Mexico’s Next Government Faces Bind In Pemex Ethane Deal

(Reuters, Diego Oré, 17.Oct.2018) — Mexico’s incoming government will soon inherit a costly dilemma over an ethane supply contract between national oil company Pemex and a consortium led by a unit of Brazilian builder Odebrecht.

Under the contract’s terms, Pemex has had to supply ethane well below current market prices.

A hydrocarbon that comes from natural gas, ethane is used to make ethylene, which in turn is used to make the common plastic polyethylene at the Braskem-Idesa plant near the Gulf coast port of Coatzacoalcos.

The plant is operated by the consortium in which Odebrecht’s unit Braskem has a 70 percent stake and Mexico’s Grupo Idesa holds the remainder.

Energy aides to President-elect Andres Manuel Lopez, who takes office Dec. 1, have said the contract is problematic, but have not yet said what the new government will do about it.

“The contract with Braskem is very damaging to Mexico’s interests,” Sen. Armando Guadiana, of Lopez Obrador’s Morena party and heads the Senate energy commission, told Reuters last week. Pemex is fully owned by the government.

The Braskem-Idesa consortium told Reuters last week it has no plans to void the contract.

If President-elect Lopez Obrador were to direct Pemex to cancel the contract, it would be forced to purchase from the consortium the sprawling Etileno XXI petrochemical facility currently valued at $1.26 billion (£956.43 million), according to a contract annex seen by Reuters.

Neither Pemex or Braskem responded to questions about the valuation.

Conversely, if the new government opted to stick to the deal, it could only hope for more favourable ethane prices that might reduce its losses.

MUTUALLY BENEFICIAL?

Under the terms of the 20-year-long contract, Pemex committed to selling ethane to Braskem-Idesa for 16 cents per gallon. When the contract was signed in 2010 market prices for ethane were three times that, at 50 cents per gallon.

Current ethane prices hover around 40 cents per gallon.

A Pemex spokesman said the contract, which took effect in 2016, “responded to the market conditions of that time.”

Before the facility began operations in 2016, Pemex produced more ethane than it needed, forcing it to inject excess supply back into its natural gas pipelines.

Pemex’s production of ethane this year averages 88,000 bpd, but this is now insufficient to supply its own Morelos and Cangrejera petrochemical facilities that require a combined 66,900 bpd, plus the Baskem-Idesa contract obligation of 66,000 bpd.

As a result Pemex was forced to turn to ethane imports this year for the first time as domestic oil and gas production continues to fall, costing Pemex some $50 million during the first half of 2018, according to Reuters calculations, due to the cost of imported ethane at market rates compared to the cheaper fixed price in the contract with the Braskem-Idesa consortium.

If Pemex is left without enough ethane, it would have to shut down the so-called cracking plants at its two petrochemical facilities, and the cost of re-starting them after being idled one week would be some $2.6 million, according to comments from the head of Pemex’s ethylene unit, Alejandro Cruz, at a board meeting in December.

In June, pricing agency Platts reported that Pemex entered into a $237.6 million contract with Swiss commodities trader Vitol to supply 720,000 tonnes of ethane to Pemex through 2020.

Both Pemex and Vitol declined to confirm the deal.

In 2016, Mexico’s federal auditor determined that Pemex ethane exports during a 10-month stretch of that year could have yielded the company more than $100 million had it not been for the Braskem-Idesa contract.

Using official data, Reuters calculated a similar $100 million opportunity cost in 2017.

Both Pemex and Braskem declined to comment on the calculations.

Braskem said the contract was mutually beneficial, arguing that it helps cut Mexico’s reliance on foreign plastics.

“We are not planning on undoing a positive contractual relationship that we’ve been building with Pemex and that brings benefits to all,” said Sergio Plata, head of institutional relations for the Braskem-Idesa consortium.

Rocio Nahle, Lopez Obrador’s pick to be Mexico’s new energy minister, has said the incoming government will review the Braskem-Idesa contract for possible signs of corruption, part of a broader energy contract review.

The consortium’s Plata said he was confident the contract will not be modified.

According to a transcript of a recent session of the board of directors of Pemex’s ethane unit, acting director Rodulfo Figueroa, admitted that supplying the gas is “the most serious problem” it faces.

Lopez Obrador’s incoming transportation minister, Javier Jimenez Espriu, is an alternate member of the Grupo Idesa board of directors but told Reuters the contract was reviewed by the separate board of the Braskem-Idesa joint venture.

Luis Miguel Labardini, a Mexico City-based energy consultant, said an even bigger problem for Pemex lies with whoever agreed to the contract’s terms in the first place.

“We should give the benefit of the doubt to whoever negotiated this contract that they didn’t act in bad faith,” he said. “But they were negligent.”

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#LatAmNRG

Mexico’s AMLO Presses Big Oil To Start Pumping From Recent Finds

(Oilprice.com, Tsvetana Paraskova, 16.Oct.2018) — Mexico wants Big Oil to start producing from the recently discovered oil fields in Mexico as soon as possible, incoming President Andrés Manuel López Obrador told foreign executives at a recent meeting, Reuters reported on Tuesday, quoting sources and executives who attended the meeting.

In this first meeting with major international oil companies operating in Mexico, however, the president-elect didn’t give any indication whether new oil blocks will be offered and oil tenders held, according to attendees who spoke to Reuters.

Outgoing Mexican President Enrique Peña Nieto opened up the energy sector to foreign investment in 2013, ending 70 years of state monopoly. Since then, Mexico has held several successful auctions that have attracted oil majors to its oil and gas exploration industry.

However, incoming president López Obrador, who takes office in December, has been critical of the energy reform and has vowed to review the contracts that foreign firms have already signed with Mexico.

In July, Mexico’s energy regulator postponed two oil auctions that were set for September and October to February 2019, after López Obrador takes office this December. Then in August, reports emerged that the incoming administration was thinking of indefinitely halting competitive tenders for oil and gas in Mexico.

Last month, the incoming administration began the review process for a contract with a consortium led by U.S. Talos Energy.

Talos Energy’s chief executive Tim Duncan was one of the executives who met with López Obrador at the first meeting with foreign oil firms at the end of September.
“We know we have to exceed expectations and we’re trying to make sure we do that,” Duncan told Reuters.

López Obrador wants to reverse a decline in Mexico’s oil production as many oil fields are maturing. Mexico’s current oil production stands at about 1.84 million bpd, of which 60 percent is exported.

López Obrador signaled at the meeting that he would put around 20 currently idle drilling rigs of Mexican oil service firms to work for state energy firm Pemex, three executives who attended the meeting told Reuters.

The incoming president still needs to show that he is on board with foreign investments and still needs to hold tenders if he is to meet his goal of reversing the slide in production.

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#LatAmNRG

Mexico And Brazil’s Crude Politics

(Foreign Policy, Lisa Viscidi, .16.Oct.2018) — A potential return to resource nationalism could set both countries back.

Until this year, resource nationalism—when a government asserts its control over a country’s natural resources—seemed to be on the wane in Latin America. With oil prices low, state oil companies were struggling, and market-friendly governments had started opening their energy industries to private investment.

In the coming months, though, the region’s two largest economies may both have new leaders who came to power on promises of a return to the old days. In Mexico, President-elect Andrés Manuel López Obrador’s vow to restore Mexico’s state energy companies to their glory days and his emphasis on energy independence from the United States were central to his campaign. Similarly, Brazilian presidential candidate Fernando Haddad (who is polling well behind his rival, Jair Bolsonaro, but could still eke out a win later this month) wants to reassert state oil and power companies’ dominant positions in Brazilian energy markets. Both López Obrador and Haddad have argued that the current Mexican and Brazilian governments, in trying to open energy sectors to private investment, have effectively handed over state assets to foreign companies.

This is not the first time Latin American countries have flip-flopped on resource nationalism. The idea was initially championed in the 1950s and ’60s by Juan Pablo Pérez Alfonzo, the Venezuelan oil minister who helped found OPEC, and Getúlio Vargas, the Brazilian president who created the state oil company Petrobras in 1953. The slogan he gave it: “O petróleo é nosso,” or “The oil is ours.”

In the 1990s, historically low oil prices pushed Latin America’s energy sectors toward privatization. Petrobras shares were floated on the São Paulo and New York stock exchanges. Argentina’s state oil company, YPF, was sold off to private investors entirely. Then, in the early 2000s, as oil prices rose again, governments across the region began expropriating energy assets. A wave of recent reforms, again tied to low prices, encouraged private investment once more. In Mexico and Brazil, however, these reforms were never popular. And so, in both countries, the idea of energy sovereignty, part of a broader economic nationalist and protectionist approach, is again taking root.

For his part, López Obrador has long criticized the energy reform that the current president, Enrique Peña Nieto, signed into law in December 2013. That reform revised the constitution to open the oil and power sectors to greater private investment, creating competition for state monopolies. As a presidential candidate, López Obrador condemned the opening as putting the country’s riches into foreign rather than Mexican hands. Now, he wants to strengthen the state oil company, Pemex. He has vowed to increase Pemex’s investment budget to boost oil production, which has plummeted to 1.8 million barrels per day from a peak of 3.4 million barrels per day in 2004. His goal of 2.6 million barrels per day by the end of his term in 2024 is ambitious.

In order to end imports of gasoline from the United States by 2022, another of the president-elect’s goals, López Obrador plans to build a new refinery in his home state of Tabasco and upgrade six existing refineries, which would add over 1 million barrels per day in output if all existing refineries ran at full capacity. Mexico produces mostly heavy crude oil, much of which it ships to the United States for refining. It then imports about 1.3 million barrels per day of refined products back from the United States for domestic consumption. At the same time, López Obrador has promised Mexican voters a decrease in gasoline prices. The Peña Nieto government had cut gasoline subsidies just as international oil prices started to rise again, causing a 20 percent bump in fuel prices.

In the power sector, López Obrador plans to strengthen the state utility company and expand hydroelectric capacity in Mexico to slash imports of natural gas. In recent years, Mexico has become a critical market for U.S. shale gas as the pipeline infrastructure between the two countries has been beefed up. Cheap U.S. natural gas has also lowered the cost of electricity generation in Mexico, so tapering off the imports could hurt on both sides of the border.

In Brazil, the polarizing right-wing candidate Bolsonaro, who won 46 percent of the vote in the country’s first-round presidential election on Oct. 7, will face Haddad, a left-wing candidate from the Workers’ Party, in a second round later this month.

Bolsonaro has said that he is open to foreign investment, privatizing state companies, and creating more competition in oil and gas markets. He would likely push onward with the Petrobras divestment plan that was started under the current center-right president, Michel Temer. As part of that plan, which was designed to reduce Petrobras’s enormous debt, the company has sold off assets in refining, logistics, and transport to focus on its more profitable core business of oil exploration and production. Continued privatization is worthwhile, but beyond his support for it, Bolsonaro has been widely criticized for lacking any specific energy plan or even a detailed economic agenda.

