This is good news for Mexico’s long-beleaguered state-owned oil company, Pemex, but not such good news for the US’ refinery industry.
Last Thursday, Mexican President Andrés Manuel López Obrador made another public statement that won’t have gone down well in Washington’s corridors of power — or for that matter Texas, Louisiana, California or any other US state with a big refinery. Lopéz Obrador — commonly referred to as AMLO — said that Mexico will stop selling crude oil abroad and will only extract the oil that it needs to produce the gasoline the country requires. It is all part of the president’s quest for energy self-sufficiency.
AMLO also claimed that Mexico’s long-suffering state-owned oil company Petróleos Mexicanos (Pemex) is finally putting its decades-long crisis behind it
“Pemex is recovering from a crisis inherited from many years of neglect, because the goal of the previous neoliberal governments was for Pemex to go bankrupt in order to privatize oil… to ruin Pemex and the Federal Electricity Commission (CFE ). Fortunately, the people of Mexico said enough was enough. The change has occurred and we have dedicated ourselves to strengthening Pemex and the CFE … and we have already pulled Pemex out of the hole it was in.”
That s somewhat debatable. It’s true that in July this year Pemex’s average daily crude output reached 1.772 million barrels — its highest level since September 2018. It’s also true that in 2020 Pemex finally put an end to an unbroken 15-year rough patch of sliding production. It reported an average daily output of 1,705 million barrels. But the margin was tiny, just 4,000 barrels per day. And according to a Bloomberg report, admittedly featuring lots of unnamed sources, Pemex has apparently taken to inflating its numbers by measuring crude production at a warmer temperature than government regulators:
Pemex gauges hydrocarbon production at 20 degrees Celsius (68 degrees Fahrenheit), rather than the National Hydrocarbons Commission’s 15.56 Celsius standard, said the people, who asked not to be identified because the information isn’t public.
When combined with Pemex’s longstanding practice of counting a light oil known as condensate in its overall crude tally, the temperature bump swelled output figures by the equivalent of about 16,000 barrels a day going back to the start of 2020, the people said.
Regardless of the veracity of Bloomberg’s unsourced allegations, one thing is clear: AMLO’s quest for energy independence is gaining momentum. And it is almost certain to have raised the hackles of some very large business interests north of the border.
Bad News for US Oil Giants and Refiners
In February, a fierce winter storm in Texas resulted in days of crippling outages, not only in Texas but also large swathes of Northern Mexico that depend on natural gas supplies from the US for its electricity. The chaos wreaked by the storm, including astronomic energy bills, were a stark reminder of the risks of depending too much on one’s neighbors for energy. Prices for imported gas that Mexico uses to generate power spiked 5,000% during the crisis, Lopez Obrador said.
“What is the lesson in all of this? We must produce,” he said, referring to gas, but also to gasoline and diesel. “We are seeing that we must seek to be self-sufficient.”
In April, Mexico’s lower house of congress passed AMLO’s proposal to tighten state control over the country’s fuel market. The bill now just needs to clear the senate, where the ruling Morena party and its allies have a majority. If approved, the initiative would overturn large parts of the country’s hydrocarbon law. Most importantly, it would expand government control over fuel distribution, imports and marketing. It would allow authorities to suspend permits based on national or energy security, as well as let Pemex take over facilities whose permits have been suspended.
In May, AMLO announced that Royal Dutch Shell had agreed to sell its controlling interest in the Deer Park refinery in Houston, Texas to its partner Pemex for $596 million, making Pemex the sole owner of the refinery. This should significantly reinforce Pemex’s refining capabilities, reducing its dependence on US imports.
“Today, we closed the operation to buy the Deer Park refinery in Houston, Texas owned by Shell,” AMLO said on Twitter. Now Pemex will have 100% of the shares. The most important thing is that in 2023, we will be self-sufficient in gasoline and diesel; there will be no increases in fuel prices” .
That would be great news for Mexico, especially given how important fuel prices are in driving broader inflation, but bad news for its northern neighbour. Over the past three decades Mexico has become an increasingly important consumer of US petroleum products, particularly finished gasoline.
In 1993, on the eve of NAFTA, Mexico imported an average of 58,000 barrels of gasoline per day from the US, according to the US Energy Information Administration. By 2004 that figure had almost doubled, to 104,000. Ten years later, Mexico became a net importer of petroleum products from the U.S. for the first time in at least 40 years, importing 196,000 barrels of gasoline per day. Fast forward to today and the figure has more than doubled once again, to 462,000 — an eight-fold increase in 28 years. That’s roughly half of all the gasoline Mexico consumes. Together with Brazil, Mexico accounts for seven out of 10 barrels of U.S. gasoline exports.
This trend has been fuelled by ma host of factors. Chief among them is the over 50% decline in Mexico’s crude output since production peaked at 3,800 barrels per day in 1994. Then there’s the chronic mismanagement, corruption and rampant oil theft that has plagued Pemex for years, resulting in the disappearance of untold billions of dollars. Another key factor is chronic under-investment in Mexico’s refinery sector. By 2017, a year before AMLO became president, Mexico’s refineries were operating at 51% of capacity. No new refineries had been built for 40 years. This left Mexico with little choice but to ship its oil to the US and buy it back as gasoline, turning it, in the process, into the world’s second-largest gasoline importer.
