LNG

Petroleos Mexicanos (Pemex), the Mexican oil and gas producer, appears to have nothing left in its locker to cope with the current global crisis and may have to call on US credit lines for its pipeline natural gas and LNG imports after its corporate and state ratings were reduced.

The socialist government of President Andrés Manuel López Obrador, which had made boosting Pemex’s declining output one of its core objectives, is now being squeezed on the financial front after reversing previous administration’s policies and keeping private companies out of the energy business.

Before then crude price slump and coronavirus impacts Pemex had produced 1.7 million barrels a day of crude on average in January 2020, below government forecasts and just half of peak production of 3.4M barrels in 2004. 

Analysts said that with oil prices where they are, 75 percent of Pemex’s oil and gas fields will only generate losses if output is not cut.

They added that the risks goes well beyond Pemex as the Mexican government relies on the energy company to fund 18 percent of the national budget with its oil sales.

US company S&P Global Ratings has now downgraded Pemex and its subsidiaries PMI Trading Ltd., PMI Norteamerica SA and MEX Gas Supply and conducted similar action on the sovereign credit rating.

“Recurring government aid to Pemex over the last 12 months reinforces our assessment of an almost certain likelihood of extraordinary government support if the company were to run into financial difficulties,” explained S&P Global.

“Therefore, the ratings on Pemex continue to mirror those on the sovereign debt,” it added.

López Obrador was aiming to build a large new oil refinery in an $8 billion project with which he hoped to divert Mexican oil exports to domestic use and cut dependence on US fuel imports.

The Mexican President had reversed the policies of the previous administration that had decided to gradually cut Pemex loose from state funding for its monopoly business.

Some of the refinery contracts were awarded in July 2019 for the project in the southern port of Dos Bocas to companies including US LNG and energy engineers KBR Inc., Fluor Corp. as well as Samsung Engineering of South Korea and several Mexican companies.

The refinery in the President’s home state of Tabasco was scheduled to process 340,000 barrels per day of Mexico’s benchmark grade, Maya heavy crude, and to be completed by 2022. 

S&P Global downgraded its foreign currency and local currency ratings on Pemex to “'BBB” and “BBB-plus” from “BBB-plus” “A-minus”  respectively, and maintained a negative global scale ratings outlook after similar action on Mexican government debt.

“Lower oil and natural gas prices anticipated over the next two years will jeopardize the execution of Pemex’s business plan, because weaker cash flow will limit the ability to fully fund its multi-annual capital investment needs,” explained the S&P report.

“In this context, we see limited room for Pemex to improve its very weak credit metrics any time soon,” stated the US firm.

“In addition, low cash flow generation prospects and an extended period of adverse financing conditions could gradually tighten the company's liquidity,” it added.

“Therefore, we have revised downwards our stand-alone credit profile (SACP) on Pemex to “CCC-plus” from “B-minus,” said the report.

“The negative outlook on Pemex mirrors that on the sovereign and reflects our view that the close relationship between the company and the sovereign will remain unchanged in the next couple of years,” S&P explained.

“Our assessment also captures the integral link between Pemex and the government, given its full ownership of the company and the high government involvement in all strategic decisions,” it added.

“We consider that our assessment has been reinforced over the last 15 months through recurring government aid to Pemex in the form of capital contributions, legal amendments to alleviate the company's tax burden, the monetization of certain assets, and close collaboration to deter fuel theft,” said the credit report.

“Another factor captured in our assessment is the reversal in Mexico's energy policy under the current administration, which repositions Pemex at center stage and curbs the participation of private players in the domestic energy sector,” added S&P.

The US ratings firm said it expect a “pronounced hit” to the Mexican economy with the combined shocks of the coronavirus in Mexico itself and in the US, its main trading partner, and lower oil prices.

“These shocks, while temporary, will worsen already weak gross domestic product (GDP) growth dynamics for 2020-2023 that reflect, in part, low private-sector confidence and poor investment dynamics,” it said. 

The American Gas Association has welcomed the new natural gas transmission pipeline safety rules from the Pipeline and Hazardous Materials Safety Administration (PHMSA)  as representing a consensus approach to enhancing the safe transportation of America’s abundance of natural gas to domestic customers and LNG plants.

The PHMSA released three rules intended to continue to improve the safety and resilience of the vast US energy delivery infrastructure to keep pace with increased supply and demand.

“This significant update to pipeline safety regulations is the culmination of years of work by government, industry and pipeline safety advocates,” said AGA President and Chief Executive Karen Harbert.

“We applaud PHMSA and everyone who participated in the process for a final rule that brings certainty to our industry and everyone that works to deliver natural gas to customers throughout the country that want it,” stated Harbert.

The AGA pointed out that the Gas Pipeline Advisory Committee provided PHMSA with recommendations on the technical feasibility, reasonableness, cost-effectiveness and practicability of the proposed rule and recommendations to support finalizing the rule.

The PHMSA said the three significant final rules published in the Federal Register will strengthen the safety of more than 500,000 miles of onshore gas transmission and hazardous liquid pipelines throughout the US.

The rules will also enhance the PHMSA’s authority to issue an emergency order to address unsafe safety conditions or hazards that pose an imminent threat to pipeline safety.

“These are significant revisions to federal pipeline safety laws and will improve the safety of our nation’s energy infrastructure,” said US Transportation Secretary Elaine L. Chao.

The US pipelines deliver trillions of cubic feet of natural gas and hundreds of billions of ton-miles of liquid petroleum products each year.

The pipeline regulator said the gas transmission and hazardous liquid pipeline safety rules would modernize federal pipeline safety standards by expanding risk-based integrity management requirements, enhancing procedures to protect infrastructure from extreme weather events, and requiring greater oversight of pipelines beyond current safety requirements.

The regulator said that final rules address significant Congressional mandates from the Pipeline Safety Act of 2011 and recommendations from the National Transportation Safety Board.

“The tremendous growth in US energy production will require greater anticipation and preparation for emerging risks to public safety,” said PHMSA Administrator Skip Elliott.

“These forward-looking rules will help ensure pipeline operators invest in continuous improvements to pipeline safety and integrity management,” Elliot added.

The gas transmission rule requires operators of gas transmission pipelines constructed before 1970 to determine the material strength of their lines by reconfirming the Maximum Allowable Operating Pressure (MAOP).

In addition, the rule updates reporting and records retention standards for gas transmission pipelines.

The hazardous liquid rule encourages operators to make better use of all available data to understand pipeline safety threats and extends leak detection requirements to all non-gathering hazardous liquid pipelines.

In addition, the rule requires operators to inspect affected pipelines following an extreme weather event or natural disaster so they may address any resulting damage.

All three final rules were transmitted to the Federal Register for publication.

The mission of the PHMSA is to protect people and the environment by advancing the safe transportation of energy and other hazardous materials that are essential to the daily lives of citizens.

The PHMSA develops and enforces regulations for the safe operation of the nation’s 2.8 million-mile pipeline transportation system and the nearly one million daily shipments of hazardous materials by land, sea, and air.