Haddad, meanwhile, is fairly clear in his support for a return to the resource nationalism favored by his fellow Workers’ Party member former President Luiz Inácio Lula da Silva. Following the 2007 discovery of vast deepwater oil reserves, Lula introduced reforms that increased the government’s stake in Petrobras and made the state company the exclusive operator of the new fields. Temer later signed a law that reversed Lula’s bill, creating more opportunities for private investment in the sector. Haddad has promised to reverse Temer’s reversal and recover the oil to benefit the people. He has also pledged to strengthen Petrobras and to support the development of local industries by increasing local content requirements in oil exploitation and production. In short, Haddad would likely look to slow Petrobras’s divestment to keep energy assets in the state company’s hands and reassert its role as a driver of economic development.

Once in office, the new leaders of Mexico and Brazil will inevitably face challenges to implementing many of their plans. It is unlikely that Brazil’s next president will have enough support in Congress to overturn Temer’s law, for example. Likewise, in Mexico, although the president has broad powers to roll back aspects of the energy reform, only a two-thirds congressional majority—which López Obrador is unlikely to secure—can undo a constitutional reform. And in both countries, the administrations would face major legal challenges if they tried to unilaterally change existing contracts with private energy companies.

And then there’s the budget to think of. New refineries cost billions of dollars, are highly susceptible to corruption, and ultimately won’t lower gasoline prices for consumers. Expanding large hydroelectric dams also takes money, and it presents tremendous social and environmental challenges. Forcing a state oil company to operate all exploration and production projects risks massive corporate debt and a credit rating downgrade—precisely what happened to Petrobras under Lula and his successor, Dilma Rousseff. Meanwhile, strict local content requirements that are not coupled with programs to modernize local suppliers merely slow the development of oil and gas reserves. Despite the discovery of the undersea reserves in 2007—one of the most significant oil finds in the world in years—Brazil’s oil production remained nearly flat for years.

State-led development of energy resources can be very successful. Witness Saudi Aramco, the state oil company that has made Saudi Arabia one of the largest oil producers in the world. But experience in Latin America suggests that giving state companies a monopoly over energy production tends to restrict the industry rather than boosting it. And beyond that, it is worth considering whether it is wise to continue depending on oil to float the economy at all. As many other countries around the world, from nearby Colombia to Saudi Arabia, debate whether the time has come to transition the economy away from dependence on fossil fuels, in Mexico and Brazil, debates over energy policy continue to focus on nationalization versus privatization.

Considering resource nationalism’s poor track record in actually benefiting most citizens, it is time for these countries to shift the focus of policy discussions toward addressing today’s more pressing problems.

Lisa Viscidi is the director of the Energy, Climate Change, and Extractive Industries Program at the Inter-American Dialogue.

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#LatAmNRG

Texas Would Have A ‘Party’ If Mexico Prohibited Fracking

(Energy Analytics Institute, Ian Silverman, 16.Oct.2018) — Prohibiting fracking in a generalized manner, as announced by Mexico’s president-elect Andrés Manuel López Obrador (AMLO), would be an error that would benefit the United States.

“I’d regret this initiative to ban fracking in a general way in our country. The day it happens there would be a party in Texas for the gift we Mexicans are giving them,” reported Mexican media El Financiero, citing Mexico’s Energy Secretariat Pedro Joaquín Coldwell. “It would condemn [Mexico] to continue importing gas.”

Besides, approximately 53% of Mexico’s gas reserves are precisely unconventional resources, he added.

Fracking has been carried out in Mexico since 1960, and nearly 22% of the wells that have been exploited in conventional deposits have used this controversial technique in one way or another, announced Coldwell.

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Mexico’s Lopez Obrador Pushes Big Oil To Hurry, But Offers Little

(Reuters, David Alire Garcia, Marianna Parraga, 16.Oct.2018) — At his first meeting with foreign oil majors, Mexico’s leftist president-elect pushed the companies to prove themselves by quickly pumping oil from recent finds, sources say, but gave no sign of offering up new fields to reverse dwindling output.

President-elect Andres Manuel Lopez Obrador repeated a promise to respect more than 100 existing contracts awarded following a sweeping five-year-old energy overhaul as long as a review by his team finds no corruption. And he added: companies must show results, three executives who attended the meeting said.

For U.S. independent Talos Energy, which is developing a high-profile, big offshore discovery announced last year along with partners Premier Oil and Sierra Oil & Gas, Lopez Obrador’s message was clear: quickly bring new streams of production online.

“We know we have to exceed expectations and we’re trying to make sure we do that,” said Talos Energy CEO Tim Duncan, one of the executives who attended the session.

At the Sept. 27 meeting, the president-elect also criticized the 2013 constitutional reform for failing to stop an extended output slide.

Operators such as Talos and Italy’s Eni, which also announced a major offshore find last year, are on Lopez Obrador’s watch list to pump oil quickly, said Carlos Pascual, a former U.S. ambassador to Mexico who now helps run consultancy IHS Markit’s global energy business.

“The focus on increased barrels is going to create greater pressure for some companies,” he said.

The oil and gas blocks awarded in bidding rounds over the past three years to companies including Royal Dutch Shell and Chevron will result in $160 billion in new investment, the outgoing government estimates.

Lopez Obrador’s pick to be the new oil minister, Rocio Nahle, did not respond to a request for comment about Lopez Obrador’s presentation.

RIG OIL NOT BIG OIL

At the meeting, Lopez Obrador also explained he intends to put some 20 idle drilling rigs belonging to a few Mexican service firms to work for state giant Pemex, according to three executives who attended the meeting.

The executives, who asked not to be named to avoid any ill-will from the incoming government, said they were surprised at the decision to talk up the service contracts for Pemex instead of encouraging much bigger investments the oil companies are capable of making.

A former senior executive with Pemex said the plan could add at most 150,000 barrels per day (bpd) to Mexico’s 1.8 million bpd production in a year, far short of the 40 percent increase to 2.6 million bpd he is targeting during his six year term.

Lopez Obrador is a long-time critic of the energy reform that brought major oil companies to Mexico for the first time in more than 70 years, and has warned he will not offer up more areas for auction.

Oil companies still hope he will soften that position in order to meet his ambitious production goals.

The veteran leftist politician adopted a diplomatic tone at the industry session, said the company executives, and his team even pledged to ease regulatory delays companies face.

“Reality could force pragmatism,” said an oil executive who attended the meeting, arguing it is highly unlikely Mexico could meet Lopez Obrador’s lofty output goal with government spending alone.

As an indicator, firms are closely watching whether oil auctions set for February by Mexico’s independent oil regulator will be canceled or postponed after Lopez Obrador takes office in December.

If that happens, along with the pledge to focus production plans on squeezing more out of Pemex fields with local rigs, outside investment could cool for years in Mexico’s oil patch, home to under-explored shale plays and the country’s potentially lucrative deepwater Gulf of Mexico, according to the executives and sector analysts.

The head of the oil regulator, Juan Carlos Zepeda, has said Pemex would need to dedicate $20 billion each year to exploration and production activities to hit Lopez Obrador’s output goal, about double this year’s budget.

Advisor Rocio Nahle, Lopez Obrador’s pick to be energy minister, said last month Pemex will be allocated about $4 billion for “exploration and drilling” in 2019, without going into detail.

The nearly two hour meeting between Lopez Obrador and oil company executives ended with a promise to maintain “continuous dialogue” going forward

However, there was no question-and-answer period, and following the set speeches, Lopez Obrador and his senior energy aides quickly departed. No new meetings have yet been scheduled.

One attendee bluntly quipped afterwards: “He really doesn’t like us.”

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Pemex Hopes Gulf Discoveries Mesh With New President’s Goals

(Houston Chronicle, Jordan Blum, 11.Oct.2018) — Leaders of Mexico’s state oil company Pemex initially feared the inevitable election of leftist presidential candidate Andrés Manuel López Obrador, who spoke of rolling back the nation’s recent energy reforms and building new refineries.

Now with López Obrador set to take office in two months, Pemex is seemingly adjusting its priorities to adapt to the incoming president.

Pemex announced new shallow Gulf of Mexico discoveries this week that the company will develop on its own, aiming to undo the nation’s decade-long reduction in oil production and rely less on volumes produced from international companies, including those from Texas.

More conservative administrations in recent years pushed through the constitutional amendments to undo Pemex’s century-long monopoly and open Mexico up to exploration and production from energy companies worldwide. Pemex downsized and focused on becoming a profitable, competitive company.

While those changes won’t be undone any time soon, Lopez Obrador wants to build new refineries and reduce oil and gasoline imports, especially as Mexico is increasingly relying on U.S. companies for fuel and power supplies.

By focusing on new shallow-water oil discoveries that can ramp up more quickly, Pemex now aims to produce more oil for domestic consumption, said Ulises Hernández, director of resources, reserves and partnerships for Pemex, in a phone interview.

“It really fits in with the priorities of the next administration,” Hernández said. “All of these fields are to be developed exclusively by Pemex with no partners.”

Pemex aims to get most of these new discoveries online by the end of 2020 and rely less on U.S. oil and gas from Texas in areas like the booming Permian Basin and the Eagle Ford shale.

“We want to accelerate the development of these fields to supply the necessary light oil for our refining system,” he added.

Pemex will continue to work with other companies for deepwater exploration and production where U.S. and European companies have more expertise.

Pemex said its new discoveries offshore of southeastern Mexico near Tabasco are named Manik and Mulach and – combined with other recent finds in the region – should provide a big boost to oil and gas production volumes in the coming years.

As for the new discoveries, Pemex said the Manik and Mulach plays add 180 million barrels of oil equivalent to its probable and possible reserves. They wells have the potential to produce 250 thousand barrels of oil per day and 600 million square feet of cubic gas, Pemex said. Both new finds are proving much more fruitful than Pemex initially anticipated.

Pemex also touted the potential for its other recent finds in the region that are called the Kinbe, Koban, Xikin and Esah fields.

All of the recent discoveries add up to well more than 800 million barrels of oil equivalent.

Still, there’s the question of whether Lopez Obrador’s proposed multibillion-dollar refining investments will take away from Pemex’s exploration and production.

Pemex Chief Executive Carlos Treviño has complained it is too expensive to build new refineries and that it’s much cheaper and more efficient to overhaul and improve the existing refineries.

“That’s a decision that will have to be made at some point,” Hernández said. “But we will need to produce more oil to meet the refining capacity.”

