Facing possible bankruptcy, Pemex announces plans to upgrade its refineries

Pemex's Miguel Hidalgo refinery. (Photo: excelsior.com.mx)

The Financial Times reports that on Tuesday Dec. 8, the day oil prices hit their lowest since 2009, Pemex, Mexico’s loss-making state oil company, announced eye-popping investments of USD$23 billion.

The news comes in the midst of dire straights for Pemex, which has been rumored to be on the verge of bankruptcy for years and whose chief executive, Emilio Lozoya Austin, is under fire to resign.

The multi-year investment, in conjunction with the private sector, will be used to upgrade refineries in order to produce cleaner fuels and operate more efficiently, and on co-generation projects, Pemex said in a statement.

Pemex gave no detail on who would help fund the investment – Pemex made a record USD$10 billion loss in the third quarter. The announced investments also appeared to add up to more than USD$23 billion, suggesting some of the investment had already been committed. No one was immediately available at Pemex to clarify.

Enrique Peña Nieto, Mexico’s president, underscored the importance of the investment in the transformation of Pemex from state monolith to a company that will have to compete on its home turf under the energy reform now under way.

Pemex logo.
Pemex logo.

The investment, the president said, speaking at Pemex’s Tula refinery in the central state of Hidalgo, is about twice the budget of Mexico City, and will enable the company to create 63,000 jobs. (Pemex is actually also trying to reduce its payroll because of a colossal and unpayable pension burden that has led to a major pensions overhaul at the company).

Pemex had previously announced refinery upgrades but had to slam the brakes on the plan after government austerity cuts slashed its budget.

Petróleos Mexicanos (Pemex) is swimming in red ink. Many specialists affirm that the state oil company is facing a technology crisis and if it doesn’t improve its finances, production will continue in free-fall.

Besides having to survive in the face of record low oil prices, Pemex last week was faced with an alleged act of corruption involving its president, Lozoya Austin.

In an audio recently distributed in YouTube, Lozoya Austin was alleged to have been the intermediary for Mexican construction company OHL to acquire a contract from the Federal Electricity Commision. The recording was denied by the companies involved, but the accusations of conflict of interest by Lozoya Austin persist.

Pemex recently announced that it would open five gas stations in Houston in an effort to penetrate the retail market in the USA. The oil company said it would continue to seek opportunities to expand by opening more stations in USA cities with large Hispanic populations.

Pemex is the only company that refines oil and imports gasoline into Mexico.

Despite its many longstanding problems, experts in oil markets affirm that Pemex requires more state support because it accounts for more than half of Mexico’s Gross Domestic Product (GDP).

Nymia Almeida, a leading Pemex analyst at Moodys, said Pemex’s current deficit is due to its debts and to the large tax  burden it bears.

Photo: excelsior.com.mx Pemex's Miguel Hidalgo refinery.
Photo: excelsior.com.mx
Pemex’s Miguel Hidalgo refinery.

In its annoucement on Tuesday, Pemex said its “green growth strategy” focused on the following projects:

  • Upgrades to Pemex’s six loss-making refineries to enable them to produce ultra low sulfur petrol, at a cost of $3.1bn. This will slash the emission of greenhouse gases and pollutants by 90 per cent, Pemex said. The upgrades will be completed in the first quarter of 2016. The upgrade will more than double the output of ultra-low fuels.
  • Pemex said it would also invest $13bn at three of its refineries to make better use of residual products that would enable it to slash the use of coke to 2 to 3 per cent from 20 per cent and boost crude processing.
  • A further $3.9bn will be spent on producing ultra low sulfur diesel at Mexico’s six refineries, which will reduce the need for imports.
  • Pemex has already said it wants to capture the steam from its various industrial processes and use it to generate electricity, thus cutting operating costs and making its refineries self-sufficient in energy. It now plans to invest $3bn in such co-generation projects and said that in the long term it aimed to supply 13 per cent of national electricity demand, which would place it as Mexico’s No. 2 supplier behind state electricity company CFE.
  • Pemex also plans to invest $6.6bn in its second-biggest refinery, the Miguel Hidalgo plant in Tula where the president was speaking. The upgrades are expected to boost processing capacity.
  • Pemex also said it would renovate the Technological Museum now owned by the CFE and rename it the National Energy and Technology Museum, at a cost of $270,000.

Sources: Financial Times, El Universal, El Financiero