Pemex, Braskem escalate dispute over ethane contract
Braskem weighs its options after its ethylene and polyethylene Mexican subsidiary Braskem-Idesa didn't receive agreed ethane volumes nor compensation from Pemex. Mexico replied it is investigating the contract.
Pemex had not yet issued a credit note for $26 million over “liquidated damages for delivering ethane in lower volumes than agreed” to Braskem-Idesa, Braskem said on Feb. 26, 2020.
Braskem, Latin America’s biggest petrochemical company, was referring to its venture with Grupo Idesa. The cracker and polyethylene plant has had to work months under capacity and to resort to ethane imports.
Braskem Idesa recently resorted to import ethane from the United States as a temporary patch. It was not its original plan presented to banks that financed the project.
“Braskem Idesa has been holding talks with Pemex to preserve its rights so that it will provide a solution to the matter, and, if needed, will take actions as allowed in the contract,” it said.
Braskem partnered a decade ago with Mexican company Grupo Idesa to build the plant that started operations in June 2016 with Braskem as majority partner and operator.
The ethane contract was “part of the structural contract of financing of the petrochemical complex in Mexico,” Braskem said. It is "in effect and valid between the parts in all of its terms and conditions,” it added.
Seven financial institutions, including the World Bank’s International Finance Corporation, lent over $3 billion to this complex near the port of Coatzacoalcos.
Non-performance led to working under capacity
Braskem Idesa has capacity for 1.05 million tonnes of ethylene as well as 750,000 tonnes annually of high-density polyethylene and 350,000 tonnes annually of low-density polyethylene.
Because of the Mexican failure to deliver ethane as initially agreed, Braskem Idesa had operated at about 75% of capacity in late 2019.
The ethane supply contract resulted from an auction a decade ago by Mexico to select buyers for 66,000 barrels per day of ethane. Braskem was awarded the 20-year contract.
The original intention of the accord was to promise delivery of ethane at below market prices to help Mexico develop a petrochemical industry, as the country had to import most polyethylene it used.
Braskem Idesa said in its third quarter 2019 earnings release that it entered into accords with Smart Pass, a logistics operator, and with Enestas, a cryogenic gas transportation company, to start ethane imports from the United States.
At the time, Braskem said negotiations included up to 25,400 barrels per day, equivalent to 38% of the complex annual ethane requirements. Imports were set to start as soon as at the end of 2019.
On Feb. 10, 2020 Braskem said it had started ethane imports. It reported a $4 million investment to import up to 12,800 barrels per day of ethane. This represents 19% of the cracker capacity.
Braskem Idesa is also assessing for the longer term plans to build a 50,000-barrel-per-day import terminal and a pipeline and plans to take a decision in 2020.
Mexico investigates whether it can end contract
Mexican President Andres Manuel Lopez Obrador said on Feb. 26 during a routine daily conference that his government was “investigating if the contract can be canceled.”
“Pemex petrochemical plants were left without gas so that they can supply gas to this plant” at below market prices, he said.
Lopez Obrador started his six-year presidential term in December 2018. He won the presidency, and his party secured a majority in Congress following campaign promises of fighting corruption he has blamed on preceding administrations.
Lopez Obrador has already canceled projects and contracts awarded under previous governments. In the most notorious case, his government canceled a $13-billion construction of a new airport for Mexico City that was underway. Lopez Obrador cited corruption concerns.
While Lopez Obrador has not specified what the ethane contract investigation could involve, this coincides with efforts in several countries across the Americas to prosecute officials bribed by Braskem’s owner company Odebrecht.
Brazilian construction company Odebrecht, which owns 38% of Braskem, is at the epicenter in a myriad of corruption cases across the Americas that have led to arrest and prosecution of multiple high-ranking government officials, even former presidents.
Former Odebrecht officials are cooperating with authorities and supplying evidence of graft payments they made, helping countries put corrupt politicians in jail.
On November 2019 U.S. authorities arrested former Braskem CEO Grubisich at New York’s John F. Kennedy Airport over accusation of using slush funds to bribe officials and win contracts.
On Feb. 14, 2020, Spanish police arrested the former chief executive of Pemex during 2012-2016, Emilio Lozoya, who was found living in a luxury residence in Spain with false documents, according to Spanish newspaper El Pais.
Pemex endures heavy losses, faces high financial demands
On Feb. 27, 2020 Pemex reported a net loss for 2019 of $35 billion, compared with net income of about $2 billion in the previous year.
“We have closed one of the most complex years in the recent history,” Pemex said. The current Pemex administration of CEO Octavio Romero blamed the poor results on past administrations.
Pemex said it is having difficulties related to natural gas production because of malfunction of compression and other equipment, all due to maintenance problems.
At the same time, the Mexican government has plans to build a refinery that would carry a price tag of at least $8 billion.
Tenders associated with plans to construct the new refinery were declared void in 2019 as private companies had concerns over time and cost targets, but Pemex said it would rely on its resources to build it.
Mexico considers the new refinery vital as it could help reduce the current need to rely on imports. Pemex says the plant will be completed in 2022.
By Renzo Pipoli