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Column: On Oil Nationalism Day, Mexico’s Goal of Energy Self-Sufficiency Remains Elusive

Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the following column by Eduardo Prud’homme as part of a regular series on understanding this process.

Prud’homme was central to the development of Cenagas, the nation’s natural gas pipeline operator, an entity formed in 2015 as part of the energy reform process. He began his career at national oil company Petróleos Mexicanos (Pemex), worked for 14 years at the Energy Regulatory Commission (CRE), rising to be chief economist, and from July 2015 through February served as the ISO chief officer for Cenagas, where he oversaw the technical, commercial and economic management of the nascent Natural Gas Integrated System (Sistrangas). Based in Mexico City, he is the head of Mexico energy consultancy Gadex.

The opinions and positions expressed by Prud’homme do not necessarily reflect the views of NGI’s Mexico Gas Price Index.

Every year on the 18th of March, politicians remind the people of Mexico that their country’s oil riches exist thanks to President Lázaro Cárdenas, who nationalized the industry on this day back in 1938. Grand ceremonies at oil fields draped in flags and images of Cárdenas are held and patriotic announcements made. This year was no different. Thanks to oil revenues, Mexico is wealthy: this is the message. Electricity, gasoline, and gas are abundant and affordable. But behind the scenes, the average citizen is getting the sense that this abundance has been lost.

In 2001, Mexico’s proven hydrocarbon reserves were 32 billion boe. In 2020, this figure had declined to around 8 billion boe. In natural gas, proven reserves slipped from 41.4 Tcf to 9.2 Tcf in the same period. Oil production and natural gas production have fallen in a similar vein.

The financial performance of the emblematic company in the sector, Petroleós Mexicanos (Pemex), keeps getting worse. The government is spending less on Mexicans because of the reduction in oil revenues, and energy independence is a distant memory. It’s easy to forget that the Mexican gas system was actually self-sufficient in 2000. The volume imported that year was only 300 MMcf/d, and this was essentially logistical given that the gas went to northern Chihuahua and Baja California.

Since January 2015, dry gas production in Mexico has decreased from 4.3 Bcf/d to 2.1 Bcf/d. National production has simply ceased to be a reliable source of gas. In the same five-year period, Pemex’s gas consumption for its own activities has been 2-2.2 Bcf/d. In essence, the gas that Pemex produces today is almost entirely used by the company itself. For the rest of the population, there is only gas from the United States, and mainly from Texas.

President López Obrador insists his brake on the privatization of the energy sector will benefit the industry and the people of Mexico. But Pemex’s mega-fields are capital-intensive. When things go well, the profits are palpable. Look at Cantarell. But the good luck of the 1980s has clouded collective reasoning. Also, the state financing that triggered oil production meant an increase in external public debt that brought a decade of economic stagnation. The market risk associated with the fall in the price of crude oil was absorbed by the entire population. The oil is ours, but the risks too.

Today the risks are more evident than ever. The financial situation of Pemex is precarious, such that today it does not contribute resources to the treasury. The government is actually going to pay down $6 billion of the company’s debt this year. There are no reasonable cuts in spending, no layoffs  in unionized personnel, retirement benefits have not been structurally adjusted, the operation has not achieved improvements in efficiency. Finding a new mega-deposit with abundant reserves and low cost extraction is what everyone is betting on.

Since December 2018, Pemex’s top brass have on numerous occasions announced new basins that promise to change the game. The announcements usually come around Oil Day, March 18. Typically these assets have already been included in a list or portfolio of past projects, but nevermind. The figures that are communicated normally fall into the 3P classification, with exact volumes to be confirmed, and drilling schedules and costs absent from discussion. Quesqui and Kuxum are the latest fields to be talked up, home to 500 million boe and 5 billion boe, respectively. In the 2021 edition, it’s the Dzimpona-1 find, in Tabasco, the home state of President López Obrador. Pemex CEO Octavio Romero Oropeza said Dzimpona has the same amount of natural gas as Quesqui and Ixachi, and could hold 600 million boe.

It’s very hard to know the true scope of these fields, or any timeline for exploration and production. Given the central discourse of the López Obrador government on the rescue of energy “sovereignty”, the need to reinforce nationalist ideas among voters is understandable. Touting big finds by Pemex is a way to demonstrate that plans are working. The message is simple: the company has the ability, resources and talent to restore reserves and increase production. If corruption is cleaned up and if neoliberal policies remain in the past, there is no telling what Pemex can achieve. There is no need for private capital, or foreign investors. Pemex, a company with Mexican employees, can operate better than the best organization on earth.

This was the thrust of President Lopez Obrador’s speech on Oil Expropriation Day. He reiterated that there will be no new upstream auctions. Mexico will stop importing fuels, it will use crude production not for the export market but to refine the oil that the country requires. Pemex will be taken care of, and energy prices will not rise.

The current government’s policy has an underlying aspiration related to energy security. It seeks an end to looking to the global fuels market for any domestic needs. This idea is consistent with recent attempts to upend the Electricity Industry Law. The present is working against diversification and betting on the centralization of operations in the energy sector.

The problem is for the mega-deposits to work, the requirements will be significant. Human capital within Pemex has been depleted and project execution is far from ideal. Under these conditions, Mexico’s energy policy will be the victim of its own contradictions. Investment can only come from private initiative given the increasing pressure on public finances. The costs will be enormous to Mexico. The suspension of the new rounds for block allocation is great news for Texas producers of natural gas and marketers. Not even in the best of López Obrador’s messianic dreams is there a way to grow local production by 6 Bcf/d in his remaining three years, which is the amount of natural gas Mexico today imports from its northern neighbor.

Read More: Column: On Oil Nationalism Day, Mexico’s Goal of Energy Self-Sufficiency Remains Elusive

2021-03-19 16:27:10

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