One of big issues in the forthcoming Mexican presidential election will be the next government’s strategy for the state oil monopoly, Petróleos Mexicanos (Pemex). The two male presidential candidates, Enrique Peña Nieto, the de facto Partido Revolucionario Institucional (PRI) candidate and Andrés Manuel López Obrador, the leftwing candidate, have both made suggestions.
Peña Nieto has been talking about opening up Pemex to the private sector for the past three months, though it is far from clear what exactly he envisages. López Obrador advocates a much more statist strategy: increasing Pemex’s downstream activities, particularly in refining, to combat two problems Mexico faces. These are first the dwindling surplus on the oil trade account and second the rising cost of petrol, diesel and other refiner products in Mexico.
In November, Peña Nieto indicated that his idea of opening up Pemex went further than the Petrobras model of listing the state-owned company on the stock market. Indeed both Petrobras, the state-owned Brazilian energy company, and the Colombian state oil company, Ecopetrol, were only listed on local and then international stock markets after they had been stripped of their monopolies and forced to compete, at least in some business areas, with international energy companies.
It is not clear whether Peña Nieto actually means what he says about major Pemex reform. Like all campaigning politicians he adjusts his message to his audience. When he met 850 leaders of the powerful, PRI-supporting and financing, oil workers’ union on 13 January 2012, he made no mention of shaking up Pemex.
It is worth noting, however, that one of Peña Nieto’s political mentors, Carlos Salinas de Gortari started his presidential administration in 1988 by taking on the oil workers. There may have been an element of political revenge in this because the oil workers’ leader had endorsed (and probably financed) his main rival, but the image of that leader, Joaquín Hernández, being marched off to prison, played well with the neo-liberals who were then in the economic ascendant internationally.
If pragmatism is Peña Nieto’s key political characteristic, (which seems likely from his record in managing the Estado de México, the country’s richest and most important state), he may push for changes that the PRI has previously vetoed. One obvious example of this is the PRI’s veto, exercised by its de facto majority in the lower house of congress, on allowing private companies to build or manage oil pipelines in Mexico. Private companies can, however, move oil in tankers by road. Mexico’s oil and gas pipeline system is elderly and sprawling: a rationalisation would appease environmentalists.
Theoretically such a green move would appease Peña Nieto’s only remaining political ally for the forthcoming elections, the Partido Verde Ecologista de México (PVEM). However, despite the party’s name, it is much less of an environmental lobby group than a vehicle to push the business activities of the González Martínez family which still largely controls and bankrolls the PVEM. The González Martínez family’s primary business is manufacturing generic pharmaceuticals.
The PRI has also opposed allowing the private sector to build and operate new refineries in Mexico, where the arguments are more delicately balanced. Mexico’s growing appetite for importing (high-priced) fuels while exporting (cheaper) crude oil makes the business case for new refineries apparently convincing. Mexico is now importing half of the refined products it uses and pays for these imports with exports of lower-price crude oil.
Mexico’s trade surplus in oil products is now down to about US$1bn a month. Previously, when oil prices were strong (over US$90 a barrel) the country ran a surplus in its oil trade of around US$2bn a month. If the economy continues to grow at around 4%, Mexico’s appetite for fuels will probably grow faster and cut the trade surplus even further. The conventional view is that some time in the next presidency (2012 to 2018) Mexico will, for the first time in over a century, become a net importer of hydrocarbons.
Mexico’s surplus in oil products is continuing to shrink: in 2011 oil exports (mostly crude) were worth US$56.4bn while its oil imports (mostly fuel and refined products) came to US$42.7bn. Non-oil exports were up by 14.1%, year-on-year, in 2011 and non-oil imports were up by 13.6%. The surplus on the oil trade more or less exactly matches the deficit on non-oil trade.
Even if the next government opens up the potentially rich deep waters of the Gulf of Mexico to exploration by foreign companies (because Pemex has neither the financial muscle nor the technology to do so), the lag between discovery and production is still likely to mean that for a period at least, Mexico will become a net importer.
The left-winger, López Obrador argues that the next government should do something about the declining trade surplus in oil products by building five new oil refineries in Mexico and using them to refine more of Mexico’s crude oil, thus cutting the need for expensive imports. He added, less demonstrably, that such a strategy would also lower fuel prices in Mexico. The main problem with this new refinery strategy is that it is narrowly focused and takes account only of what is happening in Mexico.
For North America as whole, there is no need for new refineries. Indeed there is a strong argument that this region has an overcapacity in refining and that this overcapacity is capping the returns refiners make. Pemex already loses money on its own refining businesses and several other large North American refiners do the same on theirs.
Even at the top of the refining cycle, the margins in the refining business are pitiful, usually less than US$1 a barrel. By contrast the margins on the crude business are thumping. It costs Pemex about US$7 to produce each barrel of crude oil which the company now sells for over US$100 a barrel.
Pemex’s long-term strategy has been to maximise crude production and to limit its involvement in the losers’ game of refining. As new refineries cost about US$10bn each to build, the upfront cost of López Obrador’s plan would be huge and the cash returns derisory.
Arguably López Obrador would be better advised either to gear up to buy surplus refineries elsewhere in the Southern US for considerably less than the cost of building the new refineries in Mexico or better still, to use the money to develop new deepwater oilfields.
The issue of fuel prices in Mexico is becoming pressing because the cost of fuel subsidies is so large and the high price of oil in international markets is pushing up the retail price in Mexico. In 2011 the government spent M$160bn (US$12.5bn) on subsidising fuel. Cutting these subsidies which encourage car use (and thus atmospheric pollution) would probably produce major changes, and ructions, in the country.
Pemex does not publish information on how much it costs to produce petrol. By law, Mexico’s petrol prices are pegged to the price of unleaded gasoline on the Gulf Coast of the US. This price prevails whether or not the petrol is produced domestically (ie in Mexico) or imported. On 30 January, the Gulf Coast reference price was US$3.29 a gallon or US$0.86 a litre. Adjusted by the official exchange rate, this gave a theoretical price for Magna, one of the most popular of Pemex’s petrol brands, in Mexico of M$11.18 a litre. As the retail price for Magna, apart from along the US border, is M$9.82 a litre, the government is subsidising petrol to the tune of M$1.36 a litre. Perhaps the actual subsidy is even higher because it may cost Pemex more than M$11.18 a litre to produce Magna: imports, by definition, are pegged to the Gulf Coast price.
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