How Did Things Get This Bad This Fast for Oil Giant, Pemex?

by Don Quijones, Wolf Street:

One of the biggest surprises awaiting seasoned travelers to Mexico these days is the daily sight of privately branded gasoline stations. For the past eight decades Mexican drivers had only one choice of filling station: state-owned oil behemoth Petróleos de Mexico (A.K.A. Pemex). Now they have six.

Of the first five private companies to open operations in the sector, three were Mexican (Hidrosina, La Gas, and Oxxo Gas) and two were US-based (Gulf and Petro-7). From 2018, foreign operators will even be allowed to sell imported gasoline from the gas stations they operate. It will be the first time since Mexico’s oil industry was nationalized, in 1938, that non-Mexican gasoline will be legally sold from non-Mexican gas stations.

This massive increase in competition is yet another big blow for an already debilitated Pemex and its myriad partners, for whom the retail business is (or at least was) a vital source of funds and profits, generating roughly 730 billion pesos ($36 billion) of revenues a year. Debt-burdened Pemex needs every peso it can get its hands on.

But rather than getting better, things just keep getting worse.

Pemex reported that in July its average crude oil production slipped below the psychological barrier of 2.0 million barrels per day, the lowest daily level registered since 1980. It’s a far cry from the glory days of the early 2000s when the company was pumping an average of 3.4 million barrels per day.

It’s not just Pemex’s crude production that’s falling. The total production of petroleum products in July was 834,000 barrels per day, 157,000 barrels per day less than in June. That’s a monthly drop of 19%. Compared to July 2016, Pemex produced 246,000 barrels per day less — a year-over-year drop of 29%.

How did things get this bad, this fast?

There are many reasons, including bad management, lack of vision, severe budget cuts, shrinking oil reserves, sinking oil prices, lack of investment resulting in poor or obsolete infrastructure, negligence and the huge tax burdens the government imposed on it in the years preceding Mexico’s oil reforms, while lavishing foreign companies with massive fiscal incentives to invest in Mexican oil fields. But there’s an even bigger reason: corruption.

Simple, plain, white-collar corruption.

There’s no better example of this than the accusations leveled against Pemex’s former CEO, Emilio Ricardo Lozoya Austin (2012-2016). Lozoya, formerly a board member of the scandal-tarnished Mexican subsidiary of the Spanish construction firm OHL and one-time senior election campaign advisor to Mexico’s current president, Enrique Peña Nieto, is accused by senior executives of the Brazilian construction firm Odebrecht of receiving “tips” worth some $10 million in exchange for his support in obtaining public work contracts.

The money allegedly passed through shell companies in the British Virgin Islands before coming to rest in private bank accounts belonging to Lozoya in Switzerland, Liechtenstein, and Monaco. Lozoya is one of countless public figures in a dozen Latin American and African countries, including Venezuela, Colombia, Argentina, Peru, Angola and Mozambique, to be accused of having his pockets lined by Brazil’s largest construction company.

The Odebrecht case could end up costing the Brazilian firm over $4 billion in fines — money it claims it does not have. The resulting corruption probe has imprisoned Brazil’s most prominent politicians and business owners. It has also done massive damage to Brazil’s state-owned oil behemoth Petrobras. Even Brazil’s former president, Luiz Inacio Lula da Silva, could face prison time for allegedly accepting Odebrecht’s paying for his family’s vacation home (while Brazil’s current bribe-drenched President is protected by the Senate).

In Mexico, the Attorney General, Raul Cervantes Andrade, is dragging his feet — perhaps no surprise, given a) he is a very close friend of President Peña Nieto, who is in turn a very close friend of Lozoya’s; and b) he worked alongside Lozoya on Peña Nieto’s presidential campaign. Within weeks of Nieto’s victory in 2012, Andrade was given the top job in Mexico’s justice system and Lozoya was handed control of Pemex, just as Nieto was about to begin denationalizing Mexico’s oil sector.

During his three-and-a-half years at the helm, Lozoya oversaw a dramatic deterioration in Pemex’s already poor financial performance. By 2015 the group’s total sales had plummeted by 21% and its operating losses had soared to an eight-decade high of $38.5 billion.

Between 2012 and 2016 the ranks of senior management and administrators on the company’s payroll tripled. Despite Pemex’s growing losses they awarded themselves generous salary rises and lucrative perks, including three executive planes and a helicopter, and 911 company cars and SUVs.

The planes and helicopter, personally requested by Lozoya himself, were supposed to be deployed in the fight against the mass theft of oil by armies of amateur opportunists who live close to the major pipelines that crisscross the country as well as some of Mexico’s most ruthless and organized drug gangs; instead, as the Mexican weekly Proceso reported this week, they were used to shuttle Lozoya and his fellow executives to and from luxury resorts in Mexico and the United States, at public expense. There’s no public record of who accompanied Lozoya on those jaunts.

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