Pemex tests limits of investor influence on climate change

MOSCOW (MRC) -- At a time when oil production is at historic lows, lenders who want Mexican oil giant Pemex to adapt to climate change are struggling to be heard, according to Hydrocarbonprocessing.

Big oil companies such as BP, Royal Dutch Shell and Repsol have begun to build strategies to cut the carbon they emit. But state-owned Petroleos Mexicanos, one of the biggest borrowers in emerging markets, is determined to push in the opposite direction.

President Andres Manuel Lopez Obrador, a leftist oil nationalist, has staked his reputation on reviving Pemex, which has been a powerful symbol of Mexican self-reliance since its creation in 1938 but is now heavily indebted. Earlier this year, Pemex became history’s largest “fallen angel” - a borrower that descends from investment grade to junk.

Lopez Obrador has said rehabilitating the country’s six outdated oil refineries and building a seventh one in his home state, Tabasco, is key. He considers the new refinery a milestone towards energy independence, one top source in the finance ministry said, adding that this concern has become more pressing in light of US President Donald Trump’s power to stifle Mexico’s economy. Lopez Obrador is determined to keep Pemex focused on exploration for oil, the sources said.

Pemex, which employs nearly 150,600 workers and is the source of almost a fifth of Mexico’s budget revenues, is set to be a critical test case for both institutional investors and climate change campaigners looking to push through change.

If its management does not heed calls to curb carbon emissions, “it will become tougher for them to issue debt,” said Marie-Sybille Connan, an analyst at asset manager Allianz Global Investors.

Investors have rarely spoken about their engagement with Pemex management, but Allianz is one of four major lenders who are now going public. Nearly 90% of the oil company’s USD107.2 billion total financial debt is held by bond investors, Refinitiv Eikon data, quarterly reports and filings related to recent refinancing transactions show. On top of this, it has USD64.9 billion in pension liabilities.

“It will become increasingly challenging for international institutional investors to invest in their bond issuances if they don’t address their sustainability concerns - whether climate, oil spills due to oil theft and health and safety,” Connan said.

The biggest challenge for both Mexico and Pemex is the fact that there are other things that take priority, said Aaron Gifford, emerging market debt analyst at T.Rowe Price, one of the largest holders of Pemex bonds. After the taxes the company pays to the government, there’s no money left to invest in new ways to produce oil.

“We’ve been very keen on speaking to Pemex’s board and really trying to get them to commit to making changes for good,” said Gifford. But management has canceled a lot of investor meetings and calls.

“Those meetings that I’ve been in, they’ve been very tense and sometimes even a little bit heated,” he said. “We have so many questions for them.”

Pemex, the Mexican finance ministry and the president’s office did not respond to requests for comment. Lopez Obrador, who has pointed to Mexico’s state-run hydroelectric plants to show he backs renewable energy, has blamed his predecessors for Pemex’s problems. Financial debt surged by 75% under the last government, a Reuters analysis of accounts from the past decade shows.

On paper, Pemex is barely solvent. Its liabilities exceed its assets by more than USD110 billion, its accounts show. The reason international investors keep lending is because the market considers the Mexican government has given an implicit guarantee for Pemex.

This support was reiterated in April, after Pemex’s bonds were downgraded. “Now, more than ever before, Petroleos Mexicanos has the absolute backing of the federal government,” company executives said in a letter on government-headed notepaper to investors, seen by Reuters.

Market pressure is already building. The company’s yield spreads have widened, showing it is already getting harder to borrow as even yield-hungry investors are rethinking their investments. Yields on Pemex bonds are between about 7% and just under 9% for the most frequently traded ones as of Aug. 28, according to MarketAxess data.

Investors such as Allianz said that even if Pemex has pressing problems now, it shouldn’t ignore long-term objectives. None expect radical change, but the four who spoke to Reuters said they feel the company is not taking their concerns seriously.

If international investors become reluctant to lend, Mexico’s own access to credit could also be at stake. Ratings agencies have repeatedly cited the company’s unsustainable debt level as a risk factor for the sovereign rating. Mexico’s sovereign bonds are skirting the edge of a downgrade.

Climate Action 100+, a group of 450 asset managers with collective assets of some $40 trillion, told Reuters earlier this month it would add Pemex to the list of 160 companies it seeks to speak to directly to prompt them to develop strategies for a lower carbon future.

“When we look at what peers are doing, Pemex should do more, show more ambition in terms of commitment to reduce carbon emissions,” said Jaime Gornsztejn, who leads the engagement with Latin American companies for Federated Hermes, a fund manager which is spearheading that effort.

He and others said companies such as Colombia’s Ecopetrol and Brazil’s Petroleo Brasileiro, or Petrobras, have gone further than Pemex to address climate concerns.

“We haven’t had much traction so far,” he said.

Pemex’s credit options are constrained by Mexico’s proximity to the United States. Even if other countries were hypothetically open to lending to the company, Jorge Sanchez, director at Mexican financial think tank Fundef, said it was unlikely Mexico would turn to them.

