorities have yet to devise an initial plan, much less its master plan, for the project.

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