Fluvio Ruíz Alarcón
Advisor
Senate of the Republic
/
Expert Contributor

The Evolution of the Oil Discourse

By Francisco Ruiz | Thu, 06/23/2022 - 15:00

To export or not to export crude oil? That seems to be the dilemma Mexico’s federal government has been facing for months. Regardless if Mexico ceases to export oil, the approach itself represents a change in the government's stance in relation to oil matters that it has maintained since it took office.

Mexico’s oil production has been falling since 2004, when it peaked at 3.4 million barrels a day. Currently, the total production of the country, which represents the sum of PEMEX and private operators, barely exceeds 1.7 million barrels per day. PEMEX is responsible for around 98 percent of that volume.

In 2018, the government and PEMEX announced that thanks to the shift in oil policy that would entail strong support for the state-owned company, at the end of the López Obrador administration in 2024, crude oil production would reach 2.7 million daily barrels. Subsequently, the estimated production projection figure for 2024 was revised downward to 2.4MMbd according to PEMEX´s first Business Plan, and later, to 2.2MMbd and finally to 2 million barrels per day during the company’s presentation on Dec. 28, 2021.

As a consequence, the official discourse has changed. Initially, a certain voluntarism prevailed, based on the extractivist logic that has existed in Mexico’s oil policy since José López Portillo’s presidency. Expectations were later nuanced, within the same extractivist discourse (remember, Mexico was reluctant to cut its oil production during the OPEC+ meeting in April 2020). Subsequently, there was a turning point and the government insisted that to combat climate change, production would be limited to 2.2 million barrels per day. Finally, once it was announced that reduction would be 2MMbd, the decision was taken to focus on the supply of the national refining system.

Last year, PEMEX’s production was estimated at an average of 1.8 million barrels per day. Nevertheless, the NOC only produced 1.666MMbd. At the beginning of April, the Ministry of Finance reported that it was adjusting its 2022 production goal, from 1.826 to 1.820 million barrels per day; and total exports from 979,000 to 879,000 barrels per day. PEMEX’s March production closed at 1.676 million barrels of oil per day, while its partners produced 20,000 barrels per day. Exports stood at 905,000 barrels per day.

However, since the 2005 reform of PEMEX´s fiscal regime, the Ministry of Finance does not consider it of great relevance that PEMEX’s Exploration and Production exports the crude it extracts or sells it to PEMEX Industrial Transformation, since the payment of the Right of Shared Profit, considered the main tool for transferring oil income to public coffers, is carried out based on the volume of extracted oil, regardless of its destination.

It is one thing to stop exporting because the crude oil processing capacity of the National Refining System (including Deer Park, Dos Bocas and the Cangrejera petrochemical refinery project), absorbed all of Pemex's possible production. It is another thing to do it based on the decision to reduce such production to only satisfy its demand, under conditions of a partial use of the installed capacity of the SNR.

Today, the National Refining System, including Deer Park, Dos Bocas and the Cangrejera petrochemical refinery project, constitute all of PEMEX´s possible oil production.

For example, if PEMEX and the federal government were to reduce production by 200,000 barrels per day and, based on the estimates of the General Economic Policy Pre-Criteria, sent by the Ministry of Finance to Congress on April 7 (considered US$92.9 as an average price for the Mexican Export Mix), it is estimated the country would lose revenues of around US$6.8 billion.

Considering this context, the government’s objective that gasoline prices do not increase in real terms, in a persistent scenario of high oil prices, could become unaffordable due to oil surpluses. As the government has reiterated, the excess income derived from a price of crude, which is much higher than that estimated to prepare the Expenditure Budget of the Federation, is used to finance the subsidies granted to the consumption of automotive fuels. Beyond the questionable nature of the partial privatization of oil income (which belongs to all Mexicans because it is generated from a resource owned by the nation), in favor of a privileged group, the truth is that the numbers don´t add up anymore.

In April 2021, the Ministry of Finance estimated extraordinary oil revenues for 2022 totaling MX$538.261billions. From this sum, MX$328.751 billions would go to public coffers and MX$209.510 billions to PEMEX. However, the cost of fuel subsidies that some analysts have estimated exceeds MX$580.000 billions for the same period. The Ministry of Finance has reported they could total MX$400.000 billions. An estimate twice the cost of building the Dos Bocas refinery.

PEMEX could lose much from this price policy, which could see it end up supplying at subsidized prices even in the purchase and sale differential, despite having eliminated the IEPS tax collection and decreed additional incentives for vendors in the ISR, or the VAT. The resulting price increase would significantly exceed the accumulated inflation since December 2018, especially in the event of a prolonged war between Russia and Ukraine, which would mean the maintenance of high oil prices and the products derived from it.

Having said this, it seems unlikely that there will be a significant change in the government’s oil policy for the remainder of the present administration. Beyond the official discourse and in the face of the government's refusal to carry out the Tax Reform that Mexico has postponed for half a century, there are no material, economic, industrial, commercial and much less, fiscal conditions to reduce the country´s structural dependence on oil.

Therefore, lowering crude oil exports and extracting only the necessary volume so that PEMEX can refine it at its facilities can be considered the central element of a discourse aimed at covering the evident reality, which fails to meet production goals.

At a symbolic and political level, this reflects a great attachment to the era called “Stabilizing the Development of Mexico,” a period when the country only produced crude oil to satisfy its internal market. However, we insist that in the absence of a deep and progressive tax reform, in the short term there will be no alternative source of resources for the country.

Photo by:   Fluvio Ruíz Alarcón