AMLO Plays a Shell Game With Pemex

When a July 7 explosion rocked an offshore production complex belonging to Petróleos Mexicanos, or Pemex, the state-owned company’s bonds also felt the boom. A week later came a Fitch downgrade, followed by a Moody’s decision to shift its outlook on Pemex to “negative” from “stable.”

The Mexican government had been reluctant to backstop Pemex debt. But on Thursday CEO Octavio Romero announced that the Mexican treasury will step in to refinance the company’s liabilities. The rescue will cut Pemex’s cost of borrowing by about half but does nothing to alleviate the company’s mismanagement, corruption, inefficiency and politicization. It might make things worse by removing market pressure. But it is an admission that Pemex can’t dig itself out of its $107 billion debt hole.

The blast on the Nohoch-A link platform in the Cantarell Field was caught on video. As heavy black smoke billowed above the inferno, emergency boats fitted with water cannons rushed to put out the flames. Rescue crews evacuated more than 320 workers. Two private contractors died in the accident, and one is missing.

Pemex said it shut down nearly “all the wells in the area” and lost 700,000 barrels of oil production. By Saturday afternoon the company claimed it had recovered 600,000 barrels of production capacity. Still, the accident was more than a hiccup at Pemex, once a beloved symbol of Mexican nationalism.

For Fitch it may have been the last straw. On July 14 the rating agency reduced Pemex “issuer default ratings” to B+ from BB-. The agency also said it is downgrading “approximately $80 billion of Pemex’s international notes outstanding to ‘B+/RR4 from ‘BB-.’ ”

Fitch said the downgrade “reflects the environmental and social impact associated with multiple accidents at Pemex’s operating facilities since February 2023.” It also cited concerns about “the Mexican government’s ability and willingness to materially improve the company’s liquidity position and capital structure in the next two years without concessions from creditors.”

Maturing debt of more than $15 billion this year and next, Fitch said, means refinancing “will expose the company to higher interest expense,” putting stress on cash flow. “An inability to refinance the capital markets debt with similar or other long-term financial instruments would exacerbate its liquidity risk by the end of 2024.”

At a morning press conference last week, Mexico’s President Andrés Manuel López Obrador pooh-poohed the Fitch rating as meaningless and said the latest accident was exaggerated in the media. But Mr. Romero’s announcement later in the week that the state will take over the role of raising money for the company looks like a direct response to deepening investor concerns that the company is a bad credit bet.

When Mr. López Obrador took office in December 2018, Mr. Romero said that by the end of the president’s six-year term Pemex’s daily crude production would reach more than 2.624 million barrels. In June crude production was 1.56 million a day including from partnerships.

Mr. López Obrador blames Pemex’s underperformance on company management under previous administrations—and on the 2014 energy reform that opened the market to limited competition. Naturally his solution is to pack the company with loyalists and try to restore its monopoly power in drilling and also in downstream activities like refining.

The government has canceled bidding rounds for new investment in oil exploration and drilling. Blocking private capital means forgoing additional oil output from the country and the commensurate tax and royalty revenue.

Pemex’s six refineries use only 54% of installed capacity. But AMLO built a new refinery in Dos Bocas, Tabasco, anyway. It cost $20 billion, twice the original estimate, and has yet to start up. Potential competitors in gasoline aren’t able to get permits to build filling stations or import supply. This hurts the broader Mexican economy: By refusing to comply with treaty obligations under the U.S.-Mexico-Canada Agreement and domestic law, the government discourages investment in other areas. Nearshoring has brought new manufacturing interests to Mexico but not nearly what might be if there were confidence in the rule of law.

In May Reuters reported a sharp increase in the production of high-sulfur “fuel oil,” a byproduct of antiquated and inefficient refineries. The inability to process this hydrocarbon stream means the company either has to export it—losing value—to more technologically advanced refineries in places like the U.S. or to burn it for electricity generation despite the heavy pollution it leaves behind.

Bond investors are celebrating the government intervention that set off a rally in Pemex debt. But by explicitly shifting the fiscal burden of a company that operates like a government bureaucracy onto the Mexican federal budget, AMLO has made Mexicans poorer.

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