The minefield ahead for AMLO and his energy strategy

Mexican President Andrés Manuel López Obrador (AMLO) is mounting a crusade to rescue state oil company Pemex, unveiling on July 16 the company’s business plan for 2019-2023, which aims to reverse plummeting production and boost exploration and refining through significant tax relief and other financial support.

The plan, however, has failed to impress the private sector with rating agency Moody’s saying the plan does not go nearly far enough to restore production and reserves, and there is no shortage of criticism for AMLO’s massive Dos Bocas refinery project, which has a key tender coming up July 26.

With this in mind, we spoke to Pemex expert David Shields, a private consultant who specializes in analysis of the oil and energy industries in Mexico.

Shields is an author of two books on Pemex and the editor of the bimonthly publication Energia a Debate.

BNamericas: From what we are beginning to learn about the Pemex business plan, what are your initial impressions?

Shields: My initial impression is that it is what was expected.

There are different visions of what people would like. In the case of Pemex, personally, I would prefer to see ‘farmouts’, as they say, or joint ventures with companies that would allow private investment to become more involved to a greater extent, which mean lower public investment, lower government investment.

That is definitely not there.

Really on the question of private investments, there are two visions. You have direct private investments and farmouts and joint ventures of different kinds, or you don’t.

The idea that you don’t have private investment is that Pemex does not share the reserves.

They are going back to a traditionalist, monopolistic energy structure, where companies get involved through Pemex and [state power company] CFE, and they get involved in long-term service contracts that don’t give them ownership of the infrastructure or the reserves. 

BNamericas: With the plan as it is, is the government realistically going to be able to do what they aim to do with Pemex, or not? Do they even want private investment?

Shields: They will do their best to get private investments through service contracts, but the problems of Pemex are very severe. They don’t have any more giant fields to exploit, and the giant fields they do have are declining.

I think you’re not going to get a big return any time in the near future, or any time in the future, unless Pemex were to go for fracking … maybe.

The resource base is much, much more limited than it was in the past, and you are going to have to spend much more money to produce the same amount of oil or less.

They are proposing to invest in very, very small fields. It’s not easy to see that these fields are going to be very profitable or that they are going to provide a great deal of production.

I think that’s the problem at this point. I think whatever you do, nothing is easy. 

BNamericas: Bechtel has announced it is dropping out of the upcoming tender for Dos Bocas. In the past you’ve said they were the only company capable of doing the job on time. How do you see this tender playing out now?

Shields: People want to support the president and his projects, but Dos Bocas is technically non-viable in many ways. 

And, I am not convinced the biggest, international companies are going to participate.

We are supposed to know July 26. I don’t know exactly what they will say. Maybe there will be some brave people out there who think this can be done.

My impression is that companies are a bit scared. They see a government with a very tough attitude about getting this done very quickly and expecting this to be done in a period and at a cost that are not very realistic.

BNamericas: Are there other reasons to be scared?

Shields: They will probably feel the project is not realistic.

The logistics is incredibly difficult. The preparation of the government is incomplete. It’s also inappropriate in a way. They don’t have a basic engineering analysis ready. It’s believed that the land could be easily flooded. I think companies will feel there’s just no adequate way for this to be done in three or four years.

If we're going beyond the companies’ own [concerns], I think the whole refinery project is badly conceived, I don’t think the oil is there.

I think it’s just an unnecessary project. It’s a giant project designed for heavy oil. Now, heavy oil is not the problem. There are many refineries around there that can process the oil.

Pemex’s additional production over the next 10 years, or the foreseeable future, will probably be light crude oil. And light crude oil, well, you could build a refinery for that, but that’s not what Pemex is proposing.

The whole idea of the refinery is to have more capacity to process oil and make gasoline and make Mexico more self-sufficient. However, I don’t see that you need a new refinery. You can do that just with the refineries that you already have.

A better plan could be to build one or more small modular refineries, which can be built quickly, for light crude oil, ideally at sites in Tabasco or elsewhere, other than Dos Bocas.

And ideally, the whole self-sufficiency argument requires considerably greater production. Now, that’s what they are proposing in their business plan, but it’s not easy to believe that that’s what’s going to happen. 

BNamericas: What about the CFE legal battle over the pipelines? After Carlos Urzúa’s recent resignation as finance minister, he went public in saying he opposed Dos Bocas and also criticized the strategy of CFE's CEO Manuel Bartlett with the contract dispute. What do you see happening?

Shields: I’m not clear about it. I don’t think anybody is really. The fact that the pipeline has not started up is bringing the industrialists to pressure the government to start up the pipeline.

The legal battle and the operation of the pipeline are not necessarily two things that have to go together. I mean, you can operate the pipeline even though you are in some kind of negotiation or legal battle.

[The strategy] may be just a way to pressure the companies into negotiation. I don’t if companies will be pressured so easily.

Ultimately, what the government hopes to achieve is negotiation and that some concessions can be achieved. Now, really I don’t know if any concessions will be achieved.

BNamericas: But that’s what they hope?

Shields: I think that’s what they hope, and I think they are two different things: one thing is negotiation and the other is international arbitration. They are quite different animals. 

CFE has accepted that the contracts are unfair to CFE, and that is like going into arbitration and saying, ‘Oh, well we know we are going to lose’.

CFE is saying, ‘Contracts are bad, we want to negotiate them.’ But if the contracts are bad, you still have to honor them.

I think Urzúa was saying something like that. He was saying that [CEO Manuel] Bartlett might be correct in saying that maybe the contract conditions, contract terms are not good, maybe that’s correct, but that doesn’t get you anywhere.

You still have to honor contracts in such cases.

BNamericas: You are touching on an important issue with President López Obrador, who from the very outset of his electoral victory has promised that the government would uphold its contracts. This CFE case seems to be one of a growing set of instances where AMLO is eroding that promise. Would you agree?

Shields: Yes, I think I agree with you on that. On several occasions, they have said one thing and done another, and they have also said on many occasions that they will be supporting private investment, but the facts seem to point in a different direction.