By Robbie Whelan
MEXICO CITY -- The front-runner in July's presidential election wants to upend Mexico's newly-opened energy sector.
Andres Manuel López Obrador, a leftist nationalist with a comfortable lead in the polls, has rattled investors by calling for a temporary freeze in new private investment in exploration and production of oil. But it is his plan to shift federal spending to refining from exploration and production that critics say could have the most dramatic consequences for the Mexican economy and U.S. refineries along the U.S. Gulf Coast.
Eventually, Mr. López Obrador wants to completely halt exports of crude oil -- a critical source of revenue for the country -- because Mexico has become too dependent on the U.S. for refined gasoline, said Rocio Nahle, a congresswoman from his Morena party whom the candidate has named as his Secretary of Energy should he win.
"We're going to change the energy policy of this country, that's a fact, " Ms. Nahle said in an interview with The Wall Street Journal.
Energy analysts, rival politicians and former employees of state oil company Petróleos Mexicanos, or Pemex, say that Mr. López Obrador's plan would throw Mexico's energy-dependent economy back to the days of the early 1970s, before key oil discoveries were made and when the country relied on a closed economy in key industries such as oil, steel and agriculture.
The refinery plan could also have broad fiscal consequences for Mexico, leading to a potential budget shortfall. For the U.S., which buys half of México's crude exports, it could force refineries along the U.S. Gulf Coast that rely on Mexican crude to look elsewhere.
Mr. López Obrador has a long history of opposing the opening of Mexico's oil industry to foreign and private investment. In 2013, he led thousands of street marchers in protests against President Enrique Peña Nieto's plan to allow private investment in exploration and production, calling the idea of sharing the benefits of Mexican natural resources with foreign oil companies an affront to national sovereignty.
"It's common sense. Why don't we add value to our resources? Why do we have to buy gasoline?" Mr. López Obrador said on Friday. "By the middle of the next presidential term, we're going to stop buying gasoline, we're going to produce gasoline in Mexico."
Mr. López Obrador's top rivals favor keeping Mexico's energy sector open and focused on exports.
For the past few decades, successive Mexican governments have invested their limited dollars in exploring and producing crude oil for export, with far less attention given to downstream activities like refining. The reason is simple: the payoff from finding crude oil is large, whereas refining has very small margins and requires massive investment.
Gasoline imports have surged in the last decade as demand for auto fuel grows and as Mexico's six existing refineries have become less productive, dogged by inefficiencies, unplanned shutdowns and damage caused by natural disasters.
Mexico imported 571,000 barrels of gasoline a day in 2017, an average rate that was 59% higher than in 2013. Meanwhile, 2017 was the worst year for domestic gasoline production in over a decade, with just 257,000 barrels refined a day, down 44% from a decade earlier. Pemex's six refineries were operating at an average capacity of 48% last year, the lowest level on record.
Mr. López Obrador wants to build one or two new refineries, which would each cost about $6 billion and take approximately three years to construct, said Ms. Nahle, a petroleum engineer who worked at Pemex petrochemical plants in the 1980s. In addition, she said he wants to upgrade all six existing Mexican refineries, getting them running at between 70% and 95% capacity within nine months.
"If you've got money to spend on either refining or exploration and production, why wouldn't you spend it on E&P, where you'll make a lot more money?" said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars.
"Clearly the calculus is a political one," Mr. Wood said. "They want shiny new plants on shore that the president can stand in front of and say, 'Look, we made this.'"
The López Obrador plan would likely take away resources needed to protect Mexico's declining production of crude oil for export.
Pemex contributes nearly 20% of Mexico's federal budget. Mexico exported $20 billion dollars of crude oil last year, at an average of 1.17 million barrels a day, about half of it to the U.S. Crude export volumes have fallen by more than 30% in the last decade as several key Mexican oil fields have become tapped out.
To try to offset that decline, the country opened its exploration and production to private investment in 2013. Since then, the country has held eight auctions and awarded 91 exploration and production contracts. But many of these will take years or even decades to yield significant amounts of crude.
The cost of upgrading and building new refineries is likely to be far higher than what the campaign estimates, analysts say. The price tag for a new refinery, at about $10-$12 billion, is likely to be much higher than López Obrador campaign is projecting, according to Gonzalo Monroy, an independent energy consultant in Mexico City.
Mexico last built a new refinery, its massive Salina Cruz facility in Oaxaca state, in 1980. Recent upgrades at the Pemex's Minatitlan and Cadereyta refineries were plagued by cost overruns.
One obstacle to improving productivity at the refineries is Pemex's 130,000 unionized workers, whose efficiency badly trails international standards.
"You'd have to carry out major reforms and dramatically modify existing labor practices, or else it's not worth it" to upgrade Mexico's refineries, said Adrián Lajous, who headed Pemex from 1995 to 1999.
Ultimately, the plan makes sense if Mexico can produce gasoline more efficiently than what it costs bringing in gasoline from Texas.
"You are basically asking Mexico .... to compete with the world's most efficient oil refiners, which are the ones on the U.S. Gulf Coast," said Pablo Medina, an analyst with the Houston firm Welligence. "Just for the sake of being energy independent, I'm not sure the price is right."
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