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Energy Analytics Institute (EAI): #LatAmNRG

AMLO Sees EOR, Pemex Farm-Outs As Key To Boosting Mexican Oil, Gas Output

(S&P Global Platts, Daniel Rodriguez, 4.Oct.2018) — Mexico’s President-elect Andres Manuel Lopez Obrador will allow Pemex to continue farming out projects to boost oil and natural gas production from mature and aging fields, according to a senior adviser to the incoming administration.

The incoming administration, in its oil production forecast for 2024, expects new secondary oil production will produce 380,000 b/d, or 15% of that year’s 2.48 million b/d expected output.

Lopez Obrador is going to be a pragmatist and will evaluate all options available for boosting oil and gas output, Abel Hibert, an economic adviser on the president-elect’s transition team, said at an event Wednesday.

“Pemex can’t do it all alone, from a financial point of view firstly and secondly from a technical know-how” perspective, Hibert said.

When asked by S&P Global Platts if a projected increase in secondary oil and gas was a clear message that Pemex farm-outs would continue under the incoming administration, Hibert responded: “Yes, definitely.”

In a meeting last week, Lopez Obrador sought the support of private operators to continue Pemex’s farm-outs to enhance recovery from mature fields, he added.

“Under Lopez Obrador’s administration, Pemex will be open to continuing farm-outs to exploit mature fields and raise output,” Hibert said.

Pemex is responsible for 80% of Mexico’s proven and probable reserves. In some cases, the company has not been able to produce oil or gas from these resources due to technical limitations or lack of funds, he added.

“The president-elect has described the decrease in oil production as an emergency, so Pemex requires all the support it can get to boost output,” Hibert said.

Pemex’s executive team under the outgoing administration of President Enrique Pena Nieto has an ambitious farm-out program in place that seeks partners for all its deepwater and most of its onshore projects.

In 2017, Pemex said it was looking to farm out as many as 74 clusters composed of 155 prospective production areas and 66 exploration areas, which would represent more than 55% of all its production and 65% of its exploration portfolio.

The company is currently tendering farm-outs for seven onshore clusters in southern Mexico. The auction will be held in February.

Due to a lack of resources, Pemex has been investing the minimum necessary to maintain operations in these areas. If the situation continues, their production will decrease to 14,100 b/d and 90 MMcf/d by 2020, data from Mexico’s National Hydrocarbon Commission show.

However, if Pemex can attract companies to come in and operate these areas, it expects to invest close to $4.65 billion over the life of the areas alongside its potential partners.

With greater resources, Pemex believes production in these areas could be raised to a combined 47,630 b/d and more-than 525 MMcf/d in the medium term.

According to CNH data, the seven clusters held a total of 191.3 million barrels of oil and 951.3 Bcf of gas of proven, probable and possible reserves in January 2017. Also, four of the seven areas have close to 450 million barrels of equivalent oil in prospective resources.

Pemex is also looking in the short term to farm out its Ayin-Batsil shallow water and Maximino-Nobilis deepwater projects. Their combined potential production peak is 280,000 b/d. The company tried unsuccessfully to auction both projects last year.

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Mexico’s President-Elect AMLO Commits to Respect Oil Contracts

(Renaissance Oil Corp., 2.Oct.2018) — Renaissance Oil Corp. announced that Mexico’s president-elect, Andres Manuel Lopez Obrador, who will take office on December 1, 2018, assured private energy executives on September 27, 2018 that their contracts will not be canceled if they meet existing terms.

During the meeting with AMEXHI, Mexico’s association of oil and gas producers, which Renaissance is a member of, Mr. Lopez Obrador underlined the importance of the private sector’s participation in developing the oil and gas sector in Mexico and its important role in increasing production in the following years.

Further, Mr. Lopez Obrador’s designated Energy Minister, Rocio Nahle, confirmed the incoming administration’s support for the contracts as well as a commitment to resolving regulatory delays.

“Renaissance is reassured by these developments and encouraged that the Mexican government is supportive of the important role international oil companies, like Renaissance, play in the development of the Mexican petroleum industry,” said Renaissance CEO Craig Steinke.

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Obrador’s Government Will Renovate Refineries of Petroleos Mexicanos

(Prensa Latina, 1.Oct.2019) — The government of elected president Andres Manuel Lopez Obrador will make a strong investment to rehabilitare the six refineries presently property of Petroleos Mexicanos (Pemex) in the country, it was known today.

Obrador announced that in the period 2019-2020 they will use with such purpose 50 billion pesos (about three billion dollars).

Refineries are located in Tula, Hidalgo; Cadereyta, Nuevo Leon; Salamanca, Guanajuato; Minatitlan, Veracruz; Salina Cruz, Oaxaca, and Ciudad Madero, in Tamaulipas.

Those industries have had operational problems and México was forced to increase gasoline imports.

Mexico Must Double Oil Exploration Spending to Halt Output Fall: Pemex

(Reuters, Marianna Parraga, David Alire Garcia, 28.Sep.2018) — Mexico will need to double to about $4 billion its annual oil exploration investment to reverse a 14-year decline in output, a move that will require more funding by Pemex and private producers, a top official with the state-run firm said Friday.

The nation’s oil industry needs Petroleos Mexicanos to invest more than $2.5 billion per year and another $1 billion to $1.5 billion from private companies to fully replace its reserves, Jose Antonio Escalera, the firm’s chief of exploration, said at an energy conference in Acapulco.

Pemex this year expects to invest about $1.65 billion, roughly the same as 2017. Reserves fell 7 percent this year, to 8.48 billion barrels of oil equivalent, and have slid more than 40 percent over the past decade, according to government data.

Escalera made the comments as the administration of President-elect Andres Manuel Lopez Obrador is still formulating its plan for Pemex and has given mixed signals over the future of the landmark energy reform.

Lopez Obrador, who will take office in December, has said he aims to boost Mexico’s oil production by a third to 2.5 million barrels per day (bpd,) from 1.82 million bpd in August. He also wants to increase domestic refining to end imports of foreign fuel.

However, he has been a critic of the nation’s opening of its oil industry to outside firms and has called for a review of the more than 100 exploration and production contracts awarded to oil companies, and a suspension of future auctions, casting doubts on what direction the energy reform will take in coming years.

“The reason why Mexico has seen an output decline since 2004 is not because of lack of potential, it is because it stopped exploring,” Juan Carlos Zepeda, chief of Mexico’s energy regulator National Hydrocarbons Commission (CNH), said at the energy conference.

Pemex said it will not meet its annual output target in 2018, and is likely to see a further slide in 2019.

LONG RANGE INVESTMENT

Pemex is making progress: It drilled 24 exploratory wells in 2017 and 35 are planned for 2018. But stemming the oil output decline will require the country to replace its reserves faster, Pemex and experts interviewed at the conference said.

The country will need $20 billion in exploration investment in the long term to confirm its estimated reserves and increase oil and gas output, according to Pemex’s calculations, a difficult task as prospective oil and gas resources to be confirmed are mostly in deep waters and onshore shale formations that require higher investment and technical knowledge.

As a sign of how it has fallen behind in replacing those reserves, Mexico has drilled 58 exploration wells on its side of the deep water Gulf of Mexico, compared with more than 1,100 on the U.S. side.

“What we need is more activity, even more exploration,” said Monica Boe, Mexico country manager of Norwegian oil major Equinor. She said auction terms could be changed to encourage more exploration activity.

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Interview: Pemex’s CEO Expects FID for Four New Fields in 2019

(S&P Global Platts, Daniel Rodriguez, 27.Sep.2018) — Mexico’s state oil company Pemex expects to make a final investment decision (FID) and begin development of its Ixachi, Pokche, Xikin, and Suuk discoveries in 2019, CEO Carlos Trevino told S&P Global Platts.

These fields are at the top of Pemex’s project pipeline, but their FID will depend on other stakeholders such as Mexico’s Treasury Secretariat, Trevino said on the sideline of the Mexican Petroleum Congress in Acapulco late Wednesday.

“We expect the incoming president will give a great value to these fields in his mission to raise Mexico’s oil production,” Trevino said.

Based on the information available, Platts Analytics estimates the peak production of these four fields could produce a combined 135,000 b/d.

Xikin has 190 MMbbl 2P reserves, Suuk has 50 MMbl 2P and 205 MMbbl 3P, Pokche has 36 MMbbl 2P and 186 MMbbl 3P, and Ixachi with 67 MMbbl 2P and 120 MMbbl 3P.

President-elect Andres Manuel Lopez Obrador has pledged to raise Mexico’s crude oil production to 2.6 million b/d by the end of his term in 2024, up from 1.8 million b/d in August.

Trevino said Pemex is not going to be able to achieve its goal of having a yearly production average of 1.95 million b/d for 2018.

The company will not be able to achieve its goal because of water invading its Xanab shallow water field in Tabasco’s coastline.

Xanab’s production has been in a freefall since January, decreasing its output by 68,200 b/d to 104,400 b/d in August. Pemex produced 1.81 million b/d in August, down from 1.93 million b/d in January.

THE CHALLENGE: A FINANCIALLY INDEPENDENT PEMEX

The great challenge Pemex faces is to decouple itself from the country’s federal government budget in its mission to become a competitive state-owned company, Trevino said.

“It is hard to know what Pemex’s budget will be as long as it will depend on the state of public finances,” Trevino added.

Since oil prices crashed in 2014, Pemex’s upstream capital investment budget was cut by two thirds to $7.2 billion in 2018, making it difficult for the company to develop its production portfolio.

If prices stay at $80/b, Trevino said Pemex’s upstream capital investment budget should return to levels similar to 2014 or 2015, somewhere between $12.7 and $17 billion.

However, the final budget the company will have will depend on the incoming administration, led by President-elect Andres Manuel Lopez Obrador.

According to Mexico’s National Hydrocarbon Commission, Pemex requires an investment of at least $20 billion to be able to develop the acreage it won at hydrocarbon auction round zero.

According to CNH, this will allow Pemex to increase its crude oil production to 1.96 million b/d by 2022 from a bottom of 1.7 million b/d in 2020.

Trevino said that he expects Pemex to reach an inflection point somewhere before 2020, adding that CNH’s projection is the worst case scenario while the state company’s forecast of producing 2 million b/d by 2020 is the best case scenario.

The critical difference between Pemex and CNH’s projections are the permitting times. “We input the shortest approval times possible while they take the maximum allowed times for granting permits,” he added.

***

Mexico’s New President Should Postpone Oil Auctions: Former Pemex Official

(Reuters, Collin Eaton, 19.Sep.2018) — A former Petroleos Mexicanos board member said on Wednesday Mexican President-elect Andres Manuel Lopez Obrador has enough political support to change the nation’s energy law and should postpone planned competitive oil auctions until the law is revised.

