How Did Pemex's Payment Slowdown Impact the Supply Chain?Wed, 01/18/2017 - 12:05
Hit by severe liquidity problems, PEMEX was US$8.5 billion in debt with its suppliers at the end of 2015. By May 2016, it had paid off US$5.3 billion, helped by credit lines from development banks and a liquidity injection from the Ministry of Finance. The situation arose after changes to PEMEX’s procurement function in 2015, when the payment period it promised its suppliers was increased to 180 days from 20. As PEMEX’s relationship with its suppliers stabilizes under new leadership and a recovering industry, Mexico Oil & Gas Review asked a range of industry players about the impact from the NOC's payment slowdown and the difficult choices suppliers faced when deciding how to react.
Filing lawsuits against PEMEX was not advisable due to the complexity of the situation. The fault does not lie with PEMEX because it was a public finance issue. PEMEX and CFE’s treasuries are run by the Ministry of Finance and companies should understand the risks when they agree to do business with them. The first influencing factor was the drop in oil prices, which changed drastically after many contracts had already been signed. Secondly, the previously strained relationship between PEMEX and the Ministry of Finance negatively impacted the NOC’s ability to make payments. PEMEX has now started to pay providers, focusing its efforts on smaller companies. This causes issues because if the larger companies are not paid there is a chain reaction and they cannot pay their subcontractors.
Most providers did not resort to legal action to recover delayed payments from PEMEX because the state company was often the only client they had. International companies facing this issue in Mexico accepted that if they demanded the payment from PEMEX it would be the last contract they would ever have with the company, and would basically amount to leaving Mexico. Mexican firms do not even have this option. The process is improving for two reasons. On one hand, PEMEX officials have the responsibility to fully follow up any debt with providers in a transparent way because they are civil servants controlling public assets. On the other, providers are no longer threatened with losing their only client because PEMEX is no longer the only industry player.
Our relationship with PEMEX has not changed significantly over the past year. PEMEX’s work is still extremely scarce with very little activity happening. The only palpable difference is its lower level of activity and its changing payment schemes. PEMEX’s payment slowdown has improved but it remains complicated. The payment terms were increased from 20 days to 180 days. This meant we had to find a way to finance Petricore in the meantime, so we turned to the NAFINSA invoicing system, through which we now collect all our invoices. Although we have to fund this new financial system, we are relieved that PEMEX’s payments are now more regular and stable. We had to adjust our strategy to fit in the changes but the most important factor is the stability of payments now.
When companies are considering how to react to delayed payments from PEMEX, they must make a business decision as much as a legal one, the question being, do they want to fight with their best client? The best move companies awaiting PEMEX payments can make is to approach law firms like Haynes and Boone for an informed legal opinion, instead of spending millions on official litigation procedures. This way PEMEX and the client can protect the relationship and avoid friction. They can then base their subsequent actions on this opinion and make the right decision based on different factors. We already detect a trend of PEMEX relying more on legal opinions rather than fully entering into litigation because it is a cheaper way of doing things and avoids drawn out disagreements.
By November 2016 PEMEX had paid us around 70 percent of what it owed us. In times of crisis we made sure to keep meeting our commitments because we trusted it would eventually pay us. The situation with PEMEX’s payments improved in 2016 because the new leadership has offered certainty, which is key. Now PEMEX can tell us the exact date of payment. Before the new management came in there was a lot of uncertainty. Even if there is a delay, knowing the payment date is useful for Grupo Hosto’s budget and work planning. It allows us to react and make internal decisions on important projects.
Contention was unavoidable given PEMEX’s payment slowdown. One must analyze the different parties involved in categories. Firstly, there are the oil service companies that hold service contracts with PEMEX. They have two choices when PEMEX does not pay them: either wait for payment or demand that payments be made more quickly. The first option allows them to maintain a positive relationship with PEMEX and avoids the long and complicated process of suing the NOC. Both factors make the decision to negotiate a more attractive option than taking legal action. Contention with operators is a different matter because these alliances are regulated by standardized, international terms and official bodies
Fortunately, we have a strong relationship with our financial partner, Navix, which works with us on these issues. The big issues for us are not cash-flow related but are related to activity levels. Not having enough production could kill our business so this is a big challenge for us. Having strong financial partners means we can give customers the credit they need. We think PEMEX is moving in the right direction. As suppliers, we need to help PEMEX design business models. The personnel at PEMEX Perforación y Servicios are enthusiastic about creating more integrated services and reducing excessive bureaucracy and supervision. It is a big area to change so the pace is slow but it is materializing.