Mexico’s state-run oil company Petróleos Mexicanos (Pemex) racked up enormous losses in 2020. It attributed them to the economic crisis caused by Covid-19, but really they reveal a serious crisis due to lack of productivity at the company.
President Andrés Manuel López Obrador now has no other option than to mitigate Pemex’s financial problems by making changes to its tax code and massive cash injections of money, using even surplus funds held at the Banco de Mexico.
The government will have to face US $14.7 billion in Pemex debt coming due. Obviously, it would be idea for this money to be invested in science and technology, in health priorities or in social benefits.
The company’s ills did not begin in this government term. Political and budgetary criteria have always been harmful to the company’s interests. López Obrador thinks that Pemex’s mission is to be a nationalist icon and a pillar of his political project. He proposes that oil revenues contribute to the wellbeing of the people. But he doesn’t seem to realize that this model expired long ago.
Pemex is no longer a chicken that lays golden eggs and needs to be transformed. Its operational and financial performance increases costs, dilapidates capital, reduces economic competitiveness and growth, all to the detriment of social wellbeing. Pemex’s big challenge should be to reduce costs, since the cost of its sales (MXN $246 billion) is almost equivalent to the total amount of its sales (MXN $249 billion), meaning that it does not generate money to pay for operations, debt, salaries and administrative expenditures.
In the energy market, Pemex’s failures caused Mexico’s dependence on imports of gasoline and natural gas. Its financial bailout is expected to cost 12 percent of Mexico’s GDP, with the government absorbing losses, debt, liabilities to its workers, negative capital assets. Moreover, if it aspires to increase oil production, it would have to double its budget and get it back to its levels of 15 years ago.
As there is no way of financing all of this, Pemex will go straight into default unless something changes radically. But the President gives orders and his ideas do not change. Recently, a board member proposed issuing petro-bonds, but this sounds like an invitation to ordinary people to put their savings into the same bottomless barrel. Overall, Pemex´s directors and board members stand in line with the President and do not propose much.
They and the President do not want to hear anything about doing new farmouts or any kind of strategic alliances with private partners. They do not want private investors involved in joint ventures on oilfields or in refineries, helping out with the financial rescue. They also do not accept putting all or parts of Pemex onto the stock exchange.
A crusade of productivity and innovation is needed. Pemex must focus only on its most profitable operations. In turn, fiscal support should be more effective, for instance, providing an exemption on payment of hydrocarbon taxes on oilfields from which Pemex is not producing.
Rationalization is required, eliminating unproductive assets and activities, in order to make Pemex a smaller and extremely efficient company. In the diagnosis, it should be considered that time is short and that the global and national energy matrix will change, as electric vehicles and new technologies advance.
Other countries –China, Brasil and Saudi Arabia among them– have been able to reorient their state-run oil companies in such a way as to open up sources of capital. But if there is one thing that characterizes the current government, it is not listening to, but instead disdaining, well-intentioned advice. López Obrador does not admit private investment, alleging supposed abuses and fraud in the past.
The President wraps himself up in the national flag in order to consolidate his power. His discourse of sovereignty is a strategy for increasing his political control, but it does not help Pemex. Rescuing Pemex would imply getting everyone to pool their efforts and should be based on dialogue and collaboration. As President López Obrador rejects this way of working, it will be his responsibility if Pemex’s deterioration is not halted.