Greener Future Required to Keep PEMEX Afloat?

The arrival of COVID-19 dealt a blow to the oil and gas industry and has set it on a new and, some would argue, more modern course. The trickle of carbon-neutral promises from the world’s major operators prior to the pandemic has turned into a tidal wave, as fallen oil prices and demand destruction has pushed billions of dollars-worth of potential resources off the table for good. Multi-billion dollar write offs have made headlines as has the almost €18 billion loss from 1Q20 suffered by Norway’s sovereign fund, the world’s largest and most successful and one that has been built on the nation’s oil wealth. All in all, the industry reliant on fossil fuels appears to be turning a newer, greener leaf.

This change is not being driven by concerns related to COVID-19 alone. The growing importance of sustainable and environmentally friendlier business practices, regardless of the sector, is finally knocking at oil and gas’ door. Behind this are the companies and individuals that provide financing for companies’ projects – the shareholders. As far back as 2016, Harvard Business Review named sustainability the “the fastest-growing cause for shareholders.” Environmental consciousness has grown over the past four years and so has the desire of shareholders to see sustainability move into the center of companies’ concerns.

Not all oil companies are involved in this effort to be greener. PEMEX, for example, is going in the opposite direction. The construction of a seventh refinery in Dos Bocas is among the actions the NOC is taking to bolster its refining strength and deliver energy sovereignty to Mexico, says the government. But according to a recent report by Reuters, choices like this could make it harder for PEMEX, the world’s most indebted oil company, to generate revenue.

Marie-Sybille Connan, Asset Manager at Allianz Global Investors – one of the NOC’s four major lenders – told Reuters recently that “it will become increasingly challenging for international institutional investors to bet on its (PEMEX) bond issuances if it does not address their sustainability concerns – whether climate, oil spills due to oil theft or health and safety.”

The federal government is determined to push PEMEX as its major economic development platform and competition within the renewable sector has been limited through a series of measures intended to secure the future of CFE. PEMEX has come under fire from the Nuevo Leon government, which, Expansión reports, has said that the health of its population is at risk from the pollution emitted by PEMEX’s Cadereyta refinery, some 53km from Monterrey. According to Alfonso Martínez of the Citizens’ Observatory for Air Quality in Monterrey, the sulphur dioxide produced during the refining process is “the main source of pollution in the metropolis.”

Reuters points out that the main sticking point for change within PEMEX continues to be the US$107.2 billion debt that it struggles under. The company’s performance during 1H20 – a record loss of US$23 billion in 1Q20 followed by a further US$1.9 billion in 2Q20 – has added to its financial despair and means all available capital must be funneled towards replenishing its reserves.

The backing PEMEX receives from the federal government means that its bonds are considered a safe bet on the stock market and so they continue to be bought. But as Moody’s pointed out when reviewing the company’s rating earlier this year, PEMEX’s dependence on the Mexican federal government is problematic. “We downgraded PEMEX's ratings and maintained the negative outlook on its ratings following the downgrade of Mexico's rating and its negative outlook given the critical importance of the government's financial strength and support in the assessment of PEMEX's credit risk,” said Nymia Almeida, Moody's Senior Vice President.

Mexico’s absolute backing of PEMEX could lead to problems if the company’s fossil fuel-led direction does not become more environmentally focused. With the relationship between PEMEX and Mexico so tightly woven, another rating’s downgrade to the company could have implications on Mexico’s sovereign bond.