Could Refining Be the Way Forward for PEMEX’s Path to Profit?

You can watch the video of this presentation here.

Fluvio Ruiz Alarcón, Independent Oil and Gas Analyst and Former Independent Advisory Board Member at PEMEX focused his presentation on the NOC. What has been PEMEX’s role over and how did it change from its early history down to the current reforms, and how could its newly envisioned role as a refining giant become profitable?

After PEMEX was founded in 1938 on the back of the nationalization and expropriation of Mexico’s then-privately operated oil and gas sector, the company’s mission was rather straightforward. “PEMEX’s main role in its existence was simply to survive,” said Ruiz. First modeled after a more socialist system in which workers played a main role, PEMEX eventually became a parastatal entity. Its role in Mexico’s economic model has often been essential, especially during the 60s.

"During its first years, “PEMEX's stabilizing development focused on supplying the domestic market in an abundant and timely manner,” explained Ruiz. For this reason, the NOC only exported marginally. Meeting internal demand was its main objective.

This situation changed in the 70s, when Mexico began to rely more on exporting crude to maintain its economic models and imported refined petrol instead. The oil shock of the decades played an important part in this development. The concept of extractivism, the act of extracting natural resources to sell them on the global market, began gaining strength. "Over time, PEMEX became  the main source of tax revenue. Its goals are based on the short-term needs of Mexico,” said Ruiz. Toward the 90s, this extractivism only intensified when the country’s governments saw this tax income as a way to avoid unpopular fiscal reforms. More and more refined products were imported and Mexico’s refining system began to deteriorate, its importance began to drop.

When the 2014 Energy Reform began gaining steam, extractivism reached its peak. Getting as many resources out of the ground as possible appeared to be a main objective. "The energy reform that came after focused on rent-seeking, non-strategic refining, in addition the law establishes asymmetric regulation,” said Ruiz. This rent-seeking was defined by Mexico’s new focus to gain money on rents rather than through using its own production to accumulate wealth. Ruiz explained that no other country in the world structured its industries so that private companies would carry the brunt of investments.

The Hydrocarbons Law established that PEMEX was subjected to an asymmetric regulation, allowing private players to gain more prominence with the playing field, shifting its balance away from PEMEX’s favor. Trying to establish a free market in the oil and gas sector was not a great success, Ruiz argued. The promised wealth and development the reform touted did not came to fruition. “In general, I would say that the Energy Reform was necessary but its implementation ended up being needlessly aggressive toward the productive enterprises of the state, said Ruiz in an interview with MBN last year.

With the entry of the López Obrador administration, a new vision for Mexico’s oil and gas sector began to take shape. “Today, we see PEMEX being positioned as core and center of the O&G sector, it seeks to regain its self-sufficiency in fuels and bet on projects like Dos Bocas and Deer Park,” Ruiz said. PEMEX was once again meant to become the cornerstone of the sector in the government’s mission to establish energy security and become self-sufficient in fuel. To this end, the government seeks to boost Meintxico’s refining system. The new prominent Dos Bocas refinery and the acquisition of the Deer Park in the US are key to this mission.

Revamping Mexico’s six existing refineries will also be of importance. “Reconfiguring three of these refineries has been dropped from the discussion, which I think is a mistake,” Ruiz argued. Since most of Mexico’s oil is heavy crude, refineries would need to be reconfigured so that they can refine this straight away to save costs. After all, refining should add value, but if economics are not balanced correctly the process can end up costing money. Mexico’s fiscal policy toward trying to balance consumer prices would have to be examined as well “They should go together, but not be as unbalanced as they have at times,” said Ruiz.

But the sweeping changes in the oil and gas sector have caused disputes between the public and private sector. On the other hand, a split between government goals and existing regulation would be harmful. To this end, Ruiz says that reforms in the energy sector should be carried by an analysis of how the sector dynamic actually works. “A reform needs the biggest possible social and political backup possible,” stated Ruiz. The end-goal of energy sustainability in the energy sector should be carried by three pillars, concluded Ruiz his presentation: energy security, equal access and environmental sustainability.