One of President Andrés Manuel López Obrador’s greatest desires is for state-run oil company Petróleos Mexicanos (Pemex) to produce more oil. However, crude oil output is threatening to continue its 15-year downward trend, falling below 1.6 million barrels per day. The reason: Pemex is short on investment capital and on technical and management capabilities.
The government is also short on money and now faces a drastic fall in tax and oil-export revenues. Even so, it will have to put up about 2 percent of Mexico’s anual GDP to meet Pemex’s financial commitments. That is in addition to investments in company operations.
Analysts at Morgan Stanley predict, based on capex estimates, that Pemex’s output will come in at between 1.2 and 1.6 million barrels per day at the end of López Obrador’s government term in 2024. That is about half of what he promised to achieve. It could be even less, if capex falls further due to the crisis in Mexico’s public finances.
Pemex has quick-to-implement alternatives to reverse the downward trend. It could speed up a unification agreement for joint exploitation of the shared world-class Zama field, discovered by Talos Energy. It could intensify joint collaboration with operating partners on farmouts or even opt for fracking, which is currently prohibited by López Obrador. But in Pemex and in the President’s head, “nationalist” ideology is all the rage. The top priority is rejecting cooperation with foreign firms.
Companies such as Italy’s Eni, Germany’s Wintershall DEA, Canada’s Renaissance Oil and Russia’s Lukoil already produce oil in Mexico. Oil majors from the United States, Europe and Asia are doing exploration and will begin producing within the next few years. Invited under the oil reforms of the previous government, these firms have not left Mexico, despite the hostile official discourse, a discouraging oil policy, low oil prices and the economic crisis.
Pemex could easily approach these companies and choose its operating, financial and technological partners. The companies would be happy to join up with Pemex in viable, long-term projects and make a greater contribution to Mexico’s energy security – a key issue for López Obrador.
But he and top officials running energy policy relish in their energy xenophobia. And it seems that Pemex’s business plan will continue to be trying to develop tiny, low-potential oil fields, without carrying out any of the required prior exploration work, and asking rookie local firms to drill wells, most of which turn up dry.
Moreover, efforts aimed at thwarting private investors in the energy business, so that markets can be opened up for Pemex –and for the state-run Federal Electricity Commission (CFE)– take meanness to an extreme. They imply breaking the backs of other players, so that Pemex and CFE can gain. Instead of drawing up creative win-win plans with the private sector for the economy to grow, the government’s energy policy promotes a lose-win plan, whose results end up being lose-lose.
Loathing of foreign companies, putting the brakes on renewable energy, the regulatory bias of not awarding permits to fuel distributors of brands other than Pemex’s, denying gas to private-sector power projects, not giving priority to farmouts and oilfield unitization – all of this destroys investment opportunities and is contrary to the interests of the state energy enterprises and the country. If the intention is for energy investors to leave the country, sooner or later they will. Renaissance Oil, frustrated with energy policy, already intends to leave. Who will be next?
Xenofobia, like racism, should not exist in the 21st century. Hopefully López Obrador’s visit to the United States will open up his mind to the benefits of energy cooperation at a time when Mexico is facing an economic and financial disaster. He may also realize that, in the context of the USMCA trade agreement, unfair or discriminatory regulatory treatment cannot be allowed, as was highlighted in the letters which the American Petroleum Institute (API) and the American Fuel & Petrochemical Manufacturers (AFPM) sent to President Donald Trump regarding Mexican energy policy.
Meanwhile, Pemex general director Octavio Romero and Energy Secretary Rocío Nahle should be self-critical enough to realize that they are acting unduly. Nahle often says that there is a place for everyone in Mexico’s energy industry, but she acts as if the opposite were true. They should acknowledge their mistakes and advise the President accordingly. It is time to rectify.
* David Shields is an energy industry analyst. His e-mail: david.shields@energiaadebate.com A Spanish version of this Op-Ed appeared first in Reforma’s newspaper print edition.
