Moody's Says PEMEX’s Refining Strategy Proves Harmful
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Moody's Says PEMEX’s Refining Strategy Proves Harmful

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Perla Velasco By Perla Velasco | Journalist & Industry Analyst - Thu, 11/24/2022 - 15:41

Moody’s Investors Service downgraded PEMEX’s credit rating based on its economic prospects due to a negative debt record and economic outlook. According to Nymia Almeida, Senior Vice President, Moody’s Mexico, the NOC’s decision to increase refining instead of focusing on production was a flawed strategy; PEMEX’s refining subsidiary lost US$7.37/b during 3Q22, reported Reforma.

To foster Mexico’s energy self-sufficiency, President López Obrador instructed PEMEX to decrease its crude oil exports to increase internal refining, as opposed to the previous administration that decided to decrease processing in the National Refining System (SNR), but this made Mexico dependent on US refineries. Turning around this former strategy proved to be a complicated and costly operation for the president, and outdated refineries ended up producing more polluting fuel oil than the desired diesel and gasoline.

Furthermore, Mexico’s fuel oil commercialization strategy became more complicated when the International Maritime Organization (IMO) implemented new regulation that prohibited ships to use fuel oil with more than 0.5 percent sulfur, criteria that PEMEX’s fuel oil does not meet. The increase in the production of fuel oil also enabled the Federal Electricity Commission (CFE) to produce more power to lower prices, despite expert opinion over the disadvantages of utilizing this fuel to create electricity due to the pollution it generates. 

PEMEX lost money during 3Q22 from its refining business, as the reconfiguration of the existing refineries to increase production represents a giant obstacle to the world’s most indebted oil company. Furthermore, the NOC has faced criticism over its environmental and economic practices, as well as the lack of investment to address such problems.

According to Almeida, it is important to plan for the long term since most oil companies have already established plans for the decline of the oil industry. When this happens, only the companies that can afford to produce in an environment of lower oil prices will survive. PEMEX, due to its high debt and fluctuating economic results, is unlikely to be able to invest enough for exploration and production in the long run, which might force the company to shrink.

Moody’s downgrade for PEMEX may mean that the oil company will need to depend further on the government to decrease its gargantuan debt. According to Reuters, this downgrade is expected to increase financing costs for PEMEX. The news is added to persistent warnings over policies that have created uncertainty for investors and conflict with its USMCA neighbors.

Photo by:   Twitter @lopezobrador_

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