Why Pemex needs partnerships to secure Mexico's energy sovereignty

When Mexico's president-elect Claudia Sheinbaum takes office on October 1, one of the greatest challenges she will face will be to restore the fortunes of the energy industry and of national oil company Pemex in particular.

While Sheinbaum has pledged to continue with the policies of the current president and her mentor, Andres Manuel López Obrádor, and to use Pemex and state-owned electricity company CFE to ensure national energy sovereignty, she may have little choice but to be more welcoming to private initiatives. 

To discuss what lies ahead for Pemex and the Mexican energy industry, BNamericas talks to Miriam Grunstein, founding partner of Brilliant Energy Consulting.

Grunstein is one of Mexico’s most experienced energy, infrastructure and regulatory lawyers. She is a leading independent legal consultant, a non-resident scholar at the Baker Institute's Center for the US and Mexico, and has taught in Mexico’s top-tier universities. Her legal publications include books and articles on energy and environmental law.

BNamericas: Pemex is the most indebted energy company in the world. What do you think the government will do to rescue it?

Grunstein: This administration has spent a lot of money on Pemex and that money has been basically lost, particularly in the refining area. But I get worried when they talk about fiscal consolidation because whatever the administration in power, when people talk about fiscal consolidation they begin to make cuts. What Pemex really has to do is look for business opportunities. What is not useful has to be cut, but Pemex has to expand its range of businesses.

BNamericas: Where do you think Pemex should be investing?

Grunstein: Pemex has to concentrate on oil exploration and production, look for the fields that are most profitable for Pemex and seek strategic alliances for them.

The problem is that we have sown so much distrust, even though Sheinbaum said that she is considering returning to the participation of private initiatives in exploration and production, perhaps by restarting the bid rounds. We’ll have to see if her party allows it. There are many fields where Pemex could tender stakes using farm-outs.

Another thing that Pemex should do is strengthen its natural gas import system and invest in gas pipelines for industrial uses and also for CFE. CFE could buy cheaper gas from Pemex.

BNamericas: What is the potential of the Mexican upstream?

Grunstein: Pemex is decapitalized. Investment in technology and financial investments are unfeasible at this time. Alliances must be made with the IOCs, but the IOCs have already gone to places where there are excellent exploration and extraction opportunities, like Brazil.

The Lakach field is going to be a failure. Gas from deep waters is going to be very expensive, especially with competition from the United States. It doesn’t make sense. Gas is not extracted from deep waters. It’s too expensive.

BNamericas: What can Pemex do to ensure energy sovereignty?

Grunstein: Talking about energy sovereignty is a huge contradiction. Pemex is paralyzed like never before and is not prepared to assume this. When the first rounds were held in 2015 and the first farm-outs were made, there was a lot of interest in partnering with Pemex. At this point I think that moment has passed by. Pemex has deteriorated and the government has created enormous distrust. 

So we have to see if we can still achieve these alliances with the private sector. We had the opportunity to partner with important companies and we let it go.

And now, with all the issues of judicial reform and when the possibility of the judiciary being captured by political and electoral forces is raised, there’s going to be a lot of distrust. Why get into a country that has been the most reluctant to open up, and with the most indebted oil company in the world?

BNamericas: Where are there grounds for a little optimism?

Grunstein: Speaking positively about the energy sector at this time is very difficult, both for hydrocarbons and for electricity. It could be said that one possible positive trend of the Sheinbaum government would be to pay much more attention to the enormous potential that Mexico has in solar photovoltaic and wind energy. But for that we need a lot of investment in transmission and generation.

At this time it’s still highly speculative what Sheinbaum can and wants to do, because she has not yet taken power. We have to see how they handle the discourse of energy sovereignty with greater inclusion of the private sector, which is something that they’re beginning to talk about.