Lack of funding weighs on Mexican oil industry

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Although it is the second largest oil producer in Latin America, Mexico seems incapable of effectively developing its oil industry. The 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. Mexico’s oil and gas industry faces challenges that have existed for years, and no political administration seems able to resolve them. Some of the major impediments to the development of the country’s oil industry include declining oil reservesthe lack of funding and expertise to develop its deepwater crude reserves, the illegal siphoning of petroleum products from pipelines by cartels, corruption within governments and national energy companies, and the lack of infrastructure to pipelines across the country.

And experts fear Mexico’s new approach to oil and gas could hurt the industry even more. In recent years, Mexico has come to depend on the United States for oil imports despite its huge domestic crude reserves. Due to the lack of refining infrastructure, Mexico produces its crude for export. It is refined in the United States and then Mexico imports the finished product into the country. Thus, when President AMLO took office in 2018, he pledged to nationalize the energy sector to strengthen Mexico’s energy security by decreasing the number of private companies participating in the sector and increasing the role of the public company Petróleos Mexicanos (Pemex). Additionally, he has pledged to stop all crude exports by 2024.

But recent developments suggest that AMLO could be moving retrograde in its energy policy. While AMLO insists its new reforms will improve Mexico’s energy security, many industry players believe they will actually lead to making electricity dirtier and more expensive, pushing back international investment and undermine regulatory institutions due to government capture. In fact, AMLO seems to go back in time, drawing many of its ideas from the state-owned energy-dominated economy of the 1960s and 1970s.

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 service stations, instead of just Pemex. The idea of ​​monopolizing the country’s energy sector would negate this recent liberalisation.

Pemex’s exports have steadily declined in recent years, falling from about 1.9 million bpd in 2004 to 1.02 million bpd last year, a decline of 46%. And that’s not Pemex’s only problem. The state-owned oil company has been repeatedly criticized internationally for its poor safety and environmental standards.

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Last year, Pemex fell in two of Natural Gas Intelligence’s (NGI) key environmental indicators. This too came under fire to increase the amount of methane it burns by gas flaring. On the security side, in 2021 Suggested Fitch Ratings that PEMEX’s security incidents will jeopardize its production growth objective. Fires at its Ku-Maloob-Zaap production fields and at a refinery in Oaxaca have also tarnished the company’s reputation.

If Mexico is to rely on Pemex to grow its domestic oil and gas industry, while fending off foreign investors, it still has a long way to go. Pemex CEO Octavio Romero announced plans to increase 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 at six refineries. One such plant is currently under construction in the southeastern 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 posting losses since 2018, with little hope of recovery.

The purchase of the Deer Park refinery should be finalized early this year according to the Mexican government. Romero suggested the cost of the rework included $596 million for the majority stake in the refinery, with the remainder repaying Pemex’s debt to Royal Dutch Shell.

Meanwhile, reports suggest its 340,000 bpd Dos Bocas build in Tabasco is well over budget at a projected cost of $12.5 billion, about 40% more than the initial estimates. This is mainly due to construction delays and rising material costs, a challenge that has been felt around the world during the pandemic. Although many suggest the budget was most likely unrealistic to begin with. The refinery was expected to be operational by the end of 2022, a goal that is unlikely to be met.

With systemic challenges to Mexico’s oil and gas industry persisting for decades, any political power trying to reform the country’s energy sector would face a monumental task. However, AMLO’s nationalist approach to energy seems doomed. Relying on a debt-ridden national oil company that has a bad reputation internationally and has been dealing with declining oil production for years is simply not realistic. In addition, lackluster budget and construction forecasts mean the refineries needed to support Mexico’s oil export shutdown aren’t expected to operate properly anytime soon.

By Felicity Bradstock for Oilprice.com

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