Make Pemex Great Again!

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Popular Mexican President-elect Andres Manuel Lopez Obrador (AMLO) takes power today facing major energy and economic challenges. The incoming president wants to break the energy sector’s dependence on the United States, while at the same time addressing fuel theft and Pemex’s poor track record for getting things done. A referendum in support of his major infrastructure themes could help, though he still needs to address the concerns of the private sector. 

Mexico relies on the United States for about 85 percent of its fuel and blending components and AMLO has vowed to create an independent fuel sector by increasing refining and reducing imports. The incoming government has promised to overhaul the country’s six refineries in seven months, but it might have to extend this time frame given Pemex’s spotty track record in hitting deadlines. Refinery runs in Mexico have again been low this year, and they require a serious overhaul and technological updates to process Mexican heavy grades of oil if AMLO’s plans for fuel independence are to occur.   

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Aside from overhauling the country’s six refineries, AMLO is moving fast to build a mid-sized refinery in the state of Tabasco. Mexico has refining capacity of roughly 1.5 million barrels per day, and the decision to build a new refinery could be a way to allay frustrations sparked by outgoing President Enrique Pena Nieto’s decision to privatize fuel sales in Mexico last year, which led to a sharp increase in retail petrol prices.  

AMLO aims to increase oil production by about 30 percent to 2.5mn bpd by 2021, hoping this will leave Mexico less dependent on the United States. This seems unlikely to say the least. To raise production, Pemex will have to channel significant investments into exploration and production, although downstream investment in Pemex is already underfunded. Pemex could, however, focus its efforts on shallow-water oilfields that are cheaper to exploit. AMLO could also help the situation further via tax exemptions or granting Pemex more funds and independence. 

Salina Cruz Pajaritos imports

AMLO has sent mixed signals to the market via oil auctions. Although he has threatened to halt future auctions until international companies reach production levels agreed to under Pena Nieto, his efforts to cut the red tape for Pemex partnerships suggest a willingness to boost ties with drilling service companies going forward.

Meanwhile, the Isthmus of Tehuantepec project, which is 125 miles of railroad and highway infrastructure that would connect the Pacific and Atlantic Oceans, could be a major development for Mexico’s energy industry. Although the main aim of this project is to expedite the transportation of merchandise and civilians, it could also offer a new and faster way to move oil, refined products and natural gas across Mexico and on to foreign markets.

The ports of Coatzacoalcos and Salina Cruz, which host terminals and refineries, are expected to be overhauled as part of this plan. Two terminals at these ports account for roughly 12 percent of Mexico’s crude oil exports, while Pajaritos complex at Coatzacoalcos receives over a third of Mexico’s imports of gasoline, blending components and middle distillates. Salina Cruz and Pajaritos are connected through pipelines that meet at the Minatitlan refinery, meaning that Pemex has the infrastructure to make this project an alternative to the Panama Canal by quickly transporting products for export to Asia or the US West Coast.         

Pajaritos product imports ClipperData

However, significant investment will be needed to complete the Tehuantepec project. More importantly, AMLO will need to guarantee the security of infrastructure in this area. Chronic fuel theft is a major problem for energy industry operations in Mexico, leading to billion dollar losses and damaged infrastructure. To make this project feasible, the government will have to safeguard the infrastructure, and particularly the pipelines connecting both ports. 

In the last few weeks, AMLO has faced additional pressure from the financial sector. The International Monetary Fund has recommended that Pemex fix its finances and settle its debt before starting on any new refinery plans. AMLO’s proposal to end crude oil exports from Pemex and his rejection of fracking in Mexico has also upset many. Meanwhile, parts of the private sector have criticized the cancellation of a new international airport in Mexico City and plans by AMLO’s MORENA party to cut bank commissions. 

As AMLO takes power, he faces a tough start as he looks to rebuild trust from the private sector and international companies, while also following through on his campaign promises. Despite these obstacles, energy sector reform will remain at the forefront of his efforts.