Fluvio Ruiz Alarcon said, following an address at the Baker Institute of Public Policy, the new administration would have the clout in congress to roll back portions of the nation’s landmark energy reforms that opened its oil fields to foreign investment.

Lopez Obrador, who takes office on Dec. 1, handily won Mexico’s presidential election in part by promising sweeping changes to Mexico’s energy industry. One of his aims is to have the state-owned oil company, known as Pemex, select partners instead of having them chosen in auctions run by Mexico’s National Hydrocarbons Commission (CNH).

“Pemex should choose its own allies,” said Ruiz. “The hydrocarbon law says that it is CNH that makes the bidding for the alliance of Pemex. They say, ‘Who wants to marry Pemex?’ They say, ‘Who offers more?’ We want Pemex to choose.”

He also said Mexico should postpone the competitive tenders for Pemex joint ventures scheduled for February until the law is changed.

The Feb. 14 oil auctions are the only ones scheduled and cover 46 onshore blocks in northern Nuevo Leon and Tamaulipas states, including the first shale areas.

The February tender would also feature seven opportunities to tie up with Pemex on onshore projects in the southern states of Veracruz, Tabasco and Chiapas.

The auctions were originally scheduled this year in the waning months of President Enrique Pena Nieto’s term, but were postponed by the National Hydrocarbons Commission (CNH), Mexico’s independent oil regulator which runs auctions and supervises the contracts.

When it announced the later date, CNH officials said they wanted to give interested oil companies more time to evaluate the projects. They also expressed a desire to work with the incoming administration of President Andres Manuel Lopez Obrador.

To date, 17 companies have begun the process of pre-qualifying for the auctions while another eight have done so for the Pemex joint ventures.

***

Mexico Oil Production to Reach 2.6 MMb/d by 2025: Lopez Obrador

(S&P Global Platts, Daniel Rodriguez, 11.Sep.2018) — Mexico’s President-elect Andres Manuel Lopez Obrador said Sunday he plans to focus on developing and exploring onshore and shallow water areas under the control of state oil company Pemex to boost the country’s oil production.

“We have a projection, and our plan is to have production of at least 2.6 million b/d by the end of the presidential term; additional production of 800,000 b/d,” Lopez Obrador said in webcast press conference.

Lopez Obrador was speaking to journalists after a meeting with Mexican drilling and oil service companies at Villahermosa in Tabasco.

Mexico’s production averaged 1.8 million b/d in July, down from an historical high of 3.4 million b/d in 2004, latest data from Mexico’s National Hydrocarbon Commission showed.

Lopez Obrador said the incoming administration plans to tender drilling contracts in December when his six-year term begins to develop Pemex’s shallow water and inland areas to boost oil production. “We are inviting all companies to participate in these tenders. However, we will have a preference over domestic contractors,” he added.

He said he planned to add Peso 75 billion ($3.9 billion) to Pemex’s exploration and production budget to boost drilling and thus raise output. The tenders will help Mexico reverse its production downtrend by the end of 2019, he added.

Mexico’s oil industry is at a crisis as a result of low public investment in the sector. Pemex in 2017 had an E&P capital expenditure budget of Peso 81.5 billion, down from Peso 222 billion in 2014, the company’s annual financial statements show. The cut in Pemex’s budget resulted in a significant decrease in drilling activity; it drilled 83 wells in 2017, compared with 705 in 2013.

Lopez Obrador blamed the previous administration for Pemex’s lower capital expenditure, claiming it was done on purpose amid expectations the private sector would offset lower activity from the state company. “It has been a complete failure, this wrongly named energy reform,” Lopez Obrador said

The president-elect has historically been an opponent of private participation in Mexico’s energy sector. His critics note Pemex’s spending cuts reflect lower global oil prices after 2014.

The president-elect neither mentioned the long-term nature of the energy sector nor the advances made by Eni at Amoca, PanAmerica with Hotchi and Talos with Zama, where peak production across the three fields could be above 250,000 b/d.

Analysts also point out that Lopez Obrador does not acknowledge that it has been a challenge for Mexico to replace production from the aging Cantarell super field, which produced 2.1 million b/d in 2003 and but 160,000 b/d in July.

Mexico won’t call for new hydrocarbon auction rounds until all 107 contracts awarded to date under the energy reform are reviewed for corruption, Lopez Obrador said.

“The majority aren’t working, there is no investment, but those 107 contracts don’t include all the oil regions in the country, just a fraction of Mexico’s hydrocarbon potential,” he added.

The president-elect did not indicate when this contract review process could conclude. Currently, Mexico’s National Hydrocarbon Commission is organizing two gas-rich auction rounds, which are expected to be awarded in February.

The commission postponed both auctions as well as a Pemex’s auction to farm out seven onshore clusters in southern Mexico from this summer until the coming year, citing a request from the industry for more time to analyze the areas as well as the opportunity to involve the incoming administration in the process.

Lopez Obrador said the state owns all of Mexico’s oil resources, and has greater control over areas that have not yet been assigned. “The greater majority of our oil potential is still under the control of Pemex,” he added.

***

Concerns Raised Over Contract Release Program in Mexico

(S&P Global, 6.Sep.2018) — Mexico gas market observers have expressed concern that a lack of liquidity and supply guarantees will complicate the final phase of Pemex’s natural gas contract release program, which is designed to allow the entry of new gas marketers.

Mexico’s Energy Regulatory Commission (CRE) last week approved the final phase of the release program, known as PCC for the acronym of its Spanish name. The final rules of the regulation have yet to be published in Mexico’s Official Federal Journal (DOF).

The commission joined the second and third phases of the program as one and set its rules in a motion approved August 31.

In January 2017, CRE approved the program, setting the goal for Pemex to release 70% of its gas marketing contracts under a four-year period.

As of March 2018, Pemex has released 30% of its marketing portfolio, 10% more than the goal established in PCC’s first phase, which began in February 2017.

CRE said Friday the final phase would maintain some first phase rules, including full transparency on offers made to users, and a no-penalty clause to end contracts with Pemex.

Other rules to be retained include one requiring Pemex to provide binding offers to users, and another requiring provision of a base formula to allow comparison of offers from Pemex and new marketers.

The energy manager at one of the largest industrial users of gas in northern Mexico told S&P Global Platts that insufficient access to cross-border pipelines is limiting the entry of new marketers.

“At the time of selecting a marketer, the factors most important for users are the economic benefits and supply warranty,” the manager said.

Industrial users’ largest concern is finding a marketer that can offer a real supply alternative beyond Pemex and CFE, the manager said. “We have seen both state companies have a monopoly in most cross-border pipelines,” he added.

EYES OPENED

“The PCC’s first phase opened the eyes to users of the supply alternatives beyond Pemex as well as the mechanics and rules of the new market,” he said.

Before Pemex’s gas supply was taken for granted and users didn’t know how to optimize its gas supply and consumption, the manager said.

“For users, the opportunity in the PCC program is to diversify their supply portfolio beyond Pemex,” he added.

“It is true Pemex is still behind most cross-border pipeline capacity, but the PCC program has empowered users by giving us more information and thus increasing our negotiating power to a certain extent,” he added.

Gonzalo Monroy, managing director of Mexico City-based energy consulting firm GMEC, told Platts he has concerns related to PCC’s last phase.

“For this final phase, due to the lack of reliable private supplies, practically everyone will sign with Pemex or CFE,” Monroy said.

INFRASTRUCTURE ACCESS

The PCC was well drafted, but realistically it has a limited possibility of being applied. It is hard to migrate to a new marketer if it doesn’t have access to reliable infrastructure, Monroy said.

“Contracts have to be sold desegregated in its different components; companies can quit their contract without a penalty; all that is good. But at the end of the day, everything comes down to supply warranty,” Monroy said.

Mexico seeks to have an open access market, but this goal is difficult to achieve due to lack of liquidity and access to cross-border capacity for new marketers, he added.

Market participants have told Platts that the three private companies growing the most in Mexico are Shell, BP and Macquarie.

Monroy said these companies have enough upstream assets in the US to allow them to negotiate with CFE and Pemex for market access in Mexico.

‘However, as a marketer, if you have no bargaining position, no trading chip, you’re hanged,” Monroy said.

***

AMLO to Continue Drilling Service Contracts

(Bloomberg, Amy Stillman and Eric Martin, 6.Sep.2018) — Mexico’s next president said he will continue with tenders for drilling service contracts starting when he takes office.

“We are preparing the rescue plan for the oil industry that will consist of producing more crude oil soon, and we will need these companies that have experience, most of them national companies,” President-elect Andres Manuel Lopez Obrador told reporters on Thursday in Mexico City. “We are already preparing tenders for the drilling of wells, and we are getting ready because we are going to launch those tenders from the first days of December.”

Lopez Obrador said he will travel to his home state of Tabasco on Saturday to meet with representatives from oil service companies. The meeting will take place with his pick for energy minister Rocio Nahle and the next chief executive officer of Pemex, Octavio Romero, according to a spokesman for Lopez Obrador who asked not to be identified, citing internal policy.

Mexico’s National Hydrocarbons Commission plans to hold auctions for more than 40 blocks and Pemex farm-out deals on February 14.

The leftist leader had previously indicated that future oil auctions, which have lured some of the world’s biggest oil companies, could be suspended or canceled as his government seeks to strengthen Pemex and focus on expanding refining capacity. He has also said that more than 100 oil contracts already awarded to companies such as Royal Dutch Shell Plc, Exxon Mobil Corp and BP Plc are being reviewed.

Pemex’s crude oil output has declined every year since 2004, which Amlo has pledged to turn around with an additional 75 billion pesos ($3.9 billion) for exploration and production investment.

***

AMLO Plans Massive New Oil Refinery

(OilPrice.com, Irina Slav, 5.Sep.2018) — Mexico’s President Andres Manuel Lopez Obrador has plans to build the country’s largest refinery with a capacity to produce 400,000 barrels of gasoline daily, Reuters reports, citing comments by Obrador during a meeting with businessmen in Monterrey.

The refinery would cost US$8 billion to build and construction could start soon, which would see it complete within three years. Though Reuters quoted Obrador as saying, “400,000 bpd of gasoline,” it added in its report that the comments did not made it clear whether he was referring to the crude oil processing capacity of the future facility or its gasoline production capacity.

Currently, Mexico’s refineries have a combined processing capacity of a maximum 1.6 million bpd of crude but, Reuters notes, it has been working at just 40 percent capacity since the start of the year because of accident-caused outages and operational issues. Pemex, which operates the six refineries, also exported more crude as prices improved internationally. In July, the state oil company produced 213,000 bpd of gasoline.

