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Pemex's corruption crusade isn't winning over investor -CEO

Alejandro Cegarra/Bloomberg
Petróleos Mexicanos CEO Octavio Romero Oropeza.

- Critics say the company urgently needs to reverse declining oil production.

By Amy Stillman/ Bloomberg

Petroleumworld 06 14 2019

“Will passenger Octavio Romero Oropeza please come to the ticket counter,” blares a loudspeaker at Veracruz airport, briefly drowning out the clank of ancient air conditioners and the cacophony of passengers grousing about delayed departures.

The chief executive officer of Petróleos Mexicanos is running late—again. That's a feature, not a bug. One of Romero's predecessors, Emilio Lozoya, regularly commandeered a company helicopter to commute to work and to travel to nearby destinations, racking up a bill for 9.8 million pesos ($511,000), according to a federal audit.

Romero is on the front line of a campaign by his boss, President Andrés Manuel López Obrador, to rid the country of endemic corruption. The strategy involves leading by austere example, and that's what Romero is trying to do at Mexico's most important company. Taxes and fees paid by the state-owned Pemex contribute 20% of the government's budget, so its fortunes and those of the country are inextricably bound together. Nowadays, that codepen­dency is more of a liability than a boon. On June 6, Fitch Ratings Inc. downgraded Pemex's bonds to junk status, citing the company's falling oil production and ballooning debt, and cut Mexico's sovereign debt rating as well. Moody's Investors Service Inc. delivered a similar one-two punch, shifting both Mexico's and Pemex's outlook to negative.

Over the course of a two-hour interview last month, Romero outlined his plans to shore up the tottering giant, which has an annual budget of $24 billion and employs about 128,000 people. Although he's been on the job for only a bit more than six months, Romero touted the success of some of his signature initiatives, including appointing honest party loyalists to senior management posts and clamping down on the multibillion-dollar trade in stolen fuel, which relies on collaborators inside the company.

A 60-year-old agronomist with no oil industry experience, Romero hasn't managed to convince investors that his “clean hands” campaign amounts to a viable business plan. Prioritizing the battle against corruption is “a mistake,” says Luis Maizel, a senior managing director at LM Capital Group in San Diego, which holds Pemex bonds. Maizel argues that is a job not for the CEO but for the compliance department. Romero should be spending more time figuring out how to halt a 14-year slide in crude output. “You have to solve everything at the same time,” says the money manager. “You cannot solve one thing at a time.”

Analysts want to see a more concrete plan for reviving production, especially after the new administration of López Obrador suspended auctions that would have allowed Pemex to share the financial burden of developing oil fields with private partners. Investors also want guarantees that the $8 billion refinery the president wants to build in his home state of Tabasco will not divert resources—or management attention—from that task.

Romero's most important achievement has been a drastic reduction in gasoline theft, a long-standing problem that worsened in recent years as drug cartels infiltrated the illicit industry. Immediately upon taking office in December, AMLO, as López Obrador is widely known, deployed soldiers to stand guard over Pemex pipelines and launched an investigation into gas stations suspected of selling pilfered fuel . The crackdown coincided with a pipeline explosion in the state of Hidalgo in January that killed more than 100 people who'd gathered there to collect gasoline from an illegal tap.

Romero said the tragedy only cemented his and the government's resolve and credits the policies with reducing Pemex's losses from theft by 95% since November, which will translate into $32.6 billion in additional revenue this year. Analysts question how Pemex arrived at those numbers: “Greater transparency in the calculation of this reduction would be useful,” says Ixchel Castro of energy consultant Wood Mackenzie.

Romero and AMLO met in the early 1990s in the oil-rich state of Tabasco, where both got swept up in a leftist movement that would go on to challenge the Institutional Revolutionary Party's 71-year monopoly on power. When AMLO was elected mayor of Mexico City in 2000, he tapped Romero to head the administrative office. A five-year stint supervising the bureaucracy of the city was a dress rehearsal for his current role. “Pemex makes a lot more money than Mexico City, and where there's more money, there's more corruption,” Romero said.

His strategy for cleaning up the company involves “removing the head from the body.” Replacing the top brass with his own team hasn't produced any discernible results on that front. In fact, one Pemex veteran elevated into a top job was forced to step down earlier this year amid reports that he'd diverted billions of pesos in public funds in his previous job at the company.

In the interview, Romero echoed AMLO's promise not to target suspected crooks from previous administrations—“we're not reviewing the pocketbooks of the ones before us”—but that stance may be changing. Late last month, the government issued a warrant for the arrest of Lozoya, the ex-Pemex chief, as part of an investigation into the purchase of a fertilizer plant. A court suspended the warrant, and Lozoya has denied all wrong­doing in a statement he posted on Twitter.

Adrián Lajous, who led Pemex from 1994 through 1999, doubts Romero's approach will make a dent in corruption. “The belief that it can be easily and promptly eliminated from the top down is a gross oversimplification,” he said in an email. “Its eradication will require time, a detailed strategy, and a sustained managerial discipline.”

Investors are less interested in seeing Romero root out bad apples at Pemex than they are in his containing the spreading rot on its balance sheet. At more than $100 billion, its debt is the biggest of any oil company. Romero admitted that Pemex's financial situation was worse than he'd anticipated: “One thing is what you have read, listened to,” he said. “Another is when you arrive and are suddenly faced with the reality of the situation.”

On his watch, the company has secured lines of credit from international banks, allowing it to renegotiate $8 billion worth of debt, and declared a two-year moratorium on new bond issuance. AMLO has injected fresh capital and taken steps to lighten the company's fiscal burden. His government is drafting legislation to revamp the oil royalty regime, which could yield a $7.2 billion reduction in Pemex's tax contributions by 2021.

Romero is also on a drive to cut costs, renegotiating drilling contracts to extract more favorable terms and eliminating hundreds of jobs. He's called a halt on deepwater exploration and production, saying onshore and shallow-water areas are less costly to develop. Investors question the logic of reducing spending in core drilling operations while lavishing funds on an expensive refinery. “All they're doing is diverting from one pocket to the other,” says John Padilla, managing director of IPD Latin America, an energy consultant.

Padilla and other Pemex watchers will tell you that Job One for Romero should be replenishing Mexico's dwindling proved reserves of crude, which have fallen almost 77% in two decades, and boosting oil output. At 1.7 million barrels a day, production is now less than half of what it was at its peak in 2004. Romero pointed to a handful of recent onshore and shallow-water discoveries. Although he conceded they don't hold a candle to Cantarell—the giant deposit in the Bay of Campeche propelled Mexican production for decades but is now almost tapped out—he's not deterred. His eyes lit up as he sketched a map of exploration areas on a scrap of paper. “They're not necessarily extraordinary fields, but we've found some very important deposits,” he said.

BOTTOM LINE - Six months into his tenure, Pemex's CEO is struggling to shore up the company's finances, while his quest to stamp out corruption hasn't produced verifiable results.

Story by Amy Stillman from Bloomberg. 06 13 2019


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