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Mexico’s Looming Energy Crisis: Part 2

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If the newly elected President of Mexico rejects energy reform, the number of bottlenecks will increase, says Jose Maria Rivera (JMR), a seasoned economist with well over 15 years of experience in the Mexican energy sector. In his interview with Strategy, Rivera comments on last month’s published article entitled, “Mexico’s Looming Energy Crisis.” He addresses the current Mexican demand for American light oil and fuels and why it is here to stay for several years to come.

energySTRATEGY ENERGY EXCLUSIVE
CONTRIBUTOR
March 6, 2019

STRATEGY: What is your impression of the article entitled “Mexico’s Looming Energy Crisis”?
JMR: I think it gives a pretty clear overview of the situation. I want to stress one element mentioned, but that’s easily lost in public discussion: available information is limited, so the many assertions we read in the media are hypotheses still subject to be discarded or confirmed. Statistics about trade or production are published after some time, so a sound conclusion in less than two months is hardly achievable. This does not mean the Mexican government is hiding things. If closing the Guadalajara pipeline had to do with some action against a specific cartel, it is logical that not all the details would be shared with the public. However, the government’s case is poorly supported when inconsistent versions are given during the week, official statistics go down, and the Secretary of Energy arrives to a press conference with no information in hand about gas imports in the middle of a gas shortage.

No one can make you feel inferior without your consent.”-6STRATEGY: President Lopez Obrador enjoys very wide public support, does he not?
JMR: Yes, very high approval ratings. An important rate of approval is not unusual when a president enters office in Mexico. President Fox had it as well in 2000, and President Calderon had  it in 2007 after launching a fight against the drug cartels. Lopez Obrador should not disappoint the nation with a poorly planned strategy. Popularity is not forever.

STRATEGY: Do you think President Obrador’s measures for strengthening PEMEX are more likely to backfire?
JMR: Unfortunately yes, I do agree. The reason is that President Obrador thinks that he can fund everything with public money, or at least with PEMEX’s own resources. Federal funding for PEMEX would compete with other needs like health, education, pensions, subsidies and social spending, and the President has ruled out tax increases. Besides, PEMEX would require enormous amounts of money to make any impact. In 2016, Peña Nieto’s administration provided PEMEX with 160.7 billion pesos (around US$8.7 billion), which were barely enough to keep the firm running after oil prices collapsed.

PEMEX’s margins for additional debt are currently very narrow and cash flow is severely pressed by payroll, pension liabilities, and losses in refining. President Obrador has openly rejected selling PEMEX’s shares to look for private funding. Not even Peña Nieto’s reform tried to do this. If you launch Obrador’s plans, everything backfires because they all mean expenditure and costs increases without proper funding or returns on investment.

STRATEGY: Do you think the new Mexican government will abandon energy liberalization?
JMR: My opinion is the President and the Secretary of Energy, Rocio Nahle, both are against this reform. It goes against everything they believe in. It is not a surprise that energy regulators have been pressed to quit. However, the President knows scraping it would damage international investor confidence. He doesn’t want to take this risk, at least until he feels more firmly in power. Keeping on-hold auctions for exploring potential oil fields follows this idea.

Chance may help energy reform to stay. In recent months, the gas shortages have proven to the consumer the importance of not being solely dependent on PEMEX. This awareness could spread as the problem persists. If oil production by private firms becomes significant– as well as their taxes – energy reform could gain points in public opinion and please the taxman. In electricity, clean energy projects and lower prices for the industry could support a reform that would open competition in energy. Environmental groups should be aware that moving backward in electricity leads to more coal and fuel oil consumption. Additionally, if PEMEX fails to deliver what it’s supposed to achieve in three years, private actors would be indispensable.

Anyhow, more than chance is needed. Energy commissioners should resist pressures to quit. Guillermo Garcia Alcocer, president of the Energy Regulation Commission, and the remaining commissioners deserve to be praised. I would say the opposite for those who left.

STRATEGY: How does this scenario fit into Mexico-US trade?
JMR: Economic integration between both nations can’t be stopped, despite politicians’ intentions in Washington or in Mexico City. As in 1994, the question remains if we want to drive the process or be pushed by the stream. Assuming the energy reform framework continues, infrastructure development will be required to be built in Mexico before North America could work as an integrated body on the subject. As happened with NAFTA’s early years, the immediate focus would be on the border states. You need more power lines connecting both countries, more pipelines for natural gas and fuels, more fuel logistic premises. Building wind or solar plants on the Mexican side to sell clean energy to the U.S. may be competitive against projects in Texas or New Mexico, for example. You could even think of projects that help to protect spots with some environmental value, besides selling clean energy.

 

Jose Maria Rivera is a Mexican economist with 15 year of experience in Mexico’s energy sector. He has served as congressman, CFO of Luz Fuerza del Centro, and until recently, as Director General for Finance at the Mexican Department of Energy. He currently resides in Texas.

 

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