A Very Bad Bet

Only Washington could devise a scheme to support US jobs by financing Mexico’s scandal- and debt-ridden state-owned oil company, Pemex

By Veronique de Rugy and Robin Currie

In the face of a pandemic-induced drop in demand for oil, private companies such as Exxon, Chevron and other US-based producers are cutting jobs and restructuring their operations. Mexico’s state-owned Petroleos Mexicanos (Pemex) is taking no such action. Indeed, it plans to increase its oil output through a new refinery in the Mexican president’s home state of Tabasco. And courtesy of new loan guarantees of $400 million, the US Export-Import Bank is helping Pemex to do it.

Because it ultimately answers to the Mexican government (the CEO is appointed by the country’s president, and a number of government ministers serve on its board), Pemex can afford to ignore market signals and make ill-advised investments if it so chooses. That’s Mexico’s business. But when the Ex-Im Bank agrees to subsidize a foreign parastatal that competes with US producers, it also becomes the business of American taxpayers.

And a deeper look at Pemex shows that markets aren’t the only thing the company is ignoring. Indeed, when it comes to Pemex, American taxpayers have plenty of other reasons to be concerned, from lax worker safety and environmental standards to shaky finances and allegedly shady dealings.

“The World’s Deadliest COVID Company”

With more than 300 of its workers dead from COVID-19, Pemex has the worst pandemic-safety record of any company in the world. Workers on its oil platforms are 10 times more vulnerable to the pandemic than the average Mexican citizen. One mechanical engineer at Pemex has described the company’s explosion- and fire-prone platforms as “time bombs.”

Pemex’s poor record on worker safety is nothing new. Between 2009 and 2017, fires, explosions, and collapsing oil rigs killed more than 190 Pemex workers and injured more than 570. These accidents also resulted in environmental destruction, including the pollution of three rivers that led to half a million Mexicans losing access to clean drinking water.

Yet during this time, Ex-Im kept funding Pemex regardless (to the tune of some $8.5 billion in taxpayer-backed loans and guarantees) and in spite of the bank’s assurances that safety standards are a key factor when considering financing.

Failing to Clean Up Its Act

Between 1965 and 2018, Pemex was the world’s ninth biggest energy producer of carbon and methane emissions. Most of its oil is “heavy sour crude,” which produces sulfur-rich fuel oil that is highly polluting. Pushed by investors and consumers, private companies in the United States are moving toward cleaner energy. Free from such pressures, the Mexican oil giant—the country’s largest company—remains unchanged.

Perhaps Pemex has limited capacity to address environmental concerns, providing as it does almost a fifth of the Mexican government’s budget revenues. The problem lies precisely in the political strings attached to Pemex’s revenues: Constant pressure to pull money out of the company coupled with funding pet projects of its political patrons crowds out investments to expand and modernize its productive capacity. In effect, Mexico’s oil production is stuck at 1979 levels, with Pemex’s six plants operating at about one-third of capacity.

A Mountain of Debt and Other Woes

Meanwhile, Pemex faces other, potentially huge, problems. For starters, the company’s debt pile – currently, a whopping $107 billion – is the largest in the global oil industry. Moreover, in the first quarter of 2020 alone, Pemex reported a loss of $23 billion, which is 2 percent of Mexico’s gross domestic product. This year, Pemex also became what Reuters calls “history’s largest fallen angel—a borrower that descends from investment grade to junk.”

At the same time, a massive corruption probe that could threaten many of Mexico’s top political elites also dogs the company. The probe centers on former Pemex CEO Emilio Lozoya. Following his extradition from Spain to Mexico in July, Lozoya has been charged with taking bribes and money laundering. But he is not going quietly. The onetime Pemex boss is cooperating with prosecutors and leveling his own accusations of graft—against three of the country’s former presidents, four former finance ministers, two presidential challengers, two state governors, and a number of lawmakers—in return.

The US government is paying attention to these allegations. In fact, the Department of Justice and the Securities and Exchange Commission have launched their own wide-ranging investigation into corruption at Pemex. They do so knowing that another US agency, the Export-Import Bank, is providing the company financial support.

Picking Winners and Losers

While American oil companies are laying off workers because of this recession, Ex-Im claims to be supporting jobs with its support to Pemex. Apparently convinced of its ability to pick “winners and losers” in the economy, the Export-Import Bank believes its $400 million in Pemex financing will facilitate the purchase of US oil and gas equipment and services. Narrowing its powers of prediction even further, it claims this will support up to 1,700 jobs in 11 states.

Supporting US jobs has long been the rationale for the Export-Import Bank’s operations. But Ex-Im has found another raison d’être (and justification for supporting Pemex): combatting China.

As mandated by Congress when it reauthorized the bank late last year, Ex-Im has allocated 20 percent of its funding to its new Program on China and Transformational Exports, which seeks to counter China’s advances in emerging technologies. The latter include artificial intelligence, biotechnology, wireless communication, renewable energy, and semiconductors. Not included in the list of special categories is oil and gas.

Nevertheless, Ex-Im still feels able to play the China card when it comes to Pemex. The new funding, it argues, “would help counter financing competition from foreign export credit agencies, including from China.” As Ex-Im sees it, the new financing is heading off Chinese efforts to forge closer ties with Pemex. But if that’s the case, what was the motivation for subsidizing Pemex all the years—decades!—before China’s economic ascendancy?

For American taxpayers, it’s time to start asking harder questions about the Pemex “deal.” Here’s a good one to start with: Can whoever occupies 1600 Pennsylvania Avenue on January 20 assure us that Ex-Im will stop using weak justifications to spend US tax dollars to support troubled foreign companies?