Earlier this year, Rocio Nahle, an adviser to Obrador and the most likely candidate for the Energy Minister job, said “In a three-year period, at the latest, we need to try to consume our own fuels and not depend on foreign gasoline.” This would be bad for U.S. refiners, who export the biggest portion of their production to Mexico. In the last few years, Mexican imports of gasoline and diesel have risen to more than 800,000 bpd, representing over 66 percent of domestic demand.
Mexico’s current oil production stands at about 1.84 million bpd, of which 60 percent is exported. At the same time, according to Reuters, the country imports around 1 million bpd of refined products.

“The commitment is to produce gasoline in Mexico,” Obrador said at the Monterrey meeting. “We want to produce gasoline because we have the raw material, we have crude oil.”

Regarding production, last month Obrador said all oil auctions would be suspended until contracts awarded by the previous government over the last three years are reviewed.

***

AMLO Says NAFTA Preserves Energy ‘Sovereignty’

(Reuters, 28.Aug.2018) — Mexican president-elect Andres Manuel Lopez Obrador welcomed a deal between Mexico and the U.S. to overhaul the North American Free Trade Agreement (NAFTA) that he said preserved Mexican “sovereignty” in the energy sector.

The U.S.-Mexico deal was announced by U.S. President Donald Trump on Aug. 27, putting pressure on Canada to agree to new terms and details that were only starting to emerge. Lopez Obrador said it was important that Canada be part of the deal.

Lopez Obrador, who is scheduled to take office on Dec. 1, said Trump “understood our position” and accepted his incoming administration’s proposals on the energy sector. The text of the new agreement has not yet been made public.

“We put the emphasis on defending national sovereignty on the energy issue and it was achieved,” Lopez Obrador told reporters after arriving in the southern state of Chiapas.

“We are satisfied because our sovereignty was saved. Mexico reserves the right to reform its constitution, its energy laws, and it was established that Mexico’s oil and natural resources belong to our nation,” he said.

Lopez Obrador opposed a constitutional change pushed through by Mexican President Enrique Pena Nieto that opened production and exploration in the energy sector to private capital.

Mexico has already awarded more than 100 oil exploration and production contracts to private companies.

Lopez Obrador has said he would pour resources into state oil company Pemex while still respecting private sector contracts, as long as a review does not find evidence of corruption.

He is expected to slow down or stall the process of offering more contracts to private players.

Jesus Seade, Lopez Obrador’s designated chief NAFTA negotiator, participated in the latest talks between the current Mexican administration and the U.S. Trade Representative to strike the new NAFTA agreement.

Seade said on Aug. 27 that both Pena Nieto’s team and the U.S. had agreed to change language in a draft proposal of the NAFTA overhaul on energy that had previously been a “cut and paste” from the text of Mexico’s energy reform.

The new language still preserved the same ideas and was consistent with Pena Nieto’s reform, Seade said, adding that Lopez Obrador was not seeking to change the legal framework for private energy projects in Mexico.

While the new administration planned to increase production at Pemex, Seade told a news conference in Washington “there will be areas where cooperation with the private sector is needed.”

***

Pemex Insider Destined for Key Post Under AMLO

(Bloomberg, Amy Stillman, 28.Aug.2018) — Mexico President-elect Andres Manuel Lopez Obrador will name Fluvio Ruiz Alarcon as Petroleos Mexicanos’s next exploration and production chief, according to two people with knowledge of the plans.

Ruiz Alarcon, a former independent adviser to Pemex, will take over on Dec. 1, when Lopez Obrador takes office. He’ll replace the current exploration and production director Juan Javier Hinojosa Puebla.

A board member, committee president and independent adviser to Pemex during two presidential administrations, Ruiz Alarcon is well-versed on the inner workings of the state energy giant. Born in Coatzacoalcos, Veracruz, a major oil hub, he is also close to Lopez Obrador’s pick for energy minister Rocio Nahle, who once worked at Pemex’s petrochemicals complex there.

A physicist and petroleum engineer, Ruiz Alarcon is critical of Pemex’s income being tapped to fund the government. If Pemex is subject to high taxes and budgetary controls, the company will struggle to reverse its flagging production, he said on Friday in an interview with national newspaper El Universal.

A spokesman for Lopez Obrador declined to comment. Ruiz Alarcon did not respond to requests for comment.

Last year Pemex’s tax contributions accounted for about 20 percent of the federal budget, down from about 40 percent a year ago.

New President

The interaction between Pemex’s finances and those of the government -– and how sharply they are distinguished — is an important question for investors following the arrival of a new president that has said he will expand oil and fuel output by spending more.

Lopez Obrador, who swept into power in a landslide July 1 election victory, has pledged to spend an additional 75 billion pesos ($4 billion) on exploration and production, with the aim of boosting output by one-third over two years. Last month, Lopez Obrador named his longtime political ally Octavio Romero Oropeza, who has no oil background, as the next Pemex chief executive officer.

Lopez Obrador is in the process of reviewing more than 100 contracts already awarded to private companies under the country’s landmark 2014 energy reforms.

Ruiz Alarcon has his work cut out for him. Pemex produced 1.866 million barrels of crude a day during the second quarter, its 13th consecutive year-over-year decline. Its reserves have shrunk by more than half over the past six years.

***

Mexico’s New President To Deal Blow To Oil Industry

(Oilprice.com, Nick Cunningham, 26.Aug.2018) — Mexico will likely halt oil auctions for at least two years, dealing a blow to its oil industry.

Mexico’s president-elect Andres Manuel Lopez Obrador (AMLO) will reportedly suspend oil auctions for at least two years, according to the Wall Street Journal, with some experts believing that his administration won’t hold any new oil auctions at all during his six-year term. He has also vowed to review the 107 contracts already awarded to companies through auctions over the last few years to check for corruption, although he has said he would not try to invalidate them so long as they check out.

Also, AMLO wants to revise some of the energy laws that govern the oil and gas sector, which could dramatically alter the landscape for foreign oil and gas companies. He long opposed the historic reforms that ended seven decades of state control over the energy sector, although he moderated his position during this year’s presidential campaign. Rolling back the reforms would be exceedingly difficult, requiring a change to the country’s constitution.

Instead, AMLO wants more modest, though still significant, legislative changes. The WSJ reports that he will pursue legislative tweaks that bolster the power of state-owned Pemex, while weakening the regulatory body that has pursued a technocratic approach and presided over the oil auctions over the last three years.

AMLO’s desired changes include allowing Pemex to choose its own private-sector partners, without needing the approval from regulators. Current rules require Pemex to partner with the highest bidder for blocks put up for a farm-out. He wants the government to be able to award Pemex with oil blocks directly. And he wants to make Pemex the sole marketer of oil produced by private firms, the WSJ reports.

These changes would amount to a partial rollback of the energy reforms, re-empowering Pemex and government control over the oil sector. Moreover, as president, AMLO chooses the head of Pemex, granting him a lot of leverage over the company. “If licensing rounds are canceled and joint ventures are the only vehicle for entry to the country, it reflects a consolidation of power within” Pemex, Maria Cortez, Latin America Upstream Senior Research Manager at Wood Mackenzie, told Bloomberg in an email. ”That could be viewed negatively by outside investors.”

On top of that, the WSJ says AMLO will push to raise local content rules, which would require a higher percentage of domestic involvement in oil projects. That means that if a company like ExxonMobil or Chevron or some other outside entity wants to drill for oil in Mexico, it would need to source a certain percentage of equipment and services from within Mexico. The idea is to capture a greater portion of the benefits of oil and gas development for the country, while also building up expertise for local industries.

However, many of these changes will be loathsome to the international oil companies, who will view them as onerous burdens that inject higher levels of uncertainty into their investments. Oil companies have repeatedly blamed strict local content rules in Brazil for years of cost inflation and delays.

“If all of this is confirmed, it would send a signal that the continuity of the oil opening may be in doubt,” Pablo Medina, an analyst with Welligence Energy Analytics, a research firm based in Houston, told the WSJ in an interview.

Meanwhile, in addition to the legislative changes to the energy reforms, AMLO’s core energy plan consists of pouring billions of dollars back into Pemex for oil exploration, with a particular focus on revitalizing the downstream sector. He wants $2.6 billion to rehabilitate Mexico’s six aging oil refineries, plus more than $8 billion to build a new refinery from scratch. The idea is to cut down or even eliminate gasoline imports from the United States.

Mexico’s oil production has been declining for over a decade, falling to 1.9 million barrels per day recently, down from 3.4 mb/d in the mid-2000s. The IEA sees output falling by another 130,000 bpd this year, due to the aging offshore oil fields, although that is a narrower decline compared to the 235,000 bpd the country lost last year.

AMLO is aiming to boost production by 600,000 bpd over the next two years, which will be a monumental task. If he is to succeed, AMLO is betting that Pemex will lead the way.

***

Gas Producers Counting on Mexico Have Worries

(Houston Chronicle, Katherine Blunt, 24.Aug.2018) — For years, U.S. producers have counted on Mexico to buy enormous quantities of natural gas from the prolific shale fields in West Texas and elsewhere. The fracking boom has given rise to massive pipeline projects to carry that gas across the border, where energy production has plummeted.

Later this year, four long-awaited pipelines to distribute U.S. natural gas throughout Mexico are expected to start up to supply the nation’s power generation and industrial sectors, potentially helping to ease bottlenecks in the crowded Permian Basin.

The question is whether those exports will continue — at least at the same rate. That depends on two political variables: The inauguration of Mexico’s president-elect and the ongoing renegotiation of the North American Free Trade Agreement.

U.S. natural gas exports to Mexico ramped up in earnest after 2013 and 2014, when Mexico opened its energy market to foreign investment and pushed to expand its pipeline network to buy cheap natural gas from its northern neighbor. The country imported roughly 1.5 trillion cubic feet of U.S. natural gas via pipeline last year, more than double 2013 levels.

U.S. producers are banking on that export demand. Natural gas shipments to Mexico by pipeline exceeded 5 billion cubic feet per day for the first time last month, up from an average of 4.2 million cubic feet per day in 2017.

The July election of Andrés Manuel López Obrador, however, has spelled uncertainty for the energy sector. Among other things, he has pledged to boost domestic oil and gas production and decrease the country’s reliance on imports by investing billions of dollars in Petróleos Mexicanos, or Pemex, the country’s state-owned energy company.

Meanwhile, President Donald Trump and Mexican President Enrique Peña Nieto are aiming to nail down a NAFTA deal before Lopez Obrador assumes the presidency in December. NAFTA, long criticized as unfair by the Trump administration, makes it easier for Texas oil and gas producers to pipe or otherwise exports their products across the border.

The pipelines nearing completion, which include Enbridge’s Nueces-Brownsville project in the Rio Grande Valley and three projects in Mexico, depend in large part on that ease of access. They’re expected to start up in October and November, and several other major projects are under construction.

