UT Energy Journalism Fellow Lorne Matalon
MEXICO CITY—Despite challenges that include low prices for crude oil, the increasing reliance on the United States for natural gas, insecurity along the path of Pemex oil pipelines and allegations of corruption within the powerful oil workers union, a senior manager at Pemex (Petróleos Mexicanos) portrays Mexican energy reform as a process that represents both a challenge and an opportunity.
“It’s not certainly the best time to go and put your fields up for grabs. However, having said that, Mexican fields have extraordinary potential,” said economist José Manuel Carrera who began his career at Pemex in 1991 when he joined the staff of the agency’s CFO. In 2015 he was appointed as the Chief of New Business Ventures at Pemex. He came to the state-owned energy agency from Mexico’s Central Bank (Banco de México) where he was a currency analyst and Manager of International Exchange.
In an interview at his office at Torre Ejecutiva Pemex, the agency’s Mexico City headquarters, Carrera amplified on the challenge Pemex faces as it adjusts to a domestic oil and has market that has been opened to foreign participation for the first time since 1938. That year, Mexican President Lázaro Cárdenas nationalized and expropriated the assets of nearly all of the foreign oil companies operating in Mexico. He later created Pemex, a state-owned firm that held a monopoly over the Mexican oil industry until 2013 when Mexican lawmakers changed the country’s constitution to lift the ban on foreign energy companies from operating in the country.
Carrera was asked about the difficulty of trying to accelerate energy reform in a low-price environment. Hope for Mexico’s energy reform and its potential to improve social development in the country were high when the plan was launched. In June 2014 crude oil peaked at 112 dollars per barrel. Planning and anticipated profits for Pemex and the foreign companies it wanted to partner with were predicated on 70-90 dollars per barrel. Today crude makes news if it cracks 50.
Adding to woes at Pemex, Moody’s in 2016 issued a downgrade and Fitch said Pemex faces insolvency. Pemex owns numerous non energy-related assets such as hospitals and hotels. It has slashed jobs but still has a workforce that analysts suggest is two to three times the labor force it needs.
Any profits it does make have historically been taken by Mexico’s federal and state governments. They have used Pemex as a piggy bank, taking 30 or 40 per cent or more of its earnings to build schools, hospitals, and in one case, a world class baseball stadium. That means profits aren’t used to upgrade equipment or train workers. That was not an issue when oil prices were high, when there was no urgency to reform Pemex and to invite foreign expertise investment and expertise to rescue it and Mexico’s under performing energy sector.
Carrera was asked about the difficulty of trying to accelerate energy reform in a low-price environment and as Mexico begins what is certain to be a contentious election cycle leading up to the selection of a new Mexican president in 2018. The following is a transcript of his comments;
on pitching foreign investors on Mexico’s energy industry
It certainly, in the eyes of a lot of people, (is) more problematic. Why? Because the low prices have actually diminished the capital expenditure of most international oil companies around the world. If you look at the 10 largest IOCs, or international oil companies around the world, they have reduced their capital expenditures between 40 to 55 percent in the last year.
That’s an important cut in investments, and therefore it’s a reflection that under these price scenarios oil companies are being much more prudent with the way they spend and much more discerning on which fields they should actually go for.
So it’s not certainly the best times to go and put your fields up for grabs. However, having said that, Mexican fields have extraordinary potential. The opportunity of research for any oil company is very, very important and the potential for exploration is also so large (and is) of such a scale that it is not easy to find fields with those characteristics.
Therefore even though we are not necessarily in the best timing, in terms of the price, the opportunity is so large that oil companies are discerning enough that they could look at this opportunity and understand that certainly the first barrels that will come out of this field will be not now but in five to seven years.
So therefore they should actually be looking at what is the price expectation on that (duration) of time rather than actually just looking at the current price. However Mexico, and Pemex in particular, will put to the market opportunities in terms of investments, which go not only for the deep waters. Pemex will also bring farm outs and service contracts suited a smaller scale and probably with the lower geological and technological risks associated. That will allow companies of other sizes to come and to reap those opportunities and to try to get into Mexico’s energy resources.
on the continued theft of oil from Pemex pipelines
(It) is a fact, we need to face it and confront it. I think Pemex has been working very hard. It’s certainly not an easy task, but Pemex is working hard in coordination with local authorities, which they being instrumental and with the federal government as well. So I think it’s a job that should be the responsibility of a bigger set of stakeholders, not only of Pemex.
It is mostly refined products. Most of the theft that we have encountered and that we have reported has been in refined products in pipelines. That’s typical because they are assets that they have a more liquid market. It’s more difficult to find markets for oil and certainly for natural gas it is very difficult.
on why Mexico plans to import increasing amounts of natural gas from the United States
The GDP of Mexico has increased dramatically in the last decade, and one of the biggest drivers has been manufacturing and services. Manufacturing and services in the Mexican economy account for 40 percent of GDP, and that’s the driving force behind the Mexican economy.
It’s 40 percent manufacturing, 40 percent services, and 20 percent the rest of the sectors. Oil and gas only represents eight percent of GDP, so the business model that Mexico has adopted has been of a very large factor. Mexico is one of the largest exporters of high technology equipment like mobile phones, televisions and home appliances. We are the sixth largest supplier for the American aerospace industry.
So therefore, the business model is clear. And one of the clear drivers of this sector has been the availability of natural gas. (With) A lot of these industries, the energy fuel, is natural gas. So therefore the imports of natural gas to Mexico will help us develop a very healthy manufacturing sector and service sector, which is the strongest driving force of the Mexican economy.
So Mexico requires to develop itself and that equires more natural gas. So the construction of these pipelines is making more natural gas available, for industr to develop manufacturing but also to use a cleaner fuel to generate electricity and therefore decrease the prices of power in Mexico.
It is critical, the role it (energy) plays. A country without abundant and accurately priced energy will have more troubles in developing itself. What energy reform is bringing to the table is direct impact to consumers but also abundant fuel correctly priced for the development of all the sectors of the economy.
on the significance of the Los Ramones natural gas pipeline projects
I’ll tell you about Los Ramones. Los Ramones is a project that now is basically a joint venture between Pemex and operators and financial investors. So therefore you see this blend of investors, which would not have happened before (Mexican energy reform).
As in the other pipelines that will help us import natural gas, Los Ramones will do exactly the same. It’s future economic development through the availability of more aggressively priced or more conveniently priced natural gas that comes from northern of the border into the Mexican grounds of manufacturing, which is what we call El Bajio or the north-central part of Mexico.
on Pemex’ adjustment to deregulated markets
We recently presented the business plan of Pemex which is the first plan that actually has as the focus of the profitability of the company. So the focus and objective of this business plan is profitability of the company.
And we have laid out a clear set of mandates and initiatives for all the companies of Pemex, which cover the full value chain of oil, and initiatives to partner with investors willing to complement the capabilities of Pemex with theirs in order to develop faster than before.
on relations with an historically corrupt but still powerful Pemex union
I think the union has been extremely supportive of the energy reform, and they have proven it to us. They are one of the key stakeholders and they really are a support to change the way Pemex has been conducting business for the last 80 years. We count on their support.
I think the union is going to be a key stakeholder, and we have never had in the last, I don’t know how many years, a single strike in Pemex; so therefore it gives you the amount of support and leverage that we feel from them. We feel actually very supported. We have never had interruptions, long–term interruptions of operations due to the union, so it has been more than supportive. And they are adapting together with us in this energy reform.