Pushing for Pemex’s resurgence
Despite energy market reforms, Mexico’s president seeks to restore nationalized petro company to dominant role
MEXICO CITY — Mexico still celebrates a federal holiday dedicated to the 1938 nationalization of the oil industry that seized reserves and facilities from international energy companies. To this day, Mexico’s presidents unfailingly attend celebrations commemorating the event that returned oil resources to the Mexican people and ended decades of exploitation with few public benefits.
The place that the holiday, known as Oil Expropriation Day, holds in the national consciousness indicates how steep a cultural climb it was in 2014 for the administration of former president Enrique Pena Nieto to end the 75-year monopoly of the stateowned oil company, Petroleos Mexicanos, and reopen Mexico’s energy resources to private investment. It’s also key in explaining why the country under populist President Andres Manuel Lopez Obrador is moving once again to freeze out foreign oil and gas companies and consolidate the power and influence of Pemex.
“The current administration believes that a bigger Pemex is a more profitable Pemex,” said Duncan Wood, director of the Mexico Institute at the Wilson Center for Public Policy in Washington. “This government wants to ensure that Pemex is the dominant actor at every level of the value chain in oil.”
The effort to restore Pemex as the dominant player in the Mexican industry comes less than five years after landmark legislation changed the Mexican constitution to allow international companies such as Royal Dutch Shell, BP and Exxon Mobil to invest and partner with Pemex. The new laws by design diminished the role of Pemex, hoping to attract much needed foreign investment and know-how to reverse Mexico’s rapidly falling oil production rates and end chronic fuel shortages.
But since Lopez Obrador took office in late 2018, his administration
has indefinitely suspended planned auctions to lease both deepwater and onshore fields to international companies. Instead, Pemex is developing the prospects and is even building a new, multibillion-dollar refinery to reduce fuel imports.
The stakes are high for U.S. oil companies and refiners, many in Texas, that have begun investing heavily in developing oil and gas fields as well as pipelines, terminals and other facilities to export fuels and natural gas to Mexico. The Houston company Talos Energy, for example, is leading a consortium that made one of the first major post-reform discoveries in Mexico’s territory in the Gulf of Mexico. The San Antonio refiner Valero Energy is investing in a project that would allow the company to import gasoline and diesel at the Port of Veracruz and move the fuel to Mexico City and other markets.
Lopez Obrador is justifying his efforts to make Pemex central to his country’s energy sector by arguing that Mexico will be the chief beneficiary. He predicted in May that earnings from Pemex, which has operated at a loss in recent years and taken on heavy debt loads, will flow into the Mexico’s treasury to support a range of social programs, such as national health care and universal pension programs.
“Pemex will be the needed leverage for national development,” he said.
Tried before
While the previous administration had imagined Pemex partnering with international companies such as Exxon Mobil and benefiting from their technology and expertise, the strategy under Lopez Obrador is to maintain Pemex’s exclusive control and lean on oilfield services companies such as Halliburton of Houston to drill oil and gas fields. It’s a plan that former government officials and outside analysts say will add costs without gaining new knowledge and technologies for Mexico’s oil and gas industry.
Dwight Dyer, a former senior energy official under the Pena Nieto administration, said an approach similar to Lopez Obrador’s was tried under President Felipe Calderon 10 years ago — with terrible results. For example, Dyer said the huge Chicontepec field in eastern Mexico was supposed to be the answer to the nation’s oil production woes in the early 2000’s, expected to produce up to 1 million barrels a day.
The oil field, however, was only producing about 30,000 barrels by 2010 despite the extensive participation of Halliburton, another Houston oilfield services company Baker Hughes, and Weatherford International, which has a large Houston presence. Part of the problem, Dyer said, was that services companies, which had carried none of risks of exploration, made money by drilling wells, regardless of whether they produced oil.
“The service contractors wanted to drill as many wells as possible,” he said. “They did not have any responsibility for the results, so they just drilled wherever Pemex told them to.”
The fate of Pemex is crucial to Lopez Obrador as the taxes the company pays fund about 40 percent of the Mexican government’s budget. But by banking on Pemex to provide the revenues needed to deliver on campaign promises from pensions to college scholarships to paid apprentices for unemployed workers, Lopez Obrador is tying the future of his administration to Pemex’s falling production rates and bloated debt, which has reached a staggering $105 billion.
The debt is the result not only of years of falling oil production, but also policies that tax Pemex at rates much higher than that of other national oil companies, even while operating at a loss. The debts incurred because of the high taxes should really be viewed as loans taken by the Mexican government for its own programs, rather than money borrowed by the company to invest in exploration, production and technology, said George Baker, editor of Mexico Energy Intelligence in Houston, who has closely followed Mexico’s energy sector for decades.
“Calling it a tax,” Baker said, “puts a veneer of business language to a non-business financial arrangement by which the government borrows money through Pemex and then uses it for its own purposes.”
Pemex’s disproportionate tax burden has lowered its credit ratings, making it more expensive and difficult for the company to borrow, said Lucas Aristizabal, a senior director at Fitch Ratings of New York. Fitch in June lowered Pemex’s rating to junk bond levels while Moody’s Investor Services, also of New York, has threatened to do the same. (The Hearst Corp., the parent company of the Houston Chronicle, owns Fitch.)
Analysts are also critical of Pemex’s business plan. The government estimates production will grow to nearly 2 million barrels a day by the end of 2020, but analysts say the company’s planned spending is insufficient to fund the exploration needed to achieve those production rates. Pemex’s output has fallen by half over the past 15 years, to about 1.7 million barrels a day in 2018 from 3.4 million barrels a day in 2003.
Pay the price
The Mexican government, meanwhile, has taken steps to keep Pemex afloat, including providing cash infusions to help service its debt. In September, the Lopez Obrador administration orchestrated a $5 billion package that allowed Pemex to refinance its debt by issuing short term bonds at high interest rates – about 2 percentage points higher than similar bonds issued by Brazil’s national oil company Petrobras, according to Luis Gonzali, a portfolio manager with Franklin Templeton in Mexico City.
As Lopez Obrador continues to prop up Pemex, analysts say he risks losing the foreign investment that could help revive that nation’s oil and gas production and generate the revenues needed to support the administration’s plans to expand social programs and boost the Mexican economy.
“My advice for Lopez Obrador is to stick with the reform program,” said Michelle Michot Foss, a fellow in energy and minerals at the Center for Energy Studies at Rice University. “Reinstate confidence. Go forward. Otherwise, pay the price.”