With a victory for Joe Biden, U.S. energy policy will lean towards renewable energy and sustainability. In the oil and gas industry, there will be stricter regulation, especially on environmental issues, which could limit that industry’s scope. U.S. economic policy will seek fair trade in open, competitive markets.
Government and banks will give preference to investment in companies with an ESG (environment, society and governance) approach, which does not relate to fossil-fuel companies. The United States will also rejoin the Paris climate accord.
The oil industry has been going through a prolonged crisis, even if it will continue to have a key role in global economic activity for at least one or two more decades. Both OPEC and the International Energy Agency (IEA) say that the industry’s problems are cyclical and that demand for oil will recover. But that has not yet happened. Oil companies’ finances have been whipped by extremely low oil prices since 2014.
The outlook for oil prices could worsen in the short term. A worsening outbreak of Covid-19 could cause greater destruction in the demand for oil. Add growing oil production from Lybia and Norway, low refining margins and the lack of new fiscal stimulus in the United States. In the medium term, an economic upturn and a reduction in Covid-19 cases would benefit prices. In the long term, pro-environmental public policy, making the most of the competitiveness of renewable energy, will define whether oil’s decline is temporary or secular.
Mexico cannot be indifferent to these global trends. The López Obrador government is wrong in taking the opposite course and going back to the old model of oil monopoly. Two international oil majors, ExxonMobil and Shell, recently made announcements which should make Mexican authorities think twice about the future.
Exxon will suspend several of its major projects and will reduce its staff by 1,900 in the United States as a result of weak demand and low oil prices. Shell will keep only 6 of its 14 refineries and will turn them into “high-value energy and chemical facilities”.
Indeed, its Deer Park refinery, which it holds in co-ownership with Pemex, is one of the six. What do they think about that in Pemex? How is Pemex affected? Will it pay its part of the new plans for that refinery?
To the degree that running refineries makes sense, Pemex could buy one of more refineries on the U.S. Gulf Coast very cheaply, instead of building the costly Dos Bocas refinery in Tabasco state. Perhaps its partner Shell could sell it a couple of refineries, ready to run, in exchange for its share in Deer Park. In any case, Pemex would have to rethink its objectives in terms of markets, costs and profitability, and not based on an ethereal concept sovereignty and self-sufficiency which is extremely expensive and is detached from the reality of energy markets.
Pemex should take seriously the idea of restructuring, downsizing and even re-inventing itself, like other, both privately-owned and state-run, oil companies do. But when has Pemex ever thought of reducing its staff, cutting its liabilities to its employees, shutting down high-cost, depleted oil fields, and promoting clean energy?
The López Obrador government has opted for energy policy measures that are contrary to free competition and which breach the legal framework. It can be foreseen that the Biden government will follow up on the protests of U.S. corporations for non-compliance of the USMCA free trade agreement on energy issues. International lawsuits will be on the way, which is not promising for the Mexico’s economic outlook in 2021.
* 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.
