Before March 18, 2021, no one knew that in the mind of Mexico’s president, Andrés Manuel López Obrador, he had reformulated his oil policies in the biblical form of the 10 Commandments. In his speech of about 15 minutes on the 83rd commemoration of the oil expropriation of 1938, he set forth 10 precepts covering investment, trade, consumer prices, and administration of the national oil company Pemex.
The vision was of oil autocracy: A brake is to be put on privatizations, and concessions will be disallowed. Import substitution by petroleum products supplied by Pemex is to be achieved by increased refining capacity, to include a new refinery at Dos Bocas.
Pemex, meanwhile, will receive new tax relief, corruption will be purged, and the job security of Pemex’s full-time workers is assured. There will be no downsizing or reductions of salaries or benefits. Pemex’s market share in gasoline and diesel is to be protected. There will be an increased budget for natural gas and gas flaring will be curtailed.
All of these ideas are consistent with his previous formal and informal remarks about Pemex, foreign investment, and international commerce.
New in his speech is the Fifth Commandment: Oil production should match domestic needs. At present, those needs could be fulfilled by a daily production of 2.0 million barrels. The idea of a production cap on oil production could take many forms, most of them problematic for investors with leases in oil properties that were auctioned between 2015 and 2018.
At the beginning of his administration in 2018, López Obrador set a daily target for Pemex of 2.6 million barrels (later reduced to 2.4 million, then 2.2 million). There was no discussion of limits on production or exports by Pemex or private investors.
His newest discernment of the national interest could come to affect how oil companies value their leases in Mexico. Before, it was expected that their discoveries would proceed according to the economics of the reservoir and accessibility of pipelines. A national production cap would affect all leaseholders. Think Talos Energy and its Zama discovery in the Mexican portion of the Gulf of Mexico.
No hot water
Equally disconcerting is the insinuation that Mexico’s oil production should be destined for the domestic market, a constraint that could require foreign producers to sell their oil production to Pemex.
Stepping back: The long-term concerns of oil and gas investors are being funneled quietly through the U.S. Embassy in Mexico City outside public view. Market actors in petroleum products regard the president’s vision as unrealistic.
Monthly U.S. propane imports to Mexico in 2020 were 6 million barrels. As one propane importer told us, “Mexico is significantly reliant on imports and cannot be self-sufficient. The pipeline network gets tapped and shut down about every other week, so their distribution is completely unreliable. If not for the importers, Mexico would have no cooking and hot water.”
To this sentiment, it could be added that without natural gas imports, the lights would go out and industrial machinery would shut down in much of the northern states.
So, if the president is bluffing about international trade, about what is he serious? The stated goals and language of the speech have electoral overtones. He is seeking to connect with voters in the June 6th midterm elections where he hopes to maintain, if not increase, his party’s hegemonic position. If successful, he would amend the constitution to void the energy reform of 2013-14.
Using the ‘p-word’
His use of the “p-word” and the “c-word” (“privatization” and “concession”), both toxic in Mexico’s energy lexicon, reveals an ulterior goal of influencing voters by insinuating that his predecessors (the “neoliberals”) had been selling out the national interest to foreigners. He is also serious about his presidential prerogative to serve as the de facto CEO of Pemex.
Insofar as his speech concerns oil policy, industry observers are skeptical: “They do not have the resources, the talent, the money or the lack of corruption to pull this off.”
Even so, the business models of some investors may have to be reset.
George Baker is the platform director of Energia.com and publisher of Mexico Energy Intelligence™, an industry newsletter based in Houston
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