Why can’t oil-rich Mexico succeed in the oil business?

An article published in Oil & Gas Journal on June 22, 1981, had the playful title “Eclipse of Mexican Light.” The title referred to the decline of Mexico’s light-grade crude oil, known as “Isthmus,” and the parallel rise of the heavy grade “Maya” crude oil.

The frenzy of activity during between 1977 and 1981 is remembered in Mexico as the years of the oil boom. Mexico was one of the hot spots around the world where oil companies were eager to find new sources of non-OPEC supply. (The North Sea and the Alaskan North Slope were other hot spots.)

Mexico would not regain its 1921 place as the second-ranked crude oil exporter (after the United States), but crude exports by Mexico’s state oil company Pemex in 1981 to U.S. refineries contributed to the oversupply in the market. In June that year, sensing that the market had turned, Pemex chief executive Jorge Díaz Serrano ordered a price reduction of $2 for both Maya- and Isthmus-grade oils

What happened next tells us about what’s wrong with Mexico’s oil industry today: Mexico’s president intervened. Pemex CEO Díaz Serrano was sacked and the discount was rescinded. In the next 60 days, Pemex would lose customers for 1 million daily barrels.

Furious to defend the rightful value of its oil exports, the Mexican government threatened a French railcar company with the cancellation of its contract unless the French national oil company, now called TotalEnergies, respected Mexico’s prices.

“It was the decision to rescind the discounts that plunged Mexico into its ‘Lost Decade’ of growth in the 1980s,” Díaz Serrano told me years later at lunch at his residence in Mexico City.

Move forward 18 years: Mexico’s president, Andrés Manuel López Obrador (AMLO), has committed Pemex to eliminate crude exports by 2024. The president is trying to make a virtue out of a half-century of failed oil policy.

In 2004, Pemex exported 1.9 million daily barrels of heavy crude oil — most of it from a single, supergiant field, Cantarell, which was believed to have 30 billion barrels of recoverable hydrocarbons. By 2020, however, Pemex’s oil exports had fallen to 1.1 million, down almost 40% in just 16 years.

What was wrong with Pemex, with Mexico?

Of the many ways to explore this question, the path that I find most promising leads back to the framing of Article 27 of Mexico’s Constitution of 1917. The framers, in the heat of a populist revolution, made a historic intellectual blunder: they mistook ownership for sovereignty.

What should have been discussions of regulation became discussions of ownership. Mexico — then and now — does not understand that granting a license to an oil company is not about conferring ownership of hydrocarbons in the ground; it’s about granting commercial right to future production (if any).

In 1938, Mexico’s last military president expropriated the assets of the foreign oil companies, ignorant of the deep truth that the exploration side of the oil business is a global communit, a community that Mexico had rashly left.

In 1959, Mexico’s Congress made a second mistake, one that would last until 2014, when the Petroleum Act that regulates Article 27 was repealed. Only Pemex could have commercial rights to oil and gas production and the retail sale of refined products. All energy prices would be state-controlled.

In 2014, the Congress established a framework for oil companies other than Pemex to be paid in cash or in kind from successful oil exploration.

What lawmakers failed to do, however, was to cut the cord of authority between the president of Mexico and the administration of Pemex. AMLO, elected in 2018 for a six-year term, seeks to restore as much of Pemex’s former monopolistic control of oil markets in Mexico as he can by regulation, intimidation and bravado.

AMLO progressively has sought to disassemble the pro-market framework of his predecessor on both the oil and power sides of the energy industry. His policies have soured investor confidence and damaged public finances.

Consider his decision to stall the development of the 6-billion-barrel Zama discovery by Houston’s Talos Energy in 2017. Production should have started two years ago, had the intimidated regulars and energy ministry adhered to global practices.

Consider the vanity project to acquire full ownership of the Deer Park refinery 25 miles east of Houston. Mexican taxpayers will borrow $500 million to buy a 98-year-old refinery that has been losing money since 2018. The refinery will become a money-losing asset of Pemex, which is technically bankrupt.

AMLO has brought about another eclipse of Mexican light.

George Baker in Houston is the publisher of Mexico Energy Intelligence, an industry newsletter. He wrote this column for The Dallas Morning News.

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