Mexico City –– Mexican President Andres Manuel Lopez Obrador took office in December vowing to revive state-owned energy company Pemex and put the brakes on foreign investment to give the public a bigger cut of the country’s oil wealth.
The leftist oil nationalist’s ambitions include building a new $8 billion refinery, refurbishing existing refineries and reversing a steady decline in crude production.
The problem is that such expensive plans – for the world’s most indebted oil company – have alarmed credit rating agencies, which are threatening to downgrade Pemex bonds to “junk” status.
A downgrade could cripple the president’s bold energy agenda, along with his plans to use new oil revenue to help finance social welfare programs. It could also imperil Mexico’s sovereign creditworthiness.
With $106 billion in financial debt, Pemex would likely see borrowing costs soar as many investors dump its bonds. After Brazilian state oil firm Petrobras had $41 billion of its bonds classified as junk in 2015, its financing costs jumped from $1.6 billion to $8.8 billion in one year.
Mexico’s options are limited. Avoiding a debt downgrade would require slashing Pemex’s tax bill, forming more partnerships with private firms to develop oil and gas fields, and canceling the new refinery, according to Reuters interviews with investors from a dozen of the world’s largest asset managers, along with former Pemex executives and finance ministry officials.
On Monday, the government unveiled measures to lighten the company’s load, including a gradual tax cut, $2.5 billion in debt refinancing, and the extension of an existing line of credit with three banks.
The announcement, trumpeted by Lopez Obrador and other top officials, did little to convince doubters.
“There are still big question marks over the long-term viability of Pemex’s business plan,” said Aaron Gifford, an emerging market analyst with asset manager T. Rowe Price Associates, a major holder of Pemex bonds.
Lopez Obrador’s election halted a liberalization of the energy market that had for the first time given foreign and private oil firms the right to develop fields on their own and in joint ventures with Pemex.
Last week, the president announced Pemex would build the new refinery – planned for his home state of Tabasco – because private-sector contractors could not meet his proposed budget or three-year timeline.
Rating agency Moody’s on Monday attacked the refinery decision, saying it would probably take longer and could cost 50% more than planned.
“The consequences for Mexico’s credit profile will depend in part on whether it continues to undermine market confidence, further dampening already depressed investment and weighing on Mexico’s economic prospects,” Moody’s said in a statement.
The government intends to start building the refinery next month and finish by May 2022. Lopez Obrador also wants to overhaul the firm’s six existing refineries, which are accident-prone, operate at 40% capacity and have hemorrhaged money for years.
Some industry experts say Pemex’s finances will not support the president’s plans.
The new refinery will have to be canceled to avoid a downgrade, said one former Pemex executive, speaking on condition of anonymity and echoing the views of others. Another former Pemex executive told Reuters the state-owned firm should be trying to raise more money by partnering “like crazy” with private oil companies.
Lopez Obrador has generally been skeptical of private energy investment – especially from foreign firms – even while promising to expand Pemex’s production and refining capacity. He contends he can save the company money through a crackdown on corruption and fuel theft, and raise output by tapping fields with easily recoverable oil.
Some cabinet members, however, have acknowledged that Mexico could use outside investment to help revive its oil production.
“The government can’t do it alone,” Energy Minister Rocio Nahle told a gathering of mostly international oil executives in an April 30 speech.
Still, Nahle urged rating agencies to be “responsible” in evaluating Pemex’s debt. She argued the firm is meeting its obligations despite picking up the tab for what she characterized as previous mismanagement.
Pemex’s financial debt surged by 75 percent under the last government, and the company’s total obligations, including pensions, today exceed its assets by more than $70 billion.
Nahle said Pemex had started turning around operations and stopped taking on more debt under the new government.
“We’re investing in production and exploration; and we’re investing to produce more gasoline and added value,” she said.
‘CHAIN OF HORRORS’
Critics of Lopez Obrador’s plans, such as Juan Carlos Romero Hicks – a leader of the opposition center-right National Action Party in Congress – say he should have stayed on the path set by former president Enrique Pena Nieto and continued opening up energy development to private capital.
Instead, Lopez Obrador has piled new risks onto Pemex, Romero Hicks said.
“It’s a chain of horrors, and horrors that make a mess of public finances in a strategic industry,” he said.