INSIGHT: Pemex throws bribery claims into $500m arbitration fight

17 June 2013 16:54  [Source: ICIS news]

By Al Greenwood

HOUSTON (ICIS)--Mexican state oil producer Pemex is suing a contractor for millions of dollars – resurrecting bribery allegations made nearly five years ago – while it fights to avoid a $500m arbitration judgment it has yet to pay for cost overruns at a refinery expansion project.

The problems at the Cadereyta Jimenez refinery date back to 1997, when Pemex awarded an expansion contract to Conproca, a joint venture between Siemens and SK Engineering & Construction. None of the companies commented on the dispute.

Delays and cost overruns bedevilled the project. Four years after winning the contract, Conproca initiated arbitration proceedings.

The two sides spent the next decade in arbitration, and by the end of 2011, Conproca prevailed. Pemex owed the joint venture more than $500m, according to court documents.

Conproca won the reward despite allegations from the US government that Siemens relied on bribes. In December 2008, the US Securities and Exchange Commission (SEC) sued Siemens, accusing the company of using bribes for projects around the world – including refinery projects in Mexico.

The SEC said that in late 2004, Siemens allegedly paid $2.6m to a politically connected business consultant to help the company settle cost overruns at the Mexican projects.

Some of these payments were allegedly routed to a Pemex senior executive, who was in a position to influence the settlement of the cost overruns, the SEC said.

In December 2008, Siemens settled the Pemex bribery allegations as well as several others by agreeing to pay a total of $800m to the US government. Another $569m would be paid to the Office of the Prosecutor General in Munich.

At the time, the Munich office had already received $285m, which Siemens had paid in October 2007.

In reaching the settlement, Siemens neither admitted to nor denied the allegations made by the SEC.

Until recently, the SEC's bribery allegations were absent from the dispute between Pemex and Conproca. At no time during the 10-year arbitration process did Pemex raise any issues related to the bribery allegations, SK Engineering said in court documents.

When Pemex filed a petition to annul the $500m arbitration award in August 2012, not once was bribery mentioned in the nearly 150-page document.

And it was not until December 2012 – four years after the SEC settlement – that Pemex raised the bribery allegations, in a lawsuit against Siemens and SK Engineering the company filed in US District Court, Southern New York District.

In that lawsuit, later amended, Pemex accused Conproca of significantly underbidding the project. Its bid required an investment of $1.382bn.

The only other qualifying bid was by a consortium led by Mitsubishi and Mitsui, Pemex said. That required an investment of $2.615bn, nearly double the Conproca bid.

The Conproca bid by itself would lead to a financial shortfall because it was so economically unrealistic, Pemex alleged.

To make up for the shortfall, Conproca manufactured cost overruns, for which Pemex would pay, the company alleged. To induce Pemex to approve payment for the overruns, Conproca allegedly bribed executives through an intermediary in late 2004.

Pemex named three company executives who were allegedly involved with the bribery. Initially, they were ordered banned from public employment because of their alleged involvement in the payment of the cost overruns.

However, Pemex conceded those orders were later reversed, and those reversals are now subject to an appeal.

Pemex gave no indications that it sought remedy against the others whom it alleged were involved with the bribes, including the alleged intermediary between Siemens and Pemex.

Siemens and SK Engineering noted other problems with the Pemex lawsuit in their motions to dismiss the case.

The payments for the cost overruns were made in 2000-2002, each said in court documents. However, Siemens allegedly paid the bribes after it was paid for the overruns, in late 2004.

In other words, Pemex paid for the cost overruns before its executives were allegedly bribed, according to Siemens and SK Engineering.

Not mentioned were the final economics of the project. It is unclear how much Conproca bid for the project, since the investment figure quoted by Pemex clashes with initial reports of the contract award.

Nonetheless, the investment required by Conproca and the $500m arbitration award still brings the total cost of the project below the investment required by the Mitsubishi and Mitsui consortium.

In other words, Pemex still came out ahead if the company's investment figures reflected the cost of the Cadereyta refinery.

Siemens and SK Engineering alleged that Pemex's bribery lawsuit has nothing to do with bribery. Instead, the lawsuit is simply an attempt to offset the $500m arbitration award.

That award is the subject of a separate lawsuit that is also pending in US court.

In Mexican courts, Pemex is trying to annul the award. A Mexican court threw out Pemex's petition, and subsequent appeals have so far been unsuccessful.

Of course, Pemex's allegations could also be true and it could ultimately prevail in the bribery case.

Such a victory, though, would be dubious, since it would indicate corruption among high-level executives.

Regardless of the outcome in the bribery case, Cadereyta will not be the first time that integrity at Pemex has been called into question.

It is these larger concerns about corruption that are among the reasons that energy reform is being pushed by Mexico's new president, Enrique Pena Nieto. In defending the need for reform, the president spoke about improving Pemex's corporate ethics during a speech commemorating the 75th anniversary of the company.

Despite Mexico's abundant natural resources, Pemex has been unable to meet the country's growing demand for natural gas.

Mexico has increasingly relied on imports, especially from the US, to meet its growing demand for the fuel, according to the US Energy Information Administration (EIA).

US natural gas exports to Mexico grew by 24% to 1.69bn cubic feet/day (bcf/day) in 2012, the highest since the US started tracking the data in 1973, the EIA said.

Mexico now relies on imports to supply more than 30% of its total supplies, the vast majority of which is from the US, the EIA said.

By: Al Greenwood
+1 713 525 2645

AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly

Get access to breaking chemical news as it happens.
ICIS Global Petrochemical Index (IPEX)
ICIS Global Petrochemical Index (IPEX). Download the free tabular data and a chart of the historical index