Mexican President announces bailout for state-owned Pemex to counter fuel theft gangs

As part of a government package to provide a revenue boost following fuel theft by gangs, Mexican President Andres Manuel Lopez Obrador announced USD $3.9 billion bailout for the state-owned oil company Friday and an additional USD $1.6 billion in revenue, totalling USD $5.5 billion. The President is determined to rescue Petroleos Mexicanos, or Pemex, which was nationalized in 1938, as a centerpiece accomplishment during his first 100 days in office. He has launched an offensive against fuel theft gangs that drill illegal taps into Pemex pipelines.

President Lopez Obrador considers Pemex to be a national symbol and engine for the economy. The government package includes assuming pension debt, injecting cash, and cutting taxes for the company, which pales in comparison to the staggering USD $43.8 billion in debt the company has incurred since 2013. The extra revenue is expected to come from increased sales for the company as sources of stolen fuel dry up. “In Pemex there has been bad management and a lot of corruption, looting. If we end the corruption, Pemex will be reborn and that will apply to the country, as well,” he said while announcing the bailout.

The Fitch ratings agency lowered Pemex’s credit rating one step to “AA,” with a negative outlook in January and said the company is essentially insolvent, with negative cash flow and a debt exceeding the value of proven oil reserves. Following the announcement on Friday, Fitch said the bailout “would likely not be enough to prevent continued deterioration in company’s credit quality. The announced support measures are less than the $12 billion to $17 billion of additional annual cash requirements Fitch estimates Pemex needs to halt production and reserve level declines.

Mexico City-based oil analyst and consultant David Shield believes that to regain its position as a viable business, Pemex needs to invest more in exploration and production even though it has limited funds, saying, “Somebody will have to bring it (money) in and that somebody will probably be private.” However, President Lopez Obrador has been highly critical of oil and gas concessionary contracts granted under the energy reform of former President Enrique Pena Nieto, saying that private companies have been slow to make promised investments or produce much oil.

President Lopez Obrador said his goal is to raise crude output 45 per cent by 2025 to 2.4 million barrels per day, from the current 1.65 million barrels per day and stressed the importance of investing government money in doing things like building refineries to reduce Mexico’s dependence on imported gasoline, although those plans involve huge investments that don’t immediately boost the company’s output.

The President has also been unwillingness to tackle the oil workers’ union, which has kept Pemex payrolls swelled with more workers than needed, siphoned off money, and saddled the company with huge liabilities. A dissident group formed earlier this month to try to organize a new union at the oil company. “I think there is still a battle to be fought there. I think the union issues may be coming to a head in the short term,” said Mr. Shields.