“It’s not about Pemex, it’s about geopolitics,” Sanchez said. “The United States won’t be happy if the main investors in Pemex, Mexico’s largest company, were Chinese or Russian.”

Pemex was the ninth biggest energy producer of carbon and methane emissions globally between 1965 and 2018, according to data from the Climate Accountability Institute, an NGO, with emissions of some 23 billion tonnes of CO2 equivalent.

That is less than the largest state-owned emitters, Saudi Aramco and the National Iranian Oil Company, but more than any other Latin American oil company, the data showed.

Even so, sources with direct knowledge of the matter told Reuters the company has no plans to change its strategy.

Lopez Obrador’s energy agenda rolls back some of the moves made by his predecessor to open the energy market to the private sector. Next year’s budget will likely be dedicated to boosting oil extracted from shallow waters, one senior Pemex executive with direct knowledge of the draft proposal said, adding there was no allocation for greener policies.

While the President says he is committed to clean energy, he has justified government efforts to impede the roll-out of new privately built solar and wind capacity on the grounds that those plants were tainted by corruption in past administrations. “(Renewable energy) was used as a pretext for doing lucrative business ... to get government subsidies, to push up the price of electricity and affect us all,” he said in July. He has also complained that wind farms are an eyesore.

“There’s no way the government will consider another scenario for its energy policy,” a person at the oil company’s commercial arm PMI said, on condition of anonymity. “What they’re looking for is becoming a big player in exploration, production and refining.”

The kind of oil Pemex mostly produces, known as “heavy sour crude,” has fallen out of favor over environmental concerns because refining it tends to produce highly polluting sulfur-rich fuel oil. Last December, Mexico’s energy regulatory commission agreed that the government could postpone a planned rule that would have required Pemex to produce and sell only ultra-low sulfur diesel across the country.

Pemex had asked the courts to give it more time to comply with the rule, saying Mexico lacked the infrastructure to comply.

As MRC informed earlier, Pemex is advancing a refinery rehabilitation program that will enable it to process 1.2 million b/d of crude oil by the end of 2020 and evaluating a reconfiguration of its petrochemical facility at Cangrejera, Mexico, into what would be its eighth refinery.

We also remind that in 2016, Pemex shut its steam cracker at its Cangrejera complex for maintenance on February 15. The cracker was idle for about 14 days. The conducted repairs at the cracker were a part of planned maintenance.

Ethylene and propylene are feedstocks for producing polyethylene (PE) and polypropylene (PP).

According to MRC's DataScope report, PE imports to Russia dropped in January-June 2020 by 7% year on year to 328,000 tonnes. High density polyethylene (HDPE) accounted for the main decrease in imports. At the same time, PP imports into Russia rose in the first six months of 2020 by 21% year on year to 105,300 tonnes. Propylene homopolymer (homopolymer PP) accounted for the main increase in imports.

Pemex, Mexican Petroleum, is a Mexican state-owned petroleum company. Pemex has a total asset worth of USD415.75 billion, and is the world's second largest non-publicly listed company by total market value, and Latin America's second largest enterprise by annual revenue as of 2009. Company produces such polymers, as polyethylene (PE), polypropylene (PP), polystyrene (PS).

Hurricane Laura shuts two sites at US emergency oil reserve

MOSCOW (MRC) -- The US Energy Department announced the shutting of two of four sites of the national emergency oil reserve temporarily to remove workers ahead of Hurricane Laura, but that the remaining sites could deliver oil if the facility gets any requests for deliveries, reported Reuters.

The department last Wednesday shut the Strategic Petroleum Reserve’s Big Hill site in Texas and the West Hackberry site in Louisiana due to Laura, Steve Winberg, an assistant secretary at the department, told reporters in a call.

He said the department had a reentry team on its way to Big Hill and it should know the condition of the facility in a few hours.

West Hackberry was “more in the eye of the storm,” Winberg said. The department has reentry teams ready to go to that site but roads in the area are not yet passable. “As soon as we can get through the roads and get across the bridges then we’ll be assessing that facility.”

The two sites were shut because the department needed to evacuate the operations teams, a department official told Reuters. “This was a planned evacuation that took place yesterday prior to the storm reaching the site.”

The other two SPR sites, Bryan Mound, in Texas, and Bayou Choctaw, in Louisiana, are open and can deliver oil should the department receive requests from refiners, Winberg said.

There have been no requests so far for oil from the reserve and fuel supplies are high in the region due to the hit in demand from the coronavirus pandemic.

Laura has since been downgraded to a tropical storm. US oil prices eased nearly 1% to USD43.04 a barrel last Thursday as the market expected a quick recovery for crude production platforms shuttered ahead of the storm.

As MRC wrote previously, most chemical production facilities in the region between Beaumont-Port Arthur, Texas, and Lake Charles, Louisiana, have shut down in preparation for Hurricane Laura, which was forecast to make landfall near the Texas-Louisiana border last Wednesday night or early Thursday. Several olefin crackers and associated derivative polymer units have been shut down, as has about 2.5 million b/d of refining capacity.

