Commentary: When I lived in Mexico City, I would drive by the Petroleos Mexicanos (PEMEX) building on my way to meetings. I used to always view the tall, imposing building as a physical representation of a centralized industry that the Mexican government had controlled since Mexican President Lazaro Cardenas nationalized the energy sector in 1938.
For the last thirty years, there has been intense discussion about privatizing PEMEX and allowing foreign investment in Mexico’s energy sector. This was finally accomplished during the administration of President Enrique Peña Nieto (2012 to 2018). Foreign investment in the country’s energy sector soon followed. Strategies also were developed to diversify into renewable energy sources.
However, when Peña Nieto’s successor Andres Manuel Lopez Obrador (AMLO) took office, he almost immediately set out to reverse this historic reform. He has taken steps to discourage foreign investment in the country’s energy sector, and is pushing the country away from renewable energy and more towards the production of traditional fossil fuel. This is contrary to the direction that most nations in the world are taking to reduce their carbon footprint.
Now, AMLO is aggressively pushing Mexico to achieve petroleum self-sufficiency by 2022. His plan to achieve this is based on cutting crude oil imports to the world by half in 2022 and completely in 2023. He also is proposing the construction of a new refinery and investing $1.3 billion in the country’s six existing refineries. Additionally, Mexico has purchased a 50 percent stake in the Deer Park refinery in Houston, Texas. AMLO’s plan is ambitious to the point where experts are wondering whether it is viable.
Mexico is one of the largest crude oil producers in the world, but ironically it imports most of the refined fuels it consumes, such as gasoline and diesel, from other countries. The U.S. alone is the source for 60 percent of Mexico’s supply. The question is whether Mexico can ramp up the production of refined fuels in such a short period of time. The country has nearly 130 million citizens that are served by the six existing refineries producing about 1.64 million barrels per day. To put it in perspective, Texas has 29 million citizens, and this state has twenty-seven refineries producing 5.1 million barrels per day. Furthermore, U.S. refineries routinely operate at around 90 percent capacity. In contrast, Mexico’s existing refineries are operating at a 40 to 50 percent capacity, down from a high of 75 percent in 2013, due to badly needed upgrades.
The irony is that AMLO has been rolling back foreign investment in the country’s petroleum industry, the very type of investment that Mexico needs to modernize its production base and build new refineries. PEMEX has more debt on its books than any major petroleum producer in the world. It has a history of mismanagement and corruption that have hampered its efforts to increase fuel production, in addition to a bloated bureaucracy that has proved inefficient. Another issue is, as it cuts crude oil exports to the world in the next two years, how does it make up for the billions of dollars of lost revenues these exports generate, while it tries to ramp up production of refined fuels?
Increasing production of light crude oil, with which refined fuels are produced, is another challenge that AMLO’s administration will have. If Mexico fails to increase its light crude reserves, it will fail to increase its production of gasoline and diesel. This is as much of a major challenge as revamping existing refineries and having new ones built.
Even if all of the stars align for AMLO’s petroleum self-sufficiency plan, the big question is, will he have time to implement and realize its success? His presidency ends in September of 2024. That doesn’t afford him much time to make his plan work. It also has the effect of putting all of the country’s eggs in one basket when it comes to refined fuels. AMLO has not been enthusiastic about renewable energy, and this option will most likely slip further onto the back burner as his administration attempts to implement his plan.
It is logical that such a big crude oil producer such as Mexico should attempt to increase its self-sufficiency when it comes to producing refined fuels. In fact, it could be argued that a plan such as AMLO’s should have been implemented many years ago. However, an unwillingness to welcome foreign investment in its petroleum sector, combined with the challenges of huge PEMEX debt, the need to increase production of light crude, and limited time left in office, seem to make the success of AMLO’s plan a longshot.
Jerry Pacheco is President of the Border Industrial Association and Executive Director of The International Business Accelerator. He also writes the column "Business Across the Border" for the Albuquerque Journal.