Economy

PEMEX And The President: AMLO Must Take On Mexico's Oil Giant

If the López Obrador government really wants to restore the state oil firm's status as a cash cow, it needs to stop treating it like a sacred cow.

Mexico's PEMEX must adjust its finances to fit its productive reality
Mexico's PEMEX must adjust its finances to fit its productive reality
Luis Rubio

-Analysis-

MEXICO CITY — Whether Mexico's oil resources are a blessing or, as the poet López Velarde opined, a curse, is an open question. What is clear is that PEMEX, our national oil company, is a dead weight that is sinking public finances and with them, the country.

Indeed, there's a distinction to be made — between the resource, on the one hand, and a state firm that (increasingly) monopolizes oil exploitation — that's crucial when it comes to any overall debate on the country's energy sector. And that's the because the resource itself can be exploited in a clear, efficient way that generates wealth, but only if PEMEX is willing an able to do so. Instead, the state firm has become an obstacle to the country's development and a debt burden threatening the economy.

The paradox is that PEMEX's predicament is proving particularly harmful to President Andrés Manuel López Obrador, who was hoping to use it as an engine of economic growth, as it was in the 1970s. But rather than supply cash, the company is gobbling up treasury money at the expense of health care services, government operations and even universities.

All of that leads to a basic question: Does the president know he is staring into a bottomless pit — or barrel — as the country is threatened with a rating downgrade, which is key to ensuring the stability of public finances?

It is clear PEMEX has become the world's most indebted oil firm. Its production has been in decline over decades, and its operations are highly inefficient. Part of its vast debt consists of money misspent on gasoline subsidies, transfers to the government and bad investments, not to mention its endemic corruption.

PEMEX's predicament is proving particularly harmful to President Andrés Manuel López Obrador.

Regarding production, as sector specialists tell me, the firm's great sin, or bad luck, was finding the Cantarell field, which was so abundant it prevented PEMEX from developing other possibilities or training its staff for less productive operations. While this field lasted and prices were high, nobody worried too much about the firm's inefficiency or quirky accounts. When it cost $20 to produce a barrel that sold for $100, with a nominal profit, in other words, of $80, the additional $2-3 lost to malpractice and corruption was of little concern.

Presently the government's elevated debts and high interest rates leave it with very little fiscal room for funding its basic functions and financing cherished projects. This was not the case in 2009 when the federal debt was less than 30% of GDP and hydrocarbon resources considerably exceeded today's. Nor is this like the 1970s, when oil reserves kept growing like foam, propelling the rest of the economy with unusual demand for steel, tubes, cement or roads.

A PEMEX oil refinery — Photo: El Universal/ZUMA

Critics of the energy reforms undertaken by the last administration, under Enrique Peña Nieto, seem to view them as entirely motivated by ideology. In fact, the Peña Nieto government realized the problems PEMEX was in and sought to develop the oil industry beyond the state oil firm. The goal was to generate a larger flow of cash into the economy in general.

In other words, its objections were exactly the same as those of President López Obrador, only it didn't want the country to depend on a single, inefficient firm but rather on the most advanced technology, and without running excessive risks to develop oil fields. Also, the fact that PEMEX is a partner to practically every private project that emerged from the reforms shows it was actually being projected, not sidelined.

The key point for Mexico is that resources be used in as efficient and profitable a manner as possible, something that is certainly not the case right now. What matters isn't who exploits those resources but the benefits they generate. And yet, this government — going against its own objectives and constitutional stipulations— is sacrificing essential programs and basic functions to keep the firm afloat. PEMEX needs its operations rationalized, not subsidies to support its inefficiency.

Ideally, a real rescue of the state firm would involve a reconfiguration of its refineries, adjustments to its labor costs and a renegotiation of all obligations to control its real money flows. Instead of sucking up billions more dollars the state can barely afford, PEMEX must adjust its finances to fit its productive reality. After that, it must renegotiate its debts with banks and bond holders, and certainly, part of the renegotiation must include the taxes it must pay the state in various forms.

What matters isn't who exploits those resources but the benefits they generate.

Simply put, PEMEX must become a firm that exploits oil resources, rather than a source of cash for the government or, as is now the case, of debt. A real rescue would be to streamline it. What's more, now is the perfect time to do so because recession is making a review of its accounts both mandatory, and possible. If the state doesn't follow through, the markets will — at an irreparable cost.

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Green

In Argentina, A Visit To World's Highest Solar Energy Park

With loans and solar panels from China, the massive solar park has been opened a year and is already powering the surrounding areas. Now the Chinese supplier is pushing for an expansion.

960,000 solar panels have been installed at the Cauchari park

Silvia Naishtat

CAUCHARI — Driving across the border with Chile into the northwest Argentine department of Susques, you may spot what looks like a black mass in the distance. Arriving at a 4,000-meter altitude in the municipality of Cauchari, what comes into view instead is an assembly of 960,000 solar panels. It is the world's highest photovoltaic (PV) park, which is also the second biggest solar energy facility in Latin America, after Mexico's Aguascalientes plant.

Spread over 800 hectares in an arid landscape, the Cauchari park has been operating for a year, and has so far turned sunshine into 315 megawatts of electricity, enough to power the local provincial capital of Jujuy through the national grid.


It has also generated some $50 million for the province, which Governor Gerardo Morales has allocated to building 239 schools.

Abundant sunshine, low temperatures

The physicist Martín Albornoz says Cauchari, which means "link to the sun," is exposed to the best solar radiation anywhere. The area has 260 days of sunshine, with no smog and relatively low temperatures, which helps keep the panels in optimal conditions.

Its construction began with a loan of more than $331 million from China's Eximbank, which allowed the purchase of panels made in Shanghai. They arrived in Buenos Aires in 2,500 containers and were later trucked a considerable distance to the site in Cauchari . This was a titanic project that required 1,200 builders and 10-ton cranes, but will save some 780,000 tons of CO2 emissions a year.

It is now run by 60 technicians. Its panels, with a 25-year guarantee, follow the sun's path and are cleaned twice a year. The plant is expected to have a service life of 40 years. Its choice of location was based on power lines traced in the 1990s to export power to Chile, now fed by the park.

Chinese engineers working in an office at the Cauchari park

Xinhua/ZUMA

Chinese want to expand

The plant belongs to the public-sector firm Jemse (Jujuy Energía y Minería), created in 2011 by the province's then governor Eduardo Fellner. Jemse's president, Felipe Albornoz, says that once Chinese credits are repaid in 20 years, Cauchari will earn the province $600 million.

The Argentine Energy ministry must now decide on the park's proposed expansion. The Chinese would pay in $200 million, which will help install 400,000 additional panels and generate enough power for the entire province of Jujuy.

The park's CEO, Guillermo Hoerth, observes that state policies are key to turning Jujuy into a green province. "We must change the production model. The world is rapidly cutting fossil fuel emissions. This is a great opportunity," Hoerth says.

The province's energy chief, Mario Pizarro, says in turn that Susques and three other provincial districts are already self-sufficient with clean energy, and three other districts would soon follow.

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