Complicating the equation: López Obrador built his support in part with a vow to oppose Trump. That could further undermine trade relations between the two countries when he takes office. Already, we’ve seena heated back-and-forth over Trump administration’s tariffs on steel and aluminum imports.

If relations continue to sour — either because of Obrador’s policies or Trump’s rebuke of NAFTA — natural gas exports would likely take a hit. For Texas, which supplies the majority of Mexico’s natural gas imports, that could mean less demand — and fewer projects.

***

Pemex Has or Doesn’t Have Money?

(Energy Analytics Institute, Aaron Simonsky, 1.Aug.2018) – If Mexico’s Pemex doesn’t have the necessary funds to invest in deep water or shale activities, how is it the state oil company will have funds to invests in new refineries as proposed by President-elect Andrés Manuel López Obrador?

Join the discussion below or on Reddit:

 

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Mexico Oil Output to Trend Upwards in 2027

(Energy Analytics Institute, Aaron Simonsky, 31.Jul.2018) – Mexico’s oil production will cease to decline in 2025.

That’s according to details of a report published by S&P Global Platts Energy Analyst and Consultant Manager Javier Díaz during an energy forum.

Díaz announced details of projections for Mexican crude oil production until 2040 that showed national crude production stabilizing in 2025; starting to rise in 2027, and reaching 2 million barrels per day through 2035, according to the daily newspaper El Financiero.

Reaching these goals, said Díaz, will depend to a large extent that in the “new era” the following will occur in the energy sector: foreign investment will continue to flow into Mexico, and the tendency to reverse the fall in production and continue the liberalization of the markets will also continue to improve market efficiency.

“These are the focal points that we see that can make the energy market more effective for Mexico,” said Díaz during an interview.

When questioned about the profitability of the possibility that Mexico’s President-elect Andrés Manuel López Obrador would build two new refineries and modernize the existing infrastructure, Díaz said that in the first instance a technical and financial study should be done regarding the possibility to modernize the infrastructure taking into consideration the age and conditions of the refineries.

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Mexico’s Next President Promises Pemex Investment

(Bloomberg, Amy Stillman, 30.Jul.2018) – Mexico’s incoming president named a new chief executive officer for Pemex and promised government investment of 75 billion pesos ($4 billion) in the oil sector, in a bid to revive the state-owned oil company.

Andres Manuel Lopez Obrador tapped longtime political ally Octavio Romero Oropeza, who has no oil background, as the next CEO of Petroleos Mexicanos. Romero will take over when the new government comes in this December. The announcement came at an event in which the president-elect promised to boost crude output as part of a 175-billion-peso rescue plan for the industry. He said 49 billion pesos will be spent on refinery upgrades.

Romero, 59, was a government official during Lopez Obrador’s five-year term as the mayor of Mexico City from 2000 to 2005. He also shares the same birthplace as the leftist leader, the oil hub of Tabasco. Lopez Obrador has said he wants to to revitalize oil ghost towns there and build a new refinery near the port of Dos Bocas at a cost of 160 billion pesos.

For a career politician with a degree in agronomy, turning around the beleaguered oil company won’t be easy.

“It’s a political appointment for an entity whose debt represents about 14% of gross domestic product,” John Padilla, managing director of energy consultant IPD Latin America LLC, said in a phone interview. “Whether that’s going to give markets a lot of confidence at this stage, at a point when Pemex is in such a debilitated state, remains to be seen.”

Romero, who replaces Carlos Trevino, will inherit a mountain of debt — more than $100 billion — and oil production that is in free-fall. Pemex pumped 1.866 MMbbl of crude a day during the second quarter, its 13th consecutive decline compared to the same period in previous years. And even as oil prices rise, the company on Friday reported a 163-billion-peso loss, the worst quarterly result since 2016.

The company expects to average 1.9 MMbpd in the third quarter of the year and 1.95 MMbbl in the fourth quarter, Luis Ramos, deputy director of exploration and production at Pemex, said on a conference call with investors. Pemex’s proven and probable reserves have dropped by more than half since 2012, as older fields become depleted and the company fails to develop ones.

Refinery upgrades

Pemex’s refining business is in such poor condition, with aging units struggling to process less expensive heavier crudes, that it loses money if it raises output. The problem has created a reverse incentive to refine less and import more. The plants, which processed 22% less crude than last year at 704,000 bpd, operated at 43% of capacity between April and June, company data show.

Lopez Obrador, who won a landslide victory in national elections on July 1, has promised to change that. He said he will prioritize raising refinery output to full capacity in two years, and build the new refinery in Tabasco.

He also named Manuel Bartlett as head of the Federal Electricity Commission, Rocio Nahle to the post of energy minister and Alberto Montoya as deputy energy minister.

Under Lopez Obrador’s predecessor, international oil companies had recently been allowed to re-enter Mexico’s production areas after being banned for more than 70 years. The new president could suspend oil auctions and review contracts already awarded for signs of corruption. The National Hydrocarbons Commission said last week that an auction to develop seven onshore areas in partnership with Pemex will now be held on February 14, from October 31 previously. A competitive bid for over 40 onshore areas will take place the same day after being pushed back from September 27.

The company is also seeking to raise an additional $3 billion to $3.5 billion in debt before the end of the year “if market conditions are favorable,” Pemex CFO David Ruelas said on a conference call with investors. Pemex’s total debt was 2.07 trillion pesos as of June 30 an increase from 1.95 trillion pesos three months earlier.

***

Mexican Group Unhappy About Delayed Auctions

(Reuters, Dave Graham and Ana Isabel Martinez, 19.Jul.2018) – A decision to delay Mexican oil auctions until after the next president takes office does not augur well for opening the country’s energy sector to private investment, the head of a major business association said on Thursday.

The government said on Wednesday it had postponed auctions scheduled for September and October until next February to give firms more time to consider the blocks on offer.

Last month, it said the auctions would be going ahead as planned.

Incoming President Andres Manuel Lopez Obrador, a leftist, has been a long-standing critic of opening up the oil and gas sector to private capital, and said before the election he would demand the auctions be halted.

Gustavo de Hoyos, president of employers’ confederation Coparmex, told Reuters that the only conclusion to draw so far was that the postponement was due to political considerations. He said that sent out a signal that was “not good.”

“We think it’s unfortunate that … political criteria imply an interruption in the rhythm of decisions in the energy sector,” he said in an interview. “Conceptually at least, there’s a clear aversion to this process of liberalization.”

The doubts expressed by de Hoyos are one of the first instances of a major business lobby questioning Lopez Obrador’s economic vision since his landslide victory on July 1.

Coparmex says it represents more than 36,000 business people accounting for about 30 percent of Mexico’s gross domestic product.

Its reservations could presage further pushback against Lopez Obrador after he takes office on Dec. 1 if doubts surface over his stewardship of Latin America’s No. 2 economy.

The president-elect clashed with prominent industry leaders during the campaign, but top business executives quickly pledged to work with him after his election win.

Lopez Obrador has said little about the oil auctions since his victory. Senior members of his campaign team did not respond to questions about whether the postponement was agreed between the incoming and outgoing administrations.

Current administration officials said it was up to Lopez Obrador’s team to say whether there had been a mutual agreement to delay the auctions. Outgoing President Enrique Pena Nieto says they will generate billions of dollars worth of investment.

Lopez Obrador has pledged to review contracts awarded under the oil and gas liberalization for evidence of corruption, and his designated chief of staff said before the vote the auctions would continue if the process was not tainted.

Reporting by Dave Graham and Ana Isabel Martinez; Editing by Peter Cooney

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LatAm’s Solar Park Turns Mexican Desert Green

(AFP, 18.Jul.2018) – Driving through the endless dunes and cacti of the Chihuahuan desert in northern Mexico, a shimmering blue field suddenly appears on the horizon — not a mirage, but the largest solar park in Latin America.

This silent stretch of sand in the state of Coahuila is the spot Italian energy giant Enel picked to build the Villanueva power plant: 2.3 million solar panels that sprawl across a sun-soaked area the size of 2,200 football fields.

When the plant reaches full capacity later this year, it will supply enough electricity to power 1.3 million homes.

It is the biggest solar project in the world outside China and India.

The panels are designed to turn in tandem with the sun, like a field of metallic sunflowers.

They are part of Mexico’s push to generate 35 per cent of its electricity from clean sources by 2024.

Mexico won plaudits from environmentalists in 2015 when it became the first emerging country to announce its emissions reduction targets for the United Nations climate accord, ambitiously vowing to halve them by 2050.

A key part of that push is a sweeping energy reform undertaken in 2013.

One of outgoing President Enrique Pena Nieto’s signature initiatives, it was initially criticised by President-elect Andres Manuel Lopez Obrador, who will take office on December 1.

But the anti-establishment leftist has warmed to the overhaul, and analysts now say it is likely here to stay.

The reform made global headlines for reopening Mexico’s oil sector to foreign companies after 76 years of State monopoly.

A lesser-known, but perhaps ultimately more important aspect was to allow private companies, to generate and supply electricity.

Under the new law, Mexico is now holding clean-energy auctions in which private companies bid to produce and sell electricity on an open market.

“We’re very happy with the business environment and opportunities that exist in Mexico,” said Enel’s global director for renewable energy, Antonio Cammisecra.

“Since the reform, we see better market conditions and potential for a company like ours.”

CUTTING COSTS

Projects like this are also benefiting from a sharp drop in prices for solar technology in recent years.

“Photovoltaic solar energy is the fastest-growing energy in the world — and that is driving technology innovators,” said Arturo Garcia, an energy specialist at international consulting firm Deloitte.

The energy reform and price plunge are together reshaping the solar market in Mexico.

“Before the reform it was an environmental issue,” said Victor Ramirez, executive director of the National Solar Energy Association.

“Today it’s not just about the environment, it’s about economics. If solar sources are cheaper, investment is going to gravitate there.”

The new opportunities are attracting international interest.

Besides the US$650-million Villanueva project, Enel has another solar park and is building two wind farms.

Last May it pledged an additional US$97 million in investment to expand its projects in Mexico.

Spain’s Iberdrola is building two solar parks, Dutch firm Alten is building another, and British-backed Atlas Renewable Energy recently acquired yet another.

“Mexico has world-class solar resources,” said Camilo Serrano, Atlas’s general manager for Mexico.

“The potential is absolutely proven, and investors’ appetite is obvious in the auctions.”

ELECTRIC

The auctions have so far raised an estimated US$8.6 billion in investment.

Mexican Energy Minister Pedro Joaquin Coldwell recently said they would lead to the construction of 40 solar parks and 25 wind projects.

