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Mexican president-elect Andrés Manuel López Obrador with his designated head of Pemex, Octavio Romero. The appointment has been severely criticized because of his hard-line political, ideological, non-technical, non-business nature. (Photo:
Thursday, August 23, 2018

Mexico Energy: AMLO Refinery Plan Unrealistic

AMLO’s refinery plans are unrealistic and follow other Pemex failures.

Inter-American Dialogue

On July 27, Mexican president-elect Andrés Manuel López Obrador said his government will earmark more than $9 billion for state-run energy companies next year and start working on a new oil refinery in southern Mexico. The moves seek to reduce reliance on fuel imports from the United States while boosting the country’s oil production, which has significantly fallen off in recent years. López Obrador did not say how he would fund his proposals, an omission that worries analysts concerned about Pemex’s already heavy debt burden. He also announced Octavio Romero Oropeza as the incoming head of Pemex. Will the promised investment help accelerate Pemex’s oil and gas production? What else is needed to boost output? How well prepared is Romero Oropeza to lead Pemex, and what should his priorities be?

George Baker, publisher of Mexico Energy Intelligence in Houston: The 116-page energy sector document that the Morena transition team issued on July 10 sports both good and bad ideas. First, among the good ideas, is advocating independent unions in the oil sector (the first time since 1935 that a political party has done this). Second is suspending until further review the so-called farm-outs of Pemex—the idea that civil servants (Pemex employees) and market-disciplined managers of oil companies can have a joint venture based on sharing risk and reward only makes sense on paper. Third is promoting the concept of intelligent cities, including low energy consumption, renewable energy and intelligent grids. A fourth good idea is expanding the grid of natural gas pipelines and the use of renewable energy sources and cogeneration.

Among the bad ideas: first is reactivating the refinery project in Tula and analyzing the construction of another refinery in the Gulf of Mexico. Pemex refinery upgrades have gone badly for the past 20 years, notably in Cadereyta, Villahermosa and Tula. A new refinery could take three years just for design and another three for contracting and financing. López Obrador would likely leave office before the first shovelful of earth was turned for the new refinery. Second is the upgrade of the role of Pemex in the energy space.

The Morena team proposes to eliminate the so-called ‘asymmetrical regulations’ that restrict Pemex to compete effectively—to aspire to ‘make Pemex great again’ as a state agency is to ignore global success stories of state oil companies with mixed-equity structures, market financing and professional management. Finally, a third bad idea is to overstate (and obfuscate) the potential for change via public policy:  there is nothing that is actionable in statements such as ‘the necessary investments in Pemex should be made,’ or ‘efforts to increase exploration and production of natural gas should be made to favor the petrochemical industry,’ or ‘deepen and coordinate all efforts to eliminate the black market in petroleum products.’ Notably, one word that does not appear in the text is ‘corruption,’ an unexpected omission by a candidate that vowed to end corruption by example. Finally, former Pemex director general Adrián Lajous recently calculated the average tenure of a director general as two years and four months. Pemex, legally configured as an agency of the federal government, always has a dozen cooks in its kitchen of corporate governance. If a director general had the authority to order early retirement for 35,000 Pemex unionized workers, there would be opportunities for leadership.

David Shields, independent energy consultant based in Mexico City: In a previous comment for the Energy Advisor on June 15, I mentioned that President-elect López Obrador’s energy team has excellent, progressive plans in renewable energy. Sadly, the same does not apply to conventional energy. The naming of Octavio Romero and Manuel Bartlett to head state-run Pemex and the Federal Electricity Commission (CFE) has been severely criticized because of their hard-line political, ideological, non-technical, non-business nature. They may be okay for rooting out corruption, but they add to fears that recent energy reforms may be rolled back, even if they and López Obrador himself deny legal amendments will be made. Congress will ultimately decide on this, and the outlook there is bad. Reforms can be reversed in practice, anyway, just through day-to-day opposition. López Obrador says he will push oil output up sharply to 2.5 million barrels per day, but reserves and reservoirs are largely depleted, there are no new discoveries, and there is not enough money for a vast exploration effort. Foreign operators will need several years to develop their projects.

His best bet for ramping up output quickly would be fracking, but he promises to prohibit that, thinking that environmental risks will be greater than the benefits. His refining plans are unrealistic, too. López´s native Tabasco State offers the wrong site and the wrong logistics for a large-scale refinery to be built in just three years. Such a project normally requires two years to study, plan and tender, then another five or six years to build. Even then, it can hardly be profitable if Mexico produces and processes only very heavy crude. Intentions to rescue Pemex and reduce reliance on energy imports are good, but the prospects are not.

Paola Carvajal, principal of the energy practice at Arthur D. Little: The increase of Pemex’s upstream investment budget would be, without doubt, a positive measure to boost Pemex’s future production. International companies with similar production levels invest up to two times more than Pemex annually. However, reaching the goal that the incoming government announced would require not only increasing financial resources, but also strengthening the internal capabilities of the network operations center to optimize the current operations and speed up the exploration and development of new reserves. To increase Mexico’s oil production in the long term, the country does not only depend on Pemex operations. Several international oil companies that recently opened operations in the country (some of them in association with Pemex) have received approval from the National Commission for Hydrocarbons for the evaluation and development of their assigned areas. Therefore, a positive business environment could help speed up their projects’ development, adding new reserves and production. The new chief executive, [Octavio] Romero Oropeza, will have to face several technical, financial and social challenges when he takes office in December. However, one of the most critical steps will be to reconcile the promises of the new government and its electorate’s expectations with regard to the company’s current business plan maintaining the trust of Pemex partners and investors in the Mexican industry.

Luis Miguel Labardini, partner at Marcos y Asociados Infraestructura y Energía in Mexico City: The López Obrador energy strategy intends to strengthen the two former monopolies in order to use them as an instrument of public policy to enhance national sovereignty over energy and natural resources. The appointments made by the future president show that the energy reform will go ahead, but with an important twist that resembles what has happened in other countries such as Brazil. The final outcome should be to have a strong and leading energy company in the case of Pemex and CFE, the federal electricity commission, that will protect the interest of the country beyond the market rationale, and look for self-sufficiency and the protection of non-renewables in the long term. The heads of these two public companies are expected to defend them from an ecosystem that will progress in its market orientation, and at times, they might get a little push from the president himself. The final outcome will be a modified reform that will slightly influence the market without disrupting it in order to promote the sovereignty and self-sufficiency of the Mexican energy market.

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor


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