Op-Ed – The MexiCOIL – Examining the Unraveling of Mexico’s National Oil Company – Pemex


Imagine you are the President of a country where the national oil resource is wholly owned, managed and operated by you – on behalf of 130 million of your citizens. This is the reality for Mexico’s President Andres Manuel Lopez Obrador (AMLO). However, the nature of reality changes over time. Will AMLO’s current strategy change in accordance with the new reality? This article explores this question.

Hope – The Current Pemex Strategy
On December 1st, 2018, AMLO was installed as the 58th President of Mexico. His platform included a bold strategy for Mexico’s energy sector – primarily Pemex. This strategy includes:

  • Reversing 15 consecutive years of oil production declines at Pemex.
  • Refusing to cut production even though Pemex continues operating unprofitable fields and refining facilities.
  • Reduce the export of Mexican crude. Reallocating those exports to Mexico’s refineries as an element of his plan to eliminate Mexico’s dependence on foreign energy markets. (Imports account for approximately 65% of Mexico’s domestic requirements).
  • Build a new US $8 billion Dos Bocas refining facility in Tabasco (AMLO’s home state – to end import dependence on refined petroleum products from the US).
  • Maintain resistance to oil exploration in Mexico’s deepwater reserves by foreign entities.
  • Attempt to refurbish dilapidated refining facilities with funding from cuts to other existing programs in the country, federal budgetary restraint, and, fiscal contributions from reductions in systemic corruption. In April 2020, a Mexican engineering company proposed a US $3 billion “rehabilitation” proposal for these refineries – paid for by Mexico in crude oil.
  • Stop fuel theft. Mexico’s Federal Auditors Office (ASF) released a report in January 2019 on fuel theft. This report reveals fuel theft cost Pemex US $3.1 billion (60 billion pesos) last year. The report states: “Currently, there is “no effective monitoring of the fuel transportation network.” There were 10, 293 fuel taps in 2017 and 14, 894 in 2018. This is a loss of lifeblood for the Mexican economy that no nation-state can afford without becoming woozy and wobbly.
  • Don’t borrow money.
  • Stop corruption – recapture its costs.

Reality – The Pemex Wreck
For 2019, PEMEX posted a net loss of US $17.7 billion (346.1 billion pesos). In late April 2020, Pemex reported a record first-quarter 2020 loss of $23 billion (562.13 billion pesos).

In April 2020, Pemex auditors KPMG issued a written “going concern” opinion about its future. “The report of the KPMG auditors on our consolidated financial statements as of December 31, 2019 will include an explanatory paragraph indicating that there is substantial doubt as to our ability to continue as a viable company.” As of May 4, 2020, Pemex has yet to submit their audited 2019 financial reporting to the SEC.

Pemex is the world’s most indebted oil company. (US $105 billion).

In April 2020 – Wall Street Rating Agencies reduced the rating on the US $105 billion in debt for Pemex into “junk status.” Pemex debt has lost almost a third of its value since the beginning of 2020. Institutional investors can no longer hold these bonds. The annualized price of Pemex debt to Mexico will rise.

In April 2020, the sovereign credit rating of Mexico was downgraded by Wall Street Rating Agencies – one grade above “junk status.”

Mexico’s six existing refineries operate at less than 30% of their capacity. They lose more money as production is increased beyond this point. Decades of not making the essential investments in maintenance and repairs have led to this degradation. Mexico currently refines about one-third of its oil production.

It has been reported that Pemex hedged about 15% of its 2020 production at approximately US $49/b. Thus, it will soon be selling its Maya crude blend into a market where prices are more than 50% below where they were a month and a half ago. The “Mexican basket” was priced at US $12.50/b on May 4, 2020. As analyst Pablo Medina observed: “What use is the hedge if Pemex is losing $20-$50bn by being forced to produce and refine at a loss? “Do the math – the hedge will not save Mexico.”

80% of ALL Mexican exports are sold to the US market – an economy now in a pandemic induced recession.

Pemex has unfunded pension liabilities of approximately $77 billion. Pemex has failed to pay employees, contract workers, and contractors.

Nations heavily reliant on oil exports like Mexico have seen their currencies deteriorate as the flight to safe-haven currencies – like the US Dollar entice investors. This recent devaluation of the peso is the worst performance among 24 peers characterized as emerging market countries. The peso to the US Dollar devaluation is the most rapid since October 2008.

A New Reality – AMLO’s Opportunity
Oil industry analyst Viktor Katona has been blunt: “Thus, PEMEX will have to find solutions by itself and find them relatively quick – investments beyond 2022 look increasingly problematic. Mexico’s offshore half-cycle costs are oscillating in the $25-30 per barrel interval and with the current price environment even brownfield investments are questionable.”

In an interview in the Financial Times, the Executive Director of the International Association of Oil & Gas Producers, Gordon Ballard, remarks:  “In the past, activity decreased then picked up again — each time, we saw it come back,” he said. “Now it’s not entirely clear if things just come back as normal. Everything has changed.”

AMLO has been characterized as a staunch Mexican nationalist. He has been characterized as stubborn and unwavering in his ongoing commitment to his campaign promises to the Mexican people. Does he have a vision for Mexico? He does. However, can that vision be informed and modified based upon the emergence of a new reality?

AMLO’s Challenge
In the Foreword to the book entitled, Mis-Measuring Our Lives, France’s former President Nicolas Sarkozy wrote:

“The time to change our trajectory is now. Amidst all these difficulties we cannot rest content with reacting on a day to day basis; we will not recover from the crisis with just ad hoc solutions…the only thing that will save us is unchaining our minds so as to gather the strength to make the necessary changes. The only thing that will save us is unchaining our minds so as to free ourselves from conformism, conservatism, and short-sighted interests….such a revolution is inconceivable without deeply challenging the way we represent the challenges of what we undertake, the results of what we do.”

Is AMLO capable of reimagining the future of Mexico and Pemex? AMLO’s challenge is characterized by a quote from scholar Daniel Levinson who writes: “As he attempts to reappraise his life, a man discovers how much it has been based on illusions, and he is faced with the task of disillusion. By this expression, I mean a reduction of illusions, a recognition that long-held assumptions and beliefs about self and world are not true. This process merits special attention because illusions play so vital a role in our lives throughout the life cycle.” (The Seasons of a Man’s Life).

The precariousness of Mexico’s Pemex cannot be understated. Can AMLO uncoil the threat that the unraveling of this Company may thrust upon Mexico? If so, what must he do?

First, he must discard the illusions that have inhabited his Pemex strategy since he took office. AMLO did not create this fiction of a company. He inherited it. Yet, now is the time and his opportunity to reimagine Pemex – for the future of the nation of Mexico. This will not be accomplished through stubbornly embracing an old reality that has been replaced with the new. It will require humility, creativity, courage, and leadership; a recognition that embedded within the tangled web of the coils of this current crisis – is a tremendous opportunity.

By Bill Dahl

Bill Dahl is a former Senior Vice President for Bank of America in Los Angeles, CA. He currently resides in Queretaro, MX. His insightful analysis of global economic affairs have been published widely. He is a contributing columnist for  IDN-InDepthNews and Wall Street International Magazine. 

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