Ethylene and propylene are feedstocks for producing polyethylene (PE) and PP.

According to MRC's DataScope report, PE imports to Russia dropped in January-June 2020 by 7% year on year to 328,000 tonnes. High density polyethylene (HDPE) accounted for the main decrease in imports. At the same time, PP imports into Russia rose in the first six months of 2020 by 21% year on year to 105,300 tonnes. Propylene homopolymer (homopolymer PP) accounted for the main increase in imports.

Sinopec Yangzi resumed production at No. 2 PTA plant in China

MOSCOW (MRC) -- Sinopec Yangzi Petrochemical Company, part of Sinopec Group, has brought on-stream its No.3 purified terephthalic acid (PTA) unit in Nanjing, according to Apic-online.

A Polymerupdate source in China informed that, the company resumed operations at the unit on August 21, 2020. The unit was shut for maintenance on August 6, 2020.

Located at Nanjing in China, the No.3 PTA unit has a production capacity of 650,000 mt/year.

PTA is used to produce polyethylene terephthalate (PET), which is used in the manufacturing of plastic bottles, films, packaging containers, in the textile and food industries.

According to MRC's ScanPlast report, Russia's estimated PET consumption totalled 367,720 tonnes in the first six months of 2020, up by 19% year on year. Russian companies processed 62,910 tonnes in June.

China Petrochemical Corporation (Sinopec Group) is a super-large petroleum and petrochemical enterprise group established in July 1998 on the basis of the former China Petrochemical Corporation. Sinopec Group"s key business activities include the exploration and production of oil and natural gas, petrochemicals and other chemical products, oil refining.

LyondellBasell PP and HDPE technologies selected for petrochemical project in Oman

MOSCOW (MRC) -- LyondellBasell (Rotterdam, the Netherlands) announced that Duqm Refinery and Petrochemical Industries Company LLC (DRPIC) has selected LyondellBasell’s world-leading polypropylene (PP) and high-density polyethylene (HDPE) technologies for a new facility, as per Chemical Engineering.

The new plants will comprise of a polypropylene (PP) plant that will utilize LyondellBasell’s Spheripol PP process technology to produce 280,000 metric tons per year (m.t./yr) of PP and a 480-m.t./yr high-density polyethylene plant which will utilize LyondellBasell’s Hostalen ACP process technology and will be built in Al Duqm, Oman.

“LyondellBasell’s market leadership in polymer process technologies is once again confirmed with this significant award by DRPIC,” said Neil Nadalin, Director of Licensing at LyondellBasell. Nadalin added: “The selection by DRPIC of the Spheripol technology as the benchmark manufacturing platform for polypropylene resins and the Hostalen ACP technology as the leading low-pressure slurry process for the production of HDPE resins shows once again the confidence operators have in products produced with our technologies.”

“The Spheripol and Hostalen technology licenses forms part of 12 technology license packages awarded by DRPIC to international technology providers, advancing the FrontEnd Engineering and Design progress toward achieving shareholders’ Final Investment Decision in 2021. Due to the increasing global demand for petrochemical products, the DRPIC Petrochemical Project will become a significant player in the region, benefiting from its strategic location on the Oman eastern sea board with direct access to international markets. Working with long established technology licensors enables us to develop a world class project empowering the future development of downstream petrochemical industries in the Special Economic Zone of Duqm,” said Dr. Salim Al Huthaili, CEO of DRPIC .

As MRC reported earlier, in June 2020, LyondellBasell, the world’s largest licensor of polyolefin technologies, said that Sinopec Hainan Refining & Chemical would use its Hostalen Advanced Cascade Process technology for a new 300 kilotonnes/year HDPE facility to be built in Yangpu, Hainan Province, China.

According to MRC's DataScope report, PE imports to Russia dropped in January-June 2020 by 7% year on year to 328,000 tonnes. High density polyethylene (HDPE) accounted for the main decrease in imports. At the same time, PP imports into Russia rose in the first six months of 2020 by 21% year on year to 105,300 tonnes. Propylene homopolymer (homopolymer PP) accounted for the main increase in imports.

LyondellBasell is one of the largest plastics, chemicals and refining companies in the world. Driven by its 13,000 employees around the globe, LyondellBasell produces materials and products that are key to advancing solutions to modern challenges like enhancing food safety through lightweight and flexible packaging, protecting the purity of water supplies through stronger and more versatile pipes, and improving the safety, comfort and fuel efficiency of many of the cars and trucks on the road. LyondellBasell sells products into approximately 100 countries and is the world's largest licensor of polyolefin technologies.

COVID-19 - News digest as of 01.09.2020

1. Coronavirus pandemic shakes up supply fundamentals for US plastic recycling

MOSCOW (MRC) -- The US plastics recycling industry is struggling to regain its footing as the coronavirus pandemic upended its business model, potentially leaving many recyclers at risk of shutting down, reported S&P Global. When the pandemic prompted widespread shutdowns in late March and April, millions of workers left office buildings to work from home, cutting off sources of bulk supply of plastic bottles - made from polyethylene terephthalate (PET) - from businesses.