PEMEX and the Future of the Mexican Hydrocarbon Industry

PEMEX has received credit rating downgrades given its continuous negative generation of economic flow. Despite this, AMLO has maintained his persistence in positioning the Mexican hydrocarbon sector as a priority on his political agenda.

PEMEX and the Future of the Mexican Hydrocarbon Industry

Key Points

  • PEMEX has received credit rating downgrades given its continuous negative generation of economic flow, despite the recovery in oil prices.

  • The credit downgrades are due in large part to PEMEX's indebtedness, its poor performance and poor organizational planning that the national company has been carrying for the last few years.

  • The administration of the President of Mexico, Andres Manuel López Obrador (AMLO), insists that PEMEX is and will continue to be the leading hydrocarbon company, granting it measures and capital injections to achieve this.

  • During the last months, AMLO proposed the creation of a new national company which he named “Gas Bienestar”. In addition, the federal government published modifications to the foreign trade rules that disproportionately favor PEMEX in the Mexican market.

Overview

The Mexican national company has suffered three credit rating downgrades by Moody’s in just the last year, going from Baa3, to Ba2, and recently from Ba2 to Ba3, within the Moody’s rating range, keeping a negative outlook. Likewise, the company Fitch Ratings downgraded PEMEX from BB to BB- according to its qualifying rank.


Despite this, AMLO has maintained his persistence in positioning the Mexican hydrocarbon sector as a priority on his political agenda. This year, his administration is investing 170 billion pesos to rescue and boost PEMEX, through capital injections and reductions in the tax burden of 73.3 billion pesos. However, despite the efforts of the Mexican government, PEMEX's growing debt stands at $116.8 billion. As a result, the Mexican company has become the 9th most indebted in the world, along with Apple, AT&T, and others.


In addition, Obrador has decreed the creation of a new national company under the authority of PEMEX, which will be called Gas Bienestar. The purpose of this company is to provide, distribute and commercialize fuel and petroleum products on the Mexican market at a lower price than all other private hydrocarbon companies.


In turn, on June 11, the Government published a modification to the General Rules of Foreign Trade (RGCE) for 2020 that establishes that only state-owned companies may import and export hydrocarbon, petroleum, mineral and precursor chemicals merchandise at a place other than authorized. This mechanism has been used by the public and private sectors to expedite the export or import of goods with special characteristics.


Impact

PEMEX has been victim of a credit degradation, which consequences include reduced credits, fewer funds to invest in projects, and less confidence in the international market. These facts make it very clear that PEMEX is not working properly, and that more than one operational and financial aspect must be changed within the company. In turn, the CEO of PEMEX, Octavio Romero, expressed his disagreement with the rating, accusing it of “lack of professionalism”.


COPARMEX defends the rating of the rating agency, arguing that it exhibits the “continuous deterioration of PEMEX's financial and operational operations, which erodes the fiscal strength of the country.”

On the other hand, the Business Coordinating Council (CCE) asked the federal government to reverse the modifications to foreign trade rules that benefit state companies "to the detriment of the private sector." Entrepreneurs consider that “Mexico runs the risk of not having essential merchandise for the industrial sector and for Mexican households” since these changes could affect between 25-48% of oil imports.


Looking Forward

PEMEX's exorbitant and growing indebtedness is a sign of its poor executive organization and the distrust of international investors in national energy companies. Therefore, the success of Gas Bienestar is at risk due to the same factors that are affecting PEMEX. It was proposed that the new company begin its pilot operation in Mexico City as of September 2021.


The private sector should not overlook this event, as it is remarkable that the federal government will do everything possible to strengthen PEMEX. Due to this, there is the possibility that it could have a social impact in Mexico, being a threat to the private business of companies that commercialize oil and its derivatives in Mexico.


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