Mexico gets Braskem to accept new terms on controversial ethane contract

Braskem agreed on “adjusting” once very favorable terms on its long-term contract to buy Mexican ethane after a year of talks and following an initial adamant Brazilian stance later softened after Mexicans late last year temporarily forced its Veracruz cracker and polyethylene plant shutdown.

Braskem Idesa plant in Veracruz, Mexico. Image courtesy of Braskem Idesa.

Braskem reported an accord that replaced the original terms of its 20-year contract with the Mexican state oil company Pemex. Braskem's majority owner is Novonor, formerly known as Odebrecht. The biggest minority owner of Braskem is the Brazilian state oil company Petrobras.

Mexican President Andres Manuel Lopez Obrador had sought changes claiming the deal had allowed Brazilians to buy Mexican ethane way below market, and get free shipping even when state oil Pemex needed to import the feedstock from the U.S. to deliver it. 

Pemex will no longer face the dilemma of either importing ethane to give to Braskem below cost or else face hefty fines, and a full construction investment refund clause in case of early termination was scrapped, Mexican media reported.

Braskem and its minority partner Grupo Idesa completed the $5.2-billion complex with just over a million tonnes annual capacity in April 2016. The investment resulted from an auction by Mexico to sell ethane in 2009. The partners  had won in public bidding, Braskem Idesa had stressed in past releases.

For nearly all of 2020 Braskem insisted on keeping terms, and reported an internal company investigation didn’t find any wrongdoing. Then Mexican President Lopez Obrador’s government forced Braskem Idesa to abruptly shut down the ethylene and polyethylene complex late last year by cutting off its energy supplies.

Shutting plant down

The Braskem Idesa venture said at the end of 2020 that Mexican officials acted irresponsibly as the abrupt power cutoff without notice prevented a shutdown under safety protocols. 

The sudden interruption of power and shutdown also caused supply problems for thousands of Mexicans that worked further downstream in the industry like distributors and plastic converters, it said. There was no warning before to at least alert customers, the company said.

A temporary agreement allowed a restart in early 2021 pending an accord as talks continued.

The new agreement establishes new volume and price commitments for the supply of ethane from Pemex, Braskem Idesa said.

Future deliveries will be “in line” with availability of this feedstock in Mexico, it said. It did not provide other details related to changes to the original 66,000-barrels-per-day supply accord.

New terminals

Braskem-Idesa said the Mexican Gulf region where its cracker and polyethylene plant is located will see a $400-million investment but didn’t provide a breakdown.

Braskem’s project involves a 16-mile pipeline and a $50-million floating storage, El Sol de Mexico said on Aug. 24. Braskem Idesa is also building a bigger project to store feedstock on land with a $150-million investment, it added.

It also said that the new accord involved using independent U.S. Gulf Coast references. Braskem Idesa imports ethane from the region.

The agreement eliminated fines that prompted Lopez Obrador to describe the deal with Brazilians as “leonine,” El Sol de Mexico said.

Adjusting terms

Braskem Idesa said on Sep. 28 that the agreement will allow Braskem Idesa, “over time, to produce  polyethylene at full capacity.”

But during most of 2020 Braskem Idesa had insisted on keeping terms, citing the lending behind the project depended on the contract.

Braskem and Idesa, with 75% and 25% equity, announced in 2012 the borrowing of $3.2 billion to finance most of the project’s $5.2-billion total cost.

Standard & Poor’s increased Baskem Idesa’s rating to B+ from B after the accord to adjust the terms was disclosed, Reuters news agency reported in Mexico.

Lopez Obrador, who started a six-year term in December 2018, had criticized the accord with Odebrecht since he was a candidate. 

In the U.S. Braskem and Odebrecht pled guilty on Dec. 2016 in what was described at the time as the largest foreign bribery case in history and agreed to pay $3.5 billion to solve charges in Brazil, the U.S. and Switzerland.

Odebrecht trial delayed a year

On July 17 2020 Mexico was able to get extradited from Spain former Pemex CEO Emilio Lozoya.

While Lozoya incriminated former Mexican President Enrique Pena Nieto with Odebrecht-related campaign funding, the trial is so far delayed by a year, Expansion reported.  

Braskem also said that despite not working at full capacity, resin production since its April 2016 inauguration has added $4 billion in exports and created thousands of direct and indirect jobs.

The shutdown coincided with a Mexican polymer market that was very tight and inventory building was urgent.

Lopez Obrador had in the past estimated losses to Mexico from the Braskem Idesa contract at about $683 million.

The 67-year old president run on a campaign centered on fighting corruption and retaining control of the country’s energy assets.

By Renzo Pipoli