When AMLO was elected he identified four main strategies for overhauling Mexico energy sector:
- Combat the huachicolero threat. By 2018 Mexico’s heavily armed, increasingly sophisticated petro-plunderers (or huachicoleros as they’re known locally) were stealing billions of dollars of crude oil and natural gas each year, often with the connivance of Pemex insiders;
- Go after Pemex’s culture of corruption. To this end, former Pemex executives, including its former CEO, have been arrested for their involvement in the Odebrecht scandal. Long-standing union boss Carlos Romero Deschamps, once identified as one of Mexico’s most corrupt political figures, has also been forced into retirement.
- Build a massive new refinery in AMLO’s home state of Tabasco, called Dos Bocas, and refurbish old ones;
- Reverse Pemex’ declining production;
- Reverse some of the energy privatisation reforms pursued by his predecessor, Enrique Peña Nieto, in relation not only to Pemex but also to the Federal Electricity Commission (CFE). Those reforms allowed some of the world’s biggest oil companies, including Royal Dutch Shell Plc, BP Plc, Chevron Corp and Exxon Mobil Corp, to get their hands on many of Pemex’s and CFE’s juiciest assets. Now AMLO is threatening to scupper some of those deals.
Unsurprisingly, AMLO has faced stiff opposition to his energy reforms, both at home and abroad. As Jacobin recently reported, a series of “deeply concerned articles” in the international press have twisted AMLO’s quest for energy sovereignty into a thesis that AMLO loves dirty energy.
Because the president is replacing the bounty of (private) solar and wind with outdated (public) energy, the reasoning goes, he is a relic of the past, a doomed dinosaur lolling in a bath of oil. “Nothing can shake AMLO’s fossil-fuel fixation,” bawls the Economist. The Financial Times warns darkly of “Mexico’s dangerous addiction to fossil fuels.” Writing in the Guardian, David Agen makes the incredible assertion that Mexico was previously a climate leader (because it handed in its plan for the Paris Agreement early) before dabbling in some amateur psychoanalysis to suggest that AMLO’s “outlook on fossil fuels and state-run companies stems from his upbringing in the oil-rich state of Tabasco.” Poor AMLO: with a childhood like that, he never stood a chance.
Other actors swept into action as well. Mary Ng, trade minister in the cabinet of Justin Trudeau — he of the Trans Mountain pipeline expansion — declared that Canada was “increasingly concerned about the investment climate in Mexico” in light of the energy bill. Another well-known environmental advocacy organization, the US Chamber of Commerce, warned that the “deeply troubling” bill would “open the door for the reinstatement of a monopoly in the electricity sector,” “limit access to clean energy for Mexico’s citizens,” and, foretelling a future route of opposition, “directly contravene Mexico’s commitments under the U.S.-Mexico-Canada Agreement.” Even Bill Gates has gotten in on the act, instructing Mexico to bet on education instead of oil. If only it had thought of that before.
Never mind the stunning hypocrisy of the industrialized world, which has been responsible for the overwhelming majority of fossil-fuel emissions over the last two hundred years, now lecturing a country like Mexico on curbing its own output. Never mind the fact that Mexico barely produces 1 percent of the world’s fossil-fuel emissions annually, while China and the United States alone account for 43 percent. Never mind the fact that renewable energy makes up a very small fraction of the total energy participation of private companies in Mexico. Never mind the fact that coal, to give one example, makes up twice the share of energy output of the United States and nearly three times that of Germany, without this triggering corresponding lectures from billionaire philanthropists. Never mind that [Mexico’s] energy-reform law gives priority to cleaner sources of energy.
AMLO will also face a tough test at home. His biggest obstacle will be Pemex itself. This is a company that has been run so badly for so long that turning it around will be a tall order. Mexico is still hugely dependent on gasoline imports from the US. Pemex is also the world’s most indebted energy company, with a total debt load of $107 billion. That doesn’t even include unfunded liabilities such as workers’ pensions. Last year, the company suffered “the worst crisis of its history” with a net loss of $21.41 billion, 38.2% more than in 2019.
«Petróleos Mexicanos was not immune to the global context and suffered the worst crisis in its history,” said its CEO Octavio Romero Oropeza in February. “However, thanks to the progress and achievements we made in the first year of this Administration, the company was able to cope and move forward.”
Since then there have been further setbacks. The construction of the Dos Bocas refinery in Tabasco is already running well over budget. A fire on board one of Pemex’s oil rigs in the Gulf of Mexico on August 22 is likely to complicate Pemex’s goal of reaching its daily production target of 1.8 million barrels, according to US ratings agency Fitch. Fitch already downgraded Pemex’s debt to junk in 2019, which triggered a furious tirade from a recently elected AMLO:
“In three years there was no investment in exploration, no investment in drilling wells, and they rated Pemex very highly. Now that there is investment, they downgrade Pemex.”
With Pemex’s finances deteriorating further, there’s a risk that one of the other two main US ratings agencies will follow Fitch’s example. If that were to happen, Pemex would become the largest “fallen angel” in history. The likely result would be higher borrowing costs for Pemex. And that would put further strains on Mexico’s already beleaguered economy and government finances.
For the moment, though, everything is calm. Fitch’s warning has had no notable impact on Pemex’s bond yields. And AMLO remains undeterred:
“We are discovering new finds on land, in shallow waters, and despite that accident… production will recommence soon and we will meet this year’s target… [W]e are no longer going to sell crude oil abroad nor are we going to buy gasoline or diesel; we are going to give added value to our raw material”.
With talk like this, relations between AMLO and Washington — which is already funding political opposition groups in Mexico — are set to get even more strained in the months ahead.