The federal government has cut off the supply of natural gas to an ethylene plant in Veracruz that is majority-owned by a subsidiary of Brazilian conglomerate Odebrecht, intensifying a dispute between the two parties.

President López Obrador told reporters at his news conference on Wednesday that the supply contract with Braskem, a Brazilian petrochemical firm that has a 70% stake in the Etileno XXI plant, has ended.

“There’s no more natural gas for the company because the contract has ended,” he said.

López Obrador said there was no possibility of renewing the contract because it allowed the sale of ethane gas to Braskem at below-market prices to the detriment of public coffers and the state oil company Pemex, the supplier.

The National Gas Control Center (Cenagas), the government’s gas pipeline administrator, informed Braskem-Idesa on Monday that the contract for the supply of natural gas to the plant in Nachital, Veracruz, would not be renewed.

Grupo Idesa, a Mexican petrochemical company, has a 30% stake in the plant.

“It’s a contract with Odebrecht, a company that is famous for extortion and corruption,” López Obrador said. “… [The contract] wasn’t terminated,  it reached its end date and it won’t be renewed.”

Odebrecht has been embroiled in corruption scandals in several Latin American countries including Mexico, where it admitted to paying bribes to the previous federal government in exchange for lucrative contracts.

The decision to cut off the supply of natural gas to its subsidiary effectively puts the Veracruz plant out of business.

“Cenagas’s actions have caused the total suspension of the plant’s processes,” Braskem-Idesa said in a statement without saying when operations might resume.

The consortium accused the government of placing the safety of the plant and its employees at risk by cutting the gas supply abruptly instead of providing 48 hours of reduced supply that would have allowed operations to be shut down safely. It also said that the decision would have an impact on the national petrochemical industry and the economy as a whole.

Braskem-Idesa claimed that its “rights, including multiple current legal provisions” have been violated and pledged to take action to defend them.

The consortium also said it has “repeatedly expressed our willingness to discuss with the authorities the issues that are raised … in relation to the operation of Braskem-Idesa and its contracts with Mexican state companies, bringing proposals for solutions.”

“We ask for respect for the rule of law,” it added before calling on the government to “rectify” the decision taken by Cenagas.

Relations between the federal government and Braskem-Idesa were already strained before the supply of natural gas was cut because the former has been seeking to renegotiate a separate contract for the supply of ethane for the manufacture of ethylene and in turn polyethylene, the most common plastic in the world today.

Signed in 2010 by the government led by former president Felipe Calderón, the contract obliges Pemex to supply ethane to Braskem-Idesa at US $0.16 per gallon until 2034. At the time, the two parties entered into the agreement, ethane had a market price of 50 cents per gallon.

López Obrador has also branded the deal as unfair, asserting that it has cost the government millions of dollars.

Source: Reuters (en), El Universal (sp)