Mexico, which had nine solar parks in 2015, aims to have 68 by 2021, he added.

Three auctions have been held so far. The production price offered by electricity suppliers has dropped from US$50 per megawatt-hour to US$20.

Thanks to the programme, Mexico is now on the top 10 list of countries with the most clean energy investment, according to the Government, – which predicts the price plunge will continue at the next auction, slated for November.

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Why Is Venezuela Still Sending Subsidized Oil To Cuba?

(OilPrice.com, Haley Zaremba, 17.Jul.2018) – In the past, oil has accounted for 96 percent of Venezuela’s exports and over 40 percent of government revenues. Now, as the nation’s economy continues to crumble amid sanctions, political strife, and low oil prices, the Venezuela’s all-important oil production is plummeting. In fact, last month’s production was the lowest in 30 years at 1.5 million barrels a day. In desperation, the struggling administration has even begun to shut down production proactively as their terminal storage meets maximum capacity and the government faces major bottlenecks at storage facilities and ports.

As oil production and exports drop, the Venezuelan government has even less money to buy essentials like food, medicines, and other basic goods–a well-established crisis growing worse all the time. The International Monetary Fund (IMF) has said that the brutal economic crisis underway in Venezuela is one of the worst in modern history. The nation’s once powerful economy has plummeted 45 percent in the last five years, and the IMF projects that it will shrink 15 percent in 2018 alone. Out-of-control inflation rates will reach 13,800 percent.

However, in the middle of the chaos — a collapsing regime, widespread hunger, medical shortages — there is one holdover from the socialist platform that autocratic President Nicolas Maduro has refused to lapse on. Despite the crisis on his own soil, Maduro continues to grant generous oil subsidies to Cuba.

The small island nation, not without its own economic issues, has been dependent on cheap Venezuelan oil since the 1990s. After the fall of the Soviet Union, comrade Cuba was in economic shambles. It was at this point that they turned to Venezuela reduced-rate crude oil, in exchange for sending skilled laborers across the Caribbean.

Now, as Venezuela sinks deeper and deeper into an extreme economic depression, few could have predicted that they would still be making good on that decade-old agreement with Cuba–even the Cubans themselves have been scrambling for new sources of cheap crude. Last year Venezuela even cut off exports to Cuba for eight months, but then once again began sending shipments of light oil to Cuba and Curacao in March 2017 at a great cost to their own refineries, which are running at just a small fraction of their capacity thanks to lack of maintenance and drained funds.

Despite all this, amazingly, there was a reported shipment of 500,000 barrels of Venezuelan crude shipped to northwestern Cuba last week, sparking an uproar back at home. Venezuela continues to supply Cuba with around 55,00 barrels of oil per day, costing the nation around $1.2 billion per year, an unthinkable generosity when 9 million Venezuelans are reporting that they can only afford to eat once a day. This money could be channeled into turning around Venezuela’s own crisis, to curb inflation and import desperately needed medicines that can no longer be found on empty Venezuelan shelves.

There is a new, albeit small, ray of hope, however, for Venezuela’s ailing economy. On July 1st Mexico overwhelmingly elected a leftist president for the first time in decades. Andres Manuel Lopez Obrador, known locally as AMLO, pledged on the campaign trail to bring Mexico’s foreign policy back to a standard of non-intervention. This would mean walking back current neoliberal Mexican President Enrique Peña-Nieto’s efforts to build a regional alliance against Maduro and put pressure on him to ease up on his increasingly despotic tendencies.

Despite public outcry against Maduro’s continued financial support of Cuba as his own people without food and desperately needed medicines, the reality is that Cuba is one of Venezuela’s last remaining allies. Even if Mexico is no longer actively working against Maduro’s regime, they won’t be supporting it the way that Cuba has and continues to do. The sad truth is that Maduro has and likely will continue to put politics over people, and cheap oil will continue to flow out of the pockets of Venezuela and into the ports of Havana, which sit ready and waiting.

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Pemex, Energy Offices to be Moved

(Natural Gas Intelligence, Ronald Buchanan, 13.Jul.2018) – Mexico President-Elect Andres Manuel Lopez Obrador aims to decentralize the government in a sweeping plan to ease the congestion of population, buildings, vehicles and pollution in the “megalopolis” of Mexico City, a strategy likely to impact the country’s energy sector from top to bottom.

The government agencies set to be relocated to the provinces include state-owned Petroleos Mexicanos (Pemex); state power utility Comision Federal de Electricidad (CFE); energy ministry the Secretaría de Energía (Sener), as well as the energy regulators, the Comision Nacional de Hidrocarburos (CNH) and the Comision Reguladora de Energia (CRE).

Under the plan, Pemex headquarters would be moved from its 51-story Mexico City tower to Ciudad del Carmen on the southeastern Gulf Coast, a base of support that supplies operations in the Sound of Campeche, where most oil and gas is produced.

Sener, CNH and CRE are slated to be moved to Villahermosa, capital of Tabasco, the state where Lopez Obrador was born.

The age of the internet should ease the transition. These days, almost all government business is conducted online.

Since the 2013-14 energy reform, sessions of the CNH and CRE have been broadcast live by Internet, and the rules of both regulators insist in keeping a distance from representatives of the companies involved in auctions.

In order to ensure transparency and avoid any hint of corruption, CNH and CRE commissioners have to provide reports to their superiors of meetings with representatives of companies, rather as diplomats of the Western and Soviet blocks did whenever they met each other at cocktail parties during the Cold War.

The Federal District of Mexico City and its surrounding conurbation currently houses a population of close to 20 million.

Public transportation is far from adequate and roads are often gridlocked. Working hours in Mexico are the longest in the Organization for Economic Co-operation and Development, aka OECD. Many people spend four hours a day — two each way — between their homes and their workplaces.

Speaking in a video produced by his Morena party, Lopez Obrador said that the decentralization plan should help improve the quality of life in the capital as well as providing more equal opportunities for the nation’s regions.

“There are islands of rapid growth in the country, but they are surrounded by areas that have been abandoned,” he said.

Yet another reason, he added, was the susceptibility of the capital to earthquakes. About 10,000 people died in the 1985 earthquake. Since then, stricter building regulations and the use of more sophisticated technology have improved safety standards. Even so, two severe tremors last September caused at least 465 deaths, and 180,000 homes were destroyed in the capital and in southern Mexico.

The plan to decentralize is to be executed steadily, in a process that is likely to take almost all of the six years of the upcoming administration and with a minimum of disruption, according to Monterrey-based businessman Alfonso Romo, who Lopez Obrador has named to be his chief of staff.

Under the plan, five key ministries would remain in Mexico City: Gobernacion, the Interior ministry; the Finance and Foreign ministries; the ministries of Defense (Army and Air Force), and the Navy.

López Obrador has said on several occasions that, as president, he will live and work in the National Palace in the historic center of Mexico City, where critics claim his presence will make even worse the gridlock that often besets the area.

For decades, Mexican presidents have worked and lived in the relatively leafy surroundings of Los Pinos, the Mexican equivalent of the White House.

The Pemex tower, in a nondescript but central barrio of Mexico City, is now one of several tall buildings that dot the Mexico City skyline. But when it was built in the early 1980s it was by far the nation’s largest building and a symbol of Mexico’s huge oil boom that ended in an equally spectacular financial crash and the nationalization of the Mexican banks.

The corporate offices of the CFE are in a much more elegant part of central Mexico City than where the Pemex tower is located. The Energy Ministry is currently housed in the south of the capital, near the Plaza de Toros, the largest bullring in the world.

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Mexico’s Presidential Elections and U.S. Energy Cos

(MarketPlace.org, Lorne Matalon, 22.Jun.2018) – Antonio Godinez Vera makes his living turning golden kernels of Mexican corn into a mash that becomes tortillas. People like Godinez, a small business owner with four employees, are part of a wave that could power Andrés Manuel López Obrador to the Mexican presidency when voters elect a new head of state on July 1.

The campaign is being closely watched by U.S. energy companies that have operated in Mexico since the country’s 2014 energy reform. That reform was an opening that allowed foreign energy companies to bid on offshore blocks in the Gulf of Mexico, onshore oil and gas development, wind and solar production and distribution and electricity generation contracts.

At a rally in suburban Mexico City, presidential front-runner López Obrador told the standing-room only crowd of 10,000 plus people that changes in Mexican energy policy haven’t produced lower prices for gasoline and electricity. López Obrador has called for a return to more state regulation of the energy industry, a prospect that could jeopardize billions of dollars in current and projected foreign investment in the sector.

“The country hasn’t gained a thing,” Godinez said as he described what he sees as the current failings of Mexico’s energy reform. Though reformers promised to narrow the gap between energy costs in the U.S. and Mexico, energy data suggest Godinez pays approximately 20 percent more for his electricity than a business does in the United States. The energy reform’s proponents are confident the benefits will be realized eventually.

In addition to studies showing voter dissatisfaction with the energy reform, high levels of violence and accusations of corruption against the current government mean Godinez will be backing López Obrador “to escape our misery.”

López Obrador has leveraged frustration over the cost of energy to highlight other campaign issues. López Obrador has stated that all that has grown since the current government assumed power in 2012 is inequality, insecurity and violence.

Violence isn’t just a campaign issue in the Mexican presidential race, it has also plagued the presidential campaign itself. A recent headline read, “11 Politicians Killed In Eight Days.” More than 100 candidates have been murdered since September 2017.

While the violence continues, voters are focused on local issues. In the southern Mexican state of Veracruz, López Obrador’s call to end privatization in the energy sector has hit a nerve. Veracruz is where much of the energy in Mexico is either produced or refined.

Ignacio Quesada is on the board of International Frontier Resources, one of the first foreign energy companies to be awarded a drilling contract after Mexico opened the doors to its energy sector four years ago.

“If they start reviewing everything, we are going to slow down, put more regulation, put more roadblocks. Things will get done but at a much slower pace,” Quesada explained. That’s the wrong direction in terms of simplifying the process.”

Much of the drilling expertise that Mexico said it needed to attract when it introduced its energy reform was perfected in the oil and gas-rich Permian Basin of Texas. Kirk Edwards, CEO of Latigo Petroleum in Odessa, Texas said some American energy companies considering Mexico are now sitting out the current election cycle before they commit millions of dollars on projects that typically take years to realize a return on investment.

“Nobody’s going start doing something like that today without the certainty of what may happen in the future,” Edwards said.

Another element is the role played by President Donald Trump.

“President Trump is a central character in the Mexican election,” explained Tony Payan, who directs the Mexico Center at Rice University in Houston. He said Trump’s anti-Mexico rhetoric has lifted López Obrador ardently nationalist campaign. Payan suggested that U.S. energy companies need be ready if López Obrador wins. “The rules of the game are definitely going to change,” he said.

