Braskem, Mexico hold talks on ethane as bribing probes take center stage

Pemex’s ethane output plunged since Braskem-Idesa started operations, slashing ethane deliveries and accumulating contractual fines that Braskem wants to collect. However, contract scrutiny intensified after the July 2020 extradition of a former Pemex CEO, now cooperating with authorities, who has revealed links between former Mexican President Enrique Pena Nieto and bribes-for-contracts schemes.

Braskem-Idesa cracker in Veracruz, Mexico completed in 2016. Image courtesy of Braskem-Idesa.

Braskem, owned by Odebrecht, started negotiations with the Mexican government over a two-decade ethane supply contract at prices way below market values that led to construction of a $5-billion ethylene-polyethylene complex, completed in 2016 but unable to run at capacity amid feedstock shortages.

Braskem Idesa imported in the second quarter 8,000 barrels per day (b/d) of U.S. ethane, or 13% of the cracker’s capacity, said Braskem’s investor relations manager Rosana Avolio during an Aug.7 earnings call. Utilization rates posted an 8% on-year increase thanks to imports.

Pedro van Langendonck, also with Braskem investor relations, said negotiations involve fine payments and addressing shortages.

“Up to date, we have roughly $66 million in liquidated damages that were not paid,” he said.

Mexican ethane shortage

Braskem and Mexican group Idesa won a 2019 auction for a 20-year, 66,000 b/d of ethane contract. This led to construction of a cracker and a million-tonnes-annual-capacity polyethylene plant in Veracruz.

Braskem and Idesa, with 75% and 25% current equity, announced in 2012 the borrowing of $3.2 billion. Total cost was $5.2 billion. Production started in April 2016.

Mexican natural gas production was 6.4 Bcf/d in 2015 but fell to 4.8 Bcf/d in 2018 and has remained at lower levels.

The National Hydrocarbons Commission (CNH) said that in June just over 3.6 Bcf/d resulted from gas output associated with oil extraction and 1.1 Bcf/d from gas fields.

Ethane production fell from 107,000 b/d in 2015 to 72,000 b/d in June, not enough to supply Pemex crackers, as well as Braskem Idesa.

Braskem said on Feb. 26 the contract was “in effect and valid between the parts in all of its terms and conditions” as it insisted on deliveries or fines.

Contract under scrutiny

Mexican newspaper Dinero en Imagen reported on May 30, 2018 that Pemex crackers at Morelos and Cangrejeras operated below capacity because Pemex was giving most ethane to Braskem.

Braskem’s contract forced Pemex to sell ethane to Braskem at about 80% under the Mont Belvieu benchmark it had to pay to source it. Because of ethane shortages, Pemex could only supply imported ethane at heavy losses or pay millions more in fines, the newspaper added.

The contract was signed during the government of Felipe Calderon (2006-1012), but modified two days into Pena Nieto (2012-2018) presidency. Terms were classified as “industrial” secret to avoid scrutiny, said non-profit citizen group Mexicans Against Corruption and Impunity (MCCI) on its website.

In 2018 Mexico’s current president Andres Manuel Lopez Obrador won elections after a campaign based on fighting corruption.

Odebrecht obtained advantages in Mexico through bribes, Lopez Obrador said in July 2017 in a video he distributed as a candidate, El Universal newspaper reported Aug. 13.

Lopez Obrador said then that Mexico should prosecute after bribery admission to U.S. authorities.

The U.S. Department of Justice said on Dec. 2016 Braskem and Odebrecht pleaded guilty and agreed to at least $3.5 billion in penalties to “resolve the largest foreign bribery case in history” involving payoffs for contracts in several countries.

On Feb. 12 Spanish police, acting on an international warrant, detained Emilio Lozoya, former Pemex CEO (2012-2016) under Pena Nieto. Spain extradited him to Mexico in mid-July.

Alejandro Gertz, Mexico’s chief state attorney, said on Aug. 11 that Lozoya declared Pena Nieto and former Finance and later Foreign Minister Luis Videgaray, who led the energy reform, participated in bribery.

Lozoya took bribes through an offshore fund while he was campaign coordinator for Pena Nieto, MCCI has said.

Lopez Obrador, who started his six-year term on December 2018, said on Feb. 26 that his government was “investigating if the contract can be canceled” in reference to Braskem-Idesa.

Braskem’s own investigation

Odebrecht, Latin America’s biggest construction company, and Braskem, Latin America's biggest petrochemical company, have since 2014 been at the center of corruption trials popularly known as ‘Car Wash’ in Brazil and other countries.

“I want to reemphasize that in the Car Wash investigations, we did look at Mexico,” van Langendonck said on Aug. 7.

“We do have an investigation report that was finalized in 2017 around the contract, nothing was found,” he added.

“We're going to some complementary procedures because in the news now, there are some details that were mentioned that were not, I mean, around 2017,” he said.

“So we have had the outside investigators to take a look at that and see if there is anything that comes up looking at these additional details,” he added.

Big ethane discount to attract investment

“The entire project was built based on the feedstock contract, right? That was the entire point of building something in Mexico. You see many other countries in the past, they had exactly the same approach,” van Langendonck said.

“At the time roughly of when the Mexico contract was awarded in the bid in 2008, 2009, the price for ethane in Saudi Arabia, if you wanted to build a facility there, was at around $30 per ton of ethane,” he added.

“So if you compare that to a discount on the Mont Belvieu ethane price, that was a discount of I don't know, I don't have the exact numbers here, but for sure, it was more than 50% discount. And I would say, closer to 80% discount, 90% discount,” he added.

“It is a strategy of countries to attract petrochemical investments by granting contracts to companies to attract investments,” he said.

Braskem’s CEO Roberto Lopes Pontes Simoes said regarding Mexico talks that “we are still in a negotiation with them in order to solve this issue.”

Braskem also works on its image, he added.

Odebrecht will take steps for the “private sale of up to its total equity” in Braskem to meet obligations to creditors, Braskem said on Aug. 7.

By Renzo Pipoli