Lack Of Financing Weighs On Mexico’s Oil Industry


Editor OilPrice.com
Sun, February 6, 2022, 

Despite being the second-biggest oil producer in Latin America, Mexico seems unable to effectively develop its oil industry. Challenges and failures have been discussed in the media for years, and it seems that even with President Andres Manuel’s (AMLO) new approach to the country’s energy sector few results have been seen.

There are some challenges to Mexico’s oil and gas industry that have been around for years, with no political administration seeming to be able to resolve them. Some of the main obstacles to developing the country’s oil industry include declining oil reserves, the lack of financing and expertise to develop its deep-water crude reserves, the illegal siphoning of oil products from pipelines by cartels, corruption within governments and national energy companies, and the lack of pipeline infrastructure across the country.

And experts worry that Mexico’s new approach to oil and gas could harm the industry even further. In recent years, Mexico has come to rely on the U.S. for its oil imports despite its domestic huge crude reserves. Due to the lack of refining infrastructure, Mexico produces its crude for export. It is refined in the U.S. and then Mexico imports the finished product back to the country. So when President AMLO came into office in 2018, he vowed to nationalize the energy sector to boost Mexico’s energy security by decreasing the number of private firms participating in the sector and increasing the role of state-owned Petróleos Mexicanos (Pemex). In addition, he’s pledged to stop all crude exports by 2024.

But recent developments suggest AMLO may be moving backward in his energy policies. While AMLO insists his new reforms will improve Mexico’s energy security, many in the industry believe they will actually lead to electricity being dirtier and more expensive, pushing away international investment, and undermining regulatory institutions because of the heavy hand of the government. In fact, AMLO appears to be going back in time, taking many of his ideas from the state-owned energy company-dominated economy of the 1960s and 70s.

This goes almost entirely against the strategy of the previous administration, which welcomed new foreign companies into Mexico’s energy industry. For the first time, private companies were allowed to open their own petrol stations, instead of just Pemex. The idea of monopolizing the country’s energy sector would undo this recent liberalization.

Pemex exports have been steadily declining in recent years, from around 1.9 million bpd in 2004 to 1.02 million bpd last year, a decrease of 46 percent. And this is not Pemex’s only problem. The state-owned oil company has been repeatedly criticized at the international level for its poor safety and environmental standards.

Last year, Pemex fell in two of the Natural Gas Intelligence’s (NGI) key environmental indicators. It also came under fire for increasing the quantity of methane it burns off through gas flaring. In terms of safety, in 2021 Fitch Ratings suggested that PEMEX safety incidents will challenge its production growth target. Fires at its Ku-Maloob-Zaap production fields and at a Oaxacan refinery have also tarnished the firm’s reputation.

If Mexico is to rely on Pemex to develop its national oil and gas industry, while pushing out foreign investors, it has a long way to go. Pemex CEO Octavio Romero announced plans to boost production to 1.51 million bpd in 2022 and 2 million bpd in 2023, reducing the need for imports. The company aims to refine its crude in six refineries. One of these plants is currently under construction in the southeast state of Tabasco. And Pemex, under AMLO’s plan, is expected to take over the Deer Park refinery outside of Houston, at a cost of $1.2 billion to Mexican taxpayers. But the refinery has been reporting losses since 2018, with little hope of revival.

The purchase of the Deer Park refinery is expected to be completed early this year according to the Mexican government. Romero suggested that the cost of the takeover included $596 million for the controlling interest of the refinery, with the rest paying off Pemex’s debt to Royal Dutch Shell.

Meanwhile, reports suggest its 340,000 bpd Dos Bocas construction in Tabasco is way over budget at a projected cost of $12.5 billion, or around 40 percent higher than original estimates. This is mainly due to construction delays and rising materials costs, a challenge that has been felt worldwide during the pandemic. Although many suggest the budget was most likely unrealistic to begin with. The refinery was due to be up and running by late 2022, a target that is unlikely to be met.

With systemic challenges to Mexico’s oil and gas industry that have persisted for decades, any political power attempting to reform the country’s energy sector would face a monumental task. However, AMLO’s nationalist approach to energy seems to be doomed for the outset. Relying on a debt-ridden national oil company that has a poor reputation internationally and has been facing decreasing oil output for years simply isn’t realistic. In addition, poor budgeting and construction projections mean that the refineries needed to support the halting of Mexico’s oil exports are unlikely to be running successfully any time soon.

By Felicity Bradstock for Oilprice.com