When Will the Opportunities in Hydrocarbons Emerge?By Alfredo Garcia Mondragón | Thu, 04/08/2021 - 13:19
Recently, the federal administration proposed to “reform” the Electricity Industry Law, seeking to return the sector to state hegemony. The reform, however, is contrary to worldwide energy trends.
Much has been said about the reality of the energy sector, with the focus on PEMEX and CFE. Among economic sectors, energy is the one that triggers the development of countries; if there is no electricity, there is no industrial development. But generating electricity continues to predominate conversations regarding the consumption of fossil fuels.
In Mexico, it has been 30 years since the electricity sector was liberalized. At that time, the oil and gas-producing sector was left out, due to ideological reasons and the lack of political weight. This resulted in the construction of various combined cycle plants, which increased gas consumption for electricity generation. The investment in natural gas production, however, was ignored.
Thus, in the mid-1990s, the Strategic Gas Project was established at PEMEX, through which it was possible to revitalize production in the Burgos and the Veracruz basins, but this effort was insufficient. The country’s gas needs continued to grow and Mexico began to increase its imports of natural gas to meet its supply needs.
This is how the growth of gas consumption for electricity and industrial generation became a race, and PEMEX is increasingly falling short in gas production. Regarding associated gas, the source of supply for the plants, petrochemicals increasingly produce high nitrogen content and the importance of petrochemical production in Mexico has been lost.
During the pandemic, the drop in gasoline and diesel consumption demonstrated the first effects of the energy transition. It also calls into question the investment in refining. While many oil companies have had their worst oil revenues in the last 25 years, others started closing and or selling their refineries. What we are seeing is a chain reaction.
In the last five years, the investment boom in renewable energies such as solar, wind and waste-to-energy began. While the world is experiencing a boom in these investments, the oil and gas chain is making the balance of its decisions to continue investing in mainly deepwater and shale gas projects, which require massive investments and exceptionally long investment cycles.
The expropriation of the oil industry in Mexico in 1938 was imitated by many countries in the world, such as Libya, Nigeria, Ecuador, Venezuela and Angola. But the nationalist idea of oil is coming to an end. It is estimated that in the next 30-40 years, energy in the world will be renewable, which is constant, abundant and increasingly cheap.
Hence, the question arises for President Andrés Manuel López Obrador: Is the policy of investing large amounts of the federal budget into the Dos Bocas refinery appropriate? Although it will be a modern refinery, for it to work at 100 percent will eat into part of the diet that corresponds to the other five refineries. These will then fall into programmed cuts due to lack of raw materials unless they decide to import crude oil to supplement their diet.
The energy transition still requires the supply of natural gas, so there is an opportunity for a third stage of natural gas exploitation in Burgos and Veracruz and to take advantage of the associated gas from the offshore fields, but this requires at least an investment of no less than US$10 billion, money that Mexico does not have. PEMEX, with a debt of more than US$100 billion, seems to have reached its debt limit.
What’s more, PEMEX projects were financed through project finance models called Pidiregas. These financing models assume that the projects are self-financing with the production generated through the investments. There also is no explanation as to why the Treasury was dedicated to paying interest and not the principal on the debt.
The oil nationalism that López Obrador has introduced to Mexico loses sight of the ability to take advantage of private investments, which bring necessary capital and supply to the Mexican market, with the gas that Mexico needs to realize its development potential in the next 30-40 years of the energy transition.
With the cancellation of the oil rounds and the creation of an adverse scenario for legal certainty, comes the distrust of international investors. No matter how much one wants to see the oil sector in one way, from the government to citizens, Mexico does not have the companies that can provide the know-how, technology and investment amounts necessary to detonate deepwater and shale gas production.
Mexico, through its governments, must understand that the idea of sovereignty is not to have a state monopoly at any price.
It would be opportune for Mexico to accelerate the rounds to begin reducing dependence on imported gas and consequently to create the jobs that Mexico so needs.