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Mexico’s Looming Energy Crisis: Part 1

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energy STRATEGY ENERGY EXCLUSIVE
CONTRIBUTOR
February 16, 2019

December 2018 marked the arrival of a new left-leaning government in Mexico, lead by Andres Manuel Lopez Obrador, who tried twice to reach the presidency, but was defeated in 2006 and 2012.

2019 has brought a bumpy start for Mexico’s oil sector, where the state-owned firm PEMEX is the dominant player despite legal reforms aimed at enabling private competition. To start with, President Obrador appointed Octavio Romero (an agronomist with no experience in energy) as PEMEX’s CEO and announced ambitious goals for oil and fuel production. However, specialists are not impressed and are skeptical of Obrador’s goals and means. Take oil production for example: the President announced fracking will be banned and new tenders for exploring potential oil fields (including deep waters) will be kept on hold for 3 years. He is relying completely on traditional oil fields in PEMEX’s hands, all of them showing a decreasing output record due to depletion.

It seems fuel has become a matter of national pride for Obrador. Obrador’s plans include building a new refinery in less than three years in his home-state of Tabasco. Fuel imports as a proportion of total consumption have increased steadily in the last 20 years. PEMEX’s aging refineries are having a hard time processing Mexico’s heavy oil because these plants were built in the 1980’s when Mexico’s fields produced light oil. To ease the burden on the refineries, Mexico and the U.S. agreed to allow PEMEX to import light American oil. But buying American oil was anathema for Obrador, worse than buying American gas. Last November, rumors leaked that President Obrador asked President Enrique Peña’s government to cancel such imports. The former PEMEX CEO refused on the ground that such a measure would create a gas shortage.

pipelineSome days before the New Year’s Eve, Obrador announced a kind of military intervention in some of PEMEX’s fuel distribution facilities, mainly in the area of influence of the Salamanca refinery, including the pipeline running from Queretaro in the east to Guadalajara in the west. His purpose, he said, was to fight fuel theft, a phenomenon that increased sharply under Enrique Peña Nieto’s administration, revealing that drug mafias had entered a new business. What came afterwards is clear as mud, using the words of the Wall Street Journal correspondent Robbie Whelan. A gas shortage arose from Guadalajara to Queretaro and by January 10thit reached Mexico City.

President Obrador faced the press daily with inconsistent explanations. One day he said gas theft was organized from a certain floor in PEMEX’s main building; another day, he said pipelines were closed as a strategy for stopping illegal tapping. When the Wall Street Journal reported data suggesting Mexico had decreased gas imports from the U.S. in December, Obrador dismissed the news as coming from a non-serious paper. Other versions added that both gas imports and crude oil imports had decreased. Soon, news reached Mexicans that the port of Tuxpan was suffering heavy traffic of ships waiting for unloading imported gas and, simultaneously, government sites with oil and gas statistics went down. Another foreign blow came when PEMEX’s roadshow in New York City received negative comments, which could affect its credit grade increasing borrowing costs.

January’s bumpy ride is still in March. However, some lessons have come to the surface. Gas shortages will strike soon because PEMEX can hardly store on average 3 days of consumption. Any disruption in the flow coming from refineries or across the border easily puts stress on fuel availability. If you add panic purchases, it is impossible to avoid a widespread shortage of gas. More spending in fuel logistics is urgent in Mexico and it is not coming from PEMEX. President Obrador’s 2019 federal budget cut funds to this part of PEMEX. Some regions are more vulnerable than others.

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When energy reform broke PEMEX’s gas monopoly, nobody else had gas storage and distribution facilities. Most firms decided to depend on PEMEX’s infrastructure for supplying their gas stations. Many gas station owners believed PEMEX wouldn´t let them fall down. Why gamble your future with someone bringing fuel through a feeble, untested channel? Hence, they shared PEMEX’s fate in gas scarcity. Just a few firms like Exxon Mobil went with gradually building their own distribution capacities. They still have a small presence in Mexico, however, acting independently from PEMEX enabled them to keep their gas stations better supplied. It seems that developing your own infrastructure, however costly and risky, protects you from PEMEX’s contagious disorders.

State governors’ reactions were, in general, silence. This is the usual conduct Mexico witnessed in times of an all-mighty president, times President Obrador seems to look for. In Guadalajara, Jalisco’s Governor Enrique Alfaro made some noise demanding PEMEX to clean its mess to no avail. In Guanajuato, where the Salamanca refinery is located, Governor Diego Sinhue Rodriguez realized not very much could be expected from PEMEX, so he is trying to ease Guanajuato’s access to Texas gas.

Ironically, Lopez Obrador’s efforts to restore PEMEX’s mythical grandiosity are likely to backfire. Fuel shortage has hurt the PEMEX brand in consumers’ eyes as well as among private brands. The myth that “PEMEX wouldn´t let us fall down” is totally broken. The government’s emphasis in refining and oil production leaves logistics as a second order problem. Then comes refining, a chronic money loser within PEMEX. Increasing expenditures here without improving efficiency means higher losses. A huge commitment is the new Tabasco refinery. It will drain resources away from more profitable oil production while giving nothing back. And which light oil will be domestically refined as Mexican oilfields yield heavy oil? New oilfields? Will a ban on fracking and keeping on hold deep waters exploration really help to increase national oil production? It looks like more than a fertile place to sell Texas’s oil, natural gas, and fuels.

Rule of law is an alarming concern for the coming years. Security experts suggest that soaring gas theft statistics during Peña Nieto’s years reveal that organized crime joined this activity. It would be impossible to reduce Pemex’s losses if organized crime is not fought in the fields and in finance. Almost nothing has been heard about this after one month of President Obrador’s intervention and no one has been arrested after a property close to a pipeline was raided by the police. The problem worsens when you add common people trying to tap pipelines themselves. On January 18ththis happened in the village of Tlahuelilpan, not far from Tula refinery. A small army patrol arrived, but the number of people forced them to stay away, while the press reached the spot. A spark ignited the entire field in flames leaving more than 90 local people killed and many other burned. After this tragedy, the President declared that people involved in this incident would not be prosecuted. Investors should be warned that Mexico’s risk premium may be rising in the coming years.

 

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