Mexico hastened its retreat from oil and gas reform this month with a business plan for the state-owned oil company that pursues sharply increased oil production with changes sharply discouraging to investment. Such a strategy would qualify as seriously conflicted anywhere. It’s especially so where future production depends on enhanced recovery in the mature fields dominating current oil and gas production and on development of promising shale and deepwater resources. Those activities require capital and technology from abroad.
State-centered wall
Andres Manuel Lopez Obrador, who started his 6-year term as president last December, dislikes the historic reforms implemented in 2014 by his predecessor, Enrique Pena Nieto. The former president in August 2014 signed into law constitutional amendments ending monopoly control over the oil and gas industry by Petroleos Mexicanos and welcoming foreign investment. Lopez Obrador hasn’t abrogated any of the 107 production-sharing and other agreements awarded in three multitiered bid rounds open to international operators since 2015. But he halted auctions. And in a new business plan for Pemex, he made clear that future upstream participation by foreign companies will occur through service contracts.
That’s no way to stimulate the investment needed if the country is not only to reverse a slide that halved oil production to 1.7 million b/d during 2004-18 but also to meet a new target of 2.7 million b/d by 2024. Lopez Obrador is driving the Mexican oil and gas industry into a state-centered wall.
According to news reports, Lopez Obrador pushed the Pemex business plan against resistance from Carlos Urzua, the finance minister until his resignation on July 9. In a departure letter, Urzua complained of having been forced to hire unqualified workers and said economic decisions should be made in isolation from “all extremism, whether of the right or the left.” Urzua’s replacement, Arturo Herrera, also has clashed with Lopez Obrador, having sensibly opposed the $8 billion, 340,000-b/d refinery planned at the Port of Dos Bocas in Tabasco.
But the populist Lopez Obrador is committed to restoring state control over oil and gas. Rehabilitating Pemex will be challenging. According to a new report by Benigna C. Leiss and Adrian Duhalt of Rice University’s Baker Institute, the company had debt of $105.9 billion last year, up from $57.9 billion in 2012. Over that period, sales by Pemex fell to $85.41 billion from $126.6 billion.
Lopez Obrador, of course, blames Pena Nieto’s reforms for the state company’s distress, which began with exorbitant taxation predating Pena Nieto’s presidency and was aggravated by an oil market collapse. And reform hardly mistreated Mexico’s icon of resource nationalism. Pemex was the only bidder allowed in the first licensing round.
A Pemex news release about the new business plan said Lopez Obrador “stated that it is a rescue of the country’s energy industry after the resounding failure of the energy reform.” This clear expression of intent misjudges history. After a slow start, Mexico’s licensing became impressively brisk with participation by 76 companies from 20 countries. By May, production under 29 contracts had reached 73,400 b/d of oil and 186.4 MMscfd of natural gas and hadn’t begun from contracts awarded in later rounds. This record does not indicate failure.
Control and money
But Lopez Obrador measures success by control and money. The Pemex press release said the government aims “to support Pemex for the first 3 years of the administration in what will be a transition stage to recover oil production so that, in the second half of the administration, Pemex will support the federal government in financing the development and economic growth of our country.”
So, once again, Pemex is to be the government’s cash machine. For a while, the strategy might seem successful as new production emerges from Mexico’s brief welcome to foreign capital. But the glory—and production—will subside after investment dwindles. And the Mexican oil and gas industry will revert to its historic role as the strangled victim of mistreated potential.