Alfredo García Mondragón
Executive Managing Director
Expert Contributor

Dilemmas of a Developing Oil Country

By Alfredo Garcia Mondragón | Fri, 02/05/2021 - 13:23

Mexico is more than nine months into the COVID pandemic that has brought a drop in consumption and demand for oil used for the transport of goods and services and in vehicles. This has resulted in large inventories that are making refinery operators unaffordable businesses, while in 2016, with the fall of oil prices, the business units that provided revenues to the integrated oil companies were related to refining and petrochemicals. Four years later, there appears to be a ghost putting the oil industry in check. It is called renewable energy and it is gaining more strength globally every day.

At the beginning of the 1990s, to be more specific in 1992, the United Nations Convention established the first global agreement to combat global warming. Five years later, the Kyoto Protocol was formalized, setting a target for the reduction of greenhouse gas emissions. As a result of this agreement, activities have advanced over the years and measures and forms of participation have been adapted.

In the first years of the first decade of the 21st century, various companies, including Statoil, BP and Shell, sought to help the Mexican government in these efforts through technological applications to reduce burning and venting of gas in oil fields and to lower carbon emissions through the sequestration of emissions from PEMEX's refineries and petrochemical plants using the securitization of green bonds.

Such efforts were not successful because of the misinterpretation of what Mexico considers to be sovereignty and nationalism. In such efforts, the operators in question would invite in the engineering and management of these projects and the way they would recover such investments would be through the placement of these green bonds sponsored by the Kyoto Protocol. Here is where the ghost of misunderstood nationalism appears: the emissions are made by the oil company of the Mexicans, so if any income is generated, then it belongs to the Mexicans. The problem is that the Mexicans never invested in reducing emissions.

Ten years after those failed efforts, the Energy Reform of 2013 was introduced by the Mexican government with the idea of fulfilling its commitments to reduce carbon emissions and thus contribute to eradicating global warming. In the implementation of this reform, the bases are established so that, in the absence of capital and the inability to operate so many investments in the renewable energy sector, the opportunity is given via legal and regulatory frameworks to private and foreign initiatives to invest in these projects and operate them at their own risk and as a complement to the Federal Electricity Commission. The established commitment was that by the year 2025, the clean energy sources in Mexico's mix would be 35 percent.

At the beginning of President Lopez Obrador's administration, it sought to reverse the Energy Reform approved by the legislature and the Senate and promulgated by President Peña Nieto, but among the mistakes it made is that the government considered the wind and the sun to be the property of Mexicans and, therefore, no one could generate renewable energy. SENER then proposed an energy policy that sought to stop these investments, and in response, this policy ended up in the courts. The result is the distrust of investors in Mexico.

The Mexican government also seeks to reduce the importation of gasoline and diesel, building a refinery in the area of Dos Bocas in the state of Tabasco, while also criticizing the fact that Tabasco didn't have an oil industry. The simple fact is that 42 years ago, during the mandate of Lopez Portillo, they didn't want to affect the environment of the virgin areas of the Mexican southeast. They even banned the area of Centla swamps from oil operations. It wasn't a whim not to bring the industry to Tabasco.

The challenge of fuel production in Mexico is not only the obsolescence of its refineries but the drop in production of heavy crude oil so that there is not enough to provide the refineries with supplies since part of this crude oil is used to improve the quality of heavy crude. The consequence of introducing one more refinery is that a great part of the hydrocarbons produced in the marine region will be assigned to the Dos Bocas refinery and will reduce even further its capacity to produce in the other refineries.

In a scenario where as a result of the pandemic, the consumption of refined products falls and the demand for renewable energies rises one might think that would spell the end of the oil industry, consumption of gasoline and diesel. From here, several realities arise.

  1. The heating power of gas to generate electricity is more efficient than renewable energies.
  2. Mexico has a fleet of 50 million vehicles throughout the country, so replacing them will take many years.
  3. Throughout the Americas, transport distances are long, and today traveling in electric cars with the time it takes to recharge the batteries and their autonomy does not make it a viable solution.
  4. In Mexico, 80 percent of the commercial logistics is conducted by road, so the consumption of diesel is comparable to the consumption of diesel in Europe.
  5. In order to have adequate production of diesel to be able to supply the transport in Mexico, it will require the refining of gasoline.
  6. Nowhere in the world is an abundant chemical element for daily use like plastic that can replace oil consumption.
  7. There is an ethical dilemma regarding the use of available land across the world, so the question arises, will good quality land be used to generate energy or food?
  8. It is an undeniable fact that the space needed for a solar field to generate electricity from a combined cycle plant, is at least 50 to 1.
  9. The investment and operation costs of renewable energies are going down, so they will be an option for energy generation.

That is why the unflattering scenarios concerning global warming, the emergence of renewable energies, the decline in diesel and gas consumption, the change in public policy and the efficiency of refineries, due to lack of supply, put Mexico in a position to face the dilemma of future energy security.

The pandemic is not here to stay and as soon as it is under control, human life and the functioning of the industry will return to normal, and with a desire to make up for lost time.

I want to clarify that I am not against renewable energies, but that the right balance for the energy matrix must be found. The technology in solar energy in the future depends largely on the development of high purity silica to reduce the footprint of these projects and, therefore, lower investment costs. Mexico is on the path of investing in renewable energies and must follow this path because the development of nations and of Mexico is based on the capacity to generate sufficient electricity, at an accessible and permanent cost. Mexico still has a great dependence on its hydrocarbons. Some analysts in the energy sector believe that Mexico is arriving late to deepwater exploration and shale  gas. Regarding gas, I do not believe that is the case, not only because it is a source of energy but also because of the goods generated from hydrocarbons, the value chain, wealth, and generation of jobs that Mexico needs in the long term.