Braskem’s Etileno XXI’s Natural Gas Supply Shut Off

Braskem, a Brazilian petrochemical producer, has seen its gas supply cut off by PEMEX, Reuters reported. The closing of the valve ties into deeper issues regarding an ethane supply contract between the companies.

President López Obrador confirmed the government’s termination of the gas supply contract, conflating it with another ethane supply contract, which he deemed unfair. He cited that the conditions of the “leonine” contract were only to Braskem’s benefit due to its low prices, while harming PEMEX and the country’s finances. He also suggested that corruption from the Calderon administration was at the basis of the contract: “There is also a complaint of corruption against this company. They did not want to reach an agreement; they want gas and ethane to continue to be sold to them at 25 percent of its cost in the market and that of PEMEX. The people of Mexico subsidize 75 percent of the cost of gas. We can no longer continue this, because we can become accomplices of corruption,” he said. López Obrador added that the contract term had merely ran out, meaning that the government did not break any of its contractual promises. However, Braskem Idesa reported that its gas supply was indeed cut off on the night of December 2 without any notice. The company needs the natural gas to power its operations; a contract supplying ethane still remains in place.

Braskem’s operation, which it owns 75 percent and runs together with Mexican company Idesa, received information from CENAGAS that its supply would therefore come to a halt. Braskem had earlier tried to renegotiate the contract and attempted to make arrangements to store methane, Forbes reported.

Braskem Idesa informed reported to the media that “the actions of CENAGAS have caused the total suspension of the plant's processes, with the consequent and negative repercussions not only for us, the plant, our customers, suppliers and employees, but also for the hundreds of businesses that depend on the value chain, affecting the national petrochemical company and the economy as a whole,” adding that the company always abided within the boundaries of the law and the legal framework set by Mexico, as well as following international standards. “We have repeatedly expressed our willingness to discuss with the authority the issues that are being raised today in relation to the operation of Braskem Idesa and its contracts with the Mexican state companies, bringing proposals and solutions," they added.

Adrián Calcáneo, Director at IHS Markit explained the underlying situation and its further effects to El Financiero. He notes that the ethane contract and the natural gas supply are two very separate issues, but it is the continuing ethane contract that is under dispute. “The access to natural gas is a theme that will pull Braskem Idesa back to the negotiation table,” he noted. The ethane contract was signed in 2010, when there was plenty of ethane available for PEMEX. A decrease in production made the resource increasingly costly for the NOC in recent years.

Hernán González, Partner at Norton Rose Fulbright, argued that the contract looks much worse in hindsight than it did back in 2010: “It made sense considering not only the natural gas and ethane prices and its access, but also PEMEX’s business plan at that time. PEMEX’s plan was to continue to produce ethane and natural gas and that plan changed dramatically. And, of course, now it does not seem like a good business but no one is blaming PEMEX’s business plan change, which in my opinion is what is rendering this project as expensive. That does not necessarily mean that there was corruption, even though this possibility cannot be ruled out completely in any sector of the economy in Mexico, unfortunately,” he told MBN in a recent interview.