The Mexican government has said foreign energy companies would ultimately contribute $200 billion to the country’s economy. However López Obrador says so far it is only those businesses, and not the people, who are seeing the benefits of that investment.
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Why Mexico’s Energy Reform Needs AMLO

(The Council on Foreign Relations, Amy Myers Jaffe, 20.Jun.2018) – Mexico’s energy reform has taken important first steps but to come to full fruition, several additional critical reforms remain to be designed and implemented, including another constitutional reform. The task of adopting and implementing new reforms is all the more difficult because not only did the government of Enrique Peña Nieto oversell the short-run benefits of the package of reforms, including energy, adopted at the beginning of his term but also his administration is linked with other, broader political failures, including corruption scandals and the mishandling of the economy. Peña Nieto’s missteps have wrested credibility from the political system and make it unlikely that a mainstream candidate could put together a governing coalition with sufficient political support to adopt the next stage in Mexico’s energy reform. That’s why a political outsider would be more uniquely positioned to further energy reform, should that be a credible political choice. Once Andrés Manuel López Obrador (AMLO) wins the election, he could have the credibility to put together a coalition with the support of the Mexican people that could justify the next stage in Mexico’s energy reform. Whether he will do so remains an open question, but the next stage of the energy reform is unlikely to happen without him.

Stage III of the Mexican Energy Reform

The first stage of the energy reform in Mexico was President Calderon’s 2008 reform that was designed to strengthen Pemex without breaking Pemex’s monopoly position. After a fractious national debate, the reform was adopted because it was promised it would make Pemex an effective national oil company. The failure of that reform led to stage two in Mexico’s energy reform, which was the constitutional reform instituted under President Peña Nieto. This constitutional reform was intended to make Mexico’s energy sector more efficient and able to meet the power, gas and oil needs of a growing economy, with a small nod to generating more clean energy. By design, it allowed Pemex to lead the process by permitting the national oil company (NOC) to select the best properties for its own exploitation in Round Zero before opening the bidding process to companies other than Pemex.

The first auctions for oil and gas blocks did not go well, partly due to falling oil prices and partly because terms reflected Mexico’s relative inexperience with auctions. However, more recent auctions have gone extremely well. Foreign capital has committed to investment over the life of their contracts of almost $150 billion, and some new fields have already been discovered. Winning bids including seventy-three companies from twenty countries attest to the interest in Mexico’s energy future. There’s been less success in developing the infrastructure to get new energy and more imported energy to end users and the government has not solved the theft from Pemex oil pipelines or Pemex’s CAPEX and its pension liabilities.

Given Pemex’s dominant position, the company needs to develop a better business model. To generate capital, it needs to take the steps taken in Brazil, Colombia, authorized in Peru, and maintained in Argentina after the renationalization of YPF: privatize some stock in the NOC. The sale of the stock would require a constitutional amendment, but would not put Pemex in the hands of private equity holders and its stock price would provide a basis for evaluating how well Pemex was reforming. The government and Pemex have already modified the weight of the Petroleum Workers’ Union on Pemex’s governing structure and balance sheet, but the pension obligations that were made with Pemex need to be restructured and funded through other mechanisms.

Building a New Political Coalition for Energy Reform

While these necessary reforms have a technocratic nature, they cannot be adopted by technocrats or political leaders by simple decree. The first two stages of Mexico’s energy reforms rested on the backs of strong political coalitions behind them. The next stage will also require a political coalition. Unfortunately, the political system that generated the first two reforms has been discredited in the eyes of the Mexican people by actions both within and outside the energy sector. The clearest sign of disappointment with the process is AMLO’s widely expected victory in a few weeks. AMLO represents a new political coalition. López Obrador will need to convince that new coalition that when his government continues to attract private capital into Mexico’s energy sector, the benefits of a strong and efficient energy sector will benefit the Mexican people and not go into the hands of corrupt officials or the economic elite. His restructuring of Pemex needs to emphasize that the company is a means to promote the country’s interests in a rejuvenated energy sector, not to benefit oil workers and the PRI party at the expense of Mexican society.

So What Will AMLO Do?

The three pillars of the Mexican economy over the past decades have been manufactured exports under NAFTA, remittances from Mexican migrants to the United States, and oil exports. AMLO has an ambitious agenda for generating public goods as well as rewarding the groups who supported his victory. The income earned from manufactured exports under NAFTA will likely stagnate, if not actually decrease, even if NAFTA is successively renegotiated, and could decrease more substantially if NAFTA is terminated. Remittances have probably peaked because Mexico’s demographics and growing economy result in fewer Mexicans going to the United States for work; U.S. policy will likely enhance that decline. Oil exports have fallen as reserves and production have been falling, and it will take up to ten years for significant new reserves to be discovered and produced. Those efforts will require companies following through on their promised investments as well as new investment. AMLO will need an energy sector that generates revenue during his six-year term and credibly paves the way for greater future benefits that will be distributed to the Mexican people. Such nationalist messages could strengthen his political coalition as he implements his reforms of what has become an illegitimate political system.
AMLO’s political discourse radicalized when López Obrador and half the Mexico electorate believed that he had been deprived of previous presidential election victories in the extremely close and controversial election in 2006 and a close second in 2012. But when López Obrador was mayor of Mexico City from 2000-2005 he was pragmatic, worked with the private sector, and was perceived as an effective leader. Analysts say lack of technology and funds required to modernize Mexico’s oil sector could lead to an additional output plunge of 700,000 b/d by 2020, unless the next administration takes some definitive action. Output is expected to rebound slightly this year and is currently averaging 1.9 million b/d, down roughly 5 to 10 percent from 2017. Pemex is targeting 1.95 million b/d for 2018. Pemex’s natural gas production has also been declining, and fuel theft has plagued the country’s refining sector.

López Obrador has said he will not seek a constitutional change to reverse the 2014 energy reform and will respect the legitimate contracts signed under the reform. There is hope that AMLO can be like President Lenín Moreno of Ecuador and implement reforms from the left with a significant role for the private sector. Will AMLO take this path? We won’t know until he begins to govern, but the Mexican economy and the Mexican people need him to enact reforms that allow Mexico to reap the benefits produced by their energy sector.

Editor’s Note:

This is a guest post by David R. Mares, the Institute of the Americas chair for Inter-American Affairs and professor for political science at the University of California San Diego and the Baker Institute scholar for Latin American energy studies at the James A. Baker III Institute for Public Policy at Rice University.
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North America’s Energy Future on Trial in Mexico

(Brookings, Carlos Pascual, David G. Victor, and Rafael Fernandez de Castro, 5.Jun.2018) – On July 1, Mexicans head to the polls to select their next president. While it has become fashionable to wall Mexican matters away from American politics, in reality the Mexican election could transform the North American community. At the epicenter of that future is a quiet, steady effort to reform Mexico’s energy markets and roll back the monopolies of Mexico’s state-owned energy companies. These reforms have already triggered contracts that could yield $200 billion in investments in the coming years.

Editor’s Note:

The Mexican election could transform the North American community, write Carlos Pascual, David G. Victor and Rafael Fernandez de Castro Medina. At the epicenter of that future is a quiet, steady effort to reform Mexico’s energy markets and roll back the monopolies of Mexico’s state-owned energy companies. This piece originally appeared in the Houston Chronicle.

Until now, nobody has really known what Mexican voters think about all this change, but the answers matter because the contending candidates for the presidency have outlined starkly different visions for the future. In April, we ran—in tandem with the Brookings Institution, the University of California at San Diego, the global consultancy IHS Markit and a leading Mexican newspaper, El Financiero—the the first systematic poll of Mexican voter attitudes. What we found is disturbing and important as North Americans watch the upcoming elections.

On the surface, the picture is positive. Most strikingly, a modest majority of the public supports continuing the energy reforms (48 percent, versus 37 percent opposed) even if they feel they are not producing good results (61 percent versus 27 percent), or that they were not necessary (47 percent versus 41 percent). Mexicans feel that returning to the past isn’t a solution. For decades, Mexicans saw Pemex, whose nationalization in 1938 is still a national holiday, as the country’s crown jewel. Those days are gone. In our poll, Mexicans opined that Pemex has not acted to the benefit of the country (61 percent versus 30 percent). Mexico is at a crossroads—none of the old models works, but none of the new models are yet formed.

Digging deeper into the polling reveals disturbing insights. Mexicans, like Americans, actually know very little about the problems and opportunities in the energy sector. Sixty-three percent believed that Mexico’s oil production either increased or stayed the same in the 10 years prior to the constitutional changes in 2013. In reality, Mexico’s oil production peaked in 2004 at 3.5 million barrels per day, and by 2013 a persisting lack of investment had driven production down to 2.4 million barrels per day. It is not surprising that Mexicans are confused about the solutions—most don’t realize that production had collapsed.

Almost everything that is important in the energy sector takes a long time to bear fruit—that’s because investment cycles are long, and longer still when investors aren’t sure whether new policies will hold. It takes 3 to 5 years for investment to translate into production and, optimistically, two years before that to pass the laws and regulations needed to execute a bid round. Thus, when Mexico changed its constitution in 2013 to open oil production to outside investors, it was going to take at least 5 to 7 years before oil production might increase. By that standard, the reforms are exactly on schedule: Today, more than 100 fields have been awarded for investment, there have been significant initial commercial finds and production is set to rise around 2020. No country in the world has managed such a complete transformation of its energy sector faster than Mexico.

For the public, reforms may still seem like unfulfilled promises. North of the border, these results really matter because it is American companies—with American jobs and investors—that are perhaps best poised to benefit from Mexico’s continued opening.

As much as Mexico has evolved as a competitive global economy, accumulating an impressive number of free trade agreements that open the country to international commerce and investment, the public fears that private investment in oil would not benefit the Mexican people (51 percent versus 34 percent). Mexicans are also suspicious of depending on foreigners. Almost two-thirds of the respondents believed that it is a significant risk for Mexico to import more than 50 percent of its gasoline and natural gas from the United States. That’s bad news for Americans who have become the number one exporter of natural gas and refined oil products like gasoline.

Just as Mexicans are becoming impatient to see tangible benefits from reform, many other oil producers are in intense competition to attract private investors—from Saudi Arabia to Russia and Brazil. Traditionally, big oil producers could afford to be inefficient because the money kept sloshing in. Those days are gone, and the whole world’s oil industry is in an arms race to reform and get better.

For the last two years, the United States has been making loud noises about cutting off Mexico. Now it is Mexico’s turn, and the big losers could be American companies that want to do business south of the border. Fixing this problem won’t be easy, but it starts with talking openly—with the public, not just elites—about how reform actually works. And why openness and competition are good news all around.

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