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Mexico’s Oil Reformation Is Underway

Refinery

Mexico’s new president Andres Manuel Lopez Obrador, casually abbreviated as AMLO, has now been in office for a month. Despite running a powerful campaign, styling himself as the only candidate who, among other things, could rebuild Mexico’s oil sector so that it stops generating losses, bounces back production-wise and repositions itself as an exciting outlet for investors. AMLO even promised to follow the footsteps of Lázaro Cardenas (who nationalized Mexico’s oil industry in 1938), although he carefully selected his wording on that point so as not to scare off oil majors with a stake in the game. A month into his presidency, it seems Lopez Obrador bring a new spirit to the complex Mexican political and economic system, but is unlikely to become the revolutionary figure that many of his supporters believe him to be.

The oil reform of President Lopez Obrador is multi-pronged and covers almost all aspects of Mexico’s petroleum industry. It aims to refurbish the downstream segment by more than doubling refinery utilization rates, increasing fuel self-sufficiency and building a new state-of-the-art refinery, whilst ramping up upstream activities with an upgraded CAPEX budget and new projects coming onstream within three years. This reform comes following 14 consecutive years of falling production and a refinery throughput decline of some 40 percent in just 10 years.

(Click to enlarge)

Source: BP Statistical Review of World Energy 2018.

Despite the state of the industry, Lopez Obrador has a fair chance of doing better than his predecessor Enrique Peña Nieto who opened up Mexico’s oil to foreign investment, yet oversaw a 25 percent drop in overall crude output. Fighting oil theft (by the so called huachicoleros) is a good way to start, with annual losses from these thefts reportedly amounting to $3 billion. AMLO has begin to fight this by ordering the army to take over the supervision of Mexico’s refineries and terminals. Although it does strike an eerily similar chord to what has been going in Venezuela under President Maduro, it might not be all that bad. If AMLO manages to eke out institutional theft (allegedly 80 percent of all theft cases), it could substantially boost his image both internally and externally.

AMLO’s plans to refurbish the Mexican downstream sector are definitely timely, but appear to be overly ambitious. Pemex’s refinery capacity utilization…




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