Energy & Mining

Opening Up


Mexico bets on PPPs and diversification for its downstream operations.

Mexico’s national oil company (NOC) Pemex is including the private sector in its operations and utilizing oil production as a funding source for national economic diversification incentives. This has led to a decrease in downstream production due to low or no investment, and has, in turn, taken a massive toll on Mexico’s existing downstream infrastructure.
Pemex has rejected the proposed investment of two new oil refineries in the country and has decreased its annual funding for existing refineries in its 2018 budget. The company’s approach coincides with the global trend of the past half-decade of betting on PPPs for capital-intensive investment.

Mexico has seen a reduction of 43% in its production of oil derivatives in the past three years. According to Pemex’s 2017 financial reports, the company reached a production level of 915,000bpd of oil derivatives, a significant decrease from 1.1 million in 2016. This decrease mimics their budget allocation, which was reduced by a 10% from 2016 to 2017. Pemex has confirmed that for 2018, they will take an additional 10% cut from the funding for their six existing refineries.
The news comes at a time when the global economy is slowly but surely recovering from the oil price crisis that seriously impacted the world’s economy and made countries reconsider the role of oil in economic development plans. The USD110 barrel is merely a memory of a bygone era and has led major oil producers like Mexico to restructure their industries to better cope with the adjusted reality.

In 2018, West Texas Intermediate (WTI) grade oil prices reached USD72, still too low for many large projects. In the particular case of Mexico, Pemex has called off the energetic train for the Cadereyta refinery and pulled the plug on all renovations for the Tula refinery. The case of the Tula refinery points to Pemex’s commercial structure and strategy. The company announced plans to release a tender for the private concession of the refinery. This would be the first of its kind in the country that has already partnered up with some Big Oil members for operating some of their upstream sites.

Pemex’s interest as a major NOC is to secure market share and sustain production, given they serve as Mexico’s main source of income and foreign capital. International oil companies’ (IOCs) interests, in contrast, are purely driven by profits. The rise of PPPs in Mexico fits both parties’ commercial strategies. In recent years, Mexico has struggled to maintain the Pemex cash flow needed to keep the national budget afloat. Although the prices and revenues of oil have fallen, the demand for oil has actually increased. With globalization pushing for industrialization in the emerging world and new exploration bringing about new NOCs into the game, joint investment with IOCs is key: they need volume in operations to offset for the loss of profit margins. This brought about major events such as Mexico’s 2014 energy reform that broke the 75-year sector monopoly.

It is clear that, at least for Pemex, the downstream industry is not of interest anymore. President Peña Nieto expressed in early January to the Energy Commission of the Senate that he wants the role of Pemex to be “the institution that fuels Mexico’s future economy” and has set its minimum production bar to the point where it provides Mexico’s energy demand to the best of its capabilities without representing a burden to the nation’s economy.

Mexico is sending a message that the era of oil as the main driver of the economy is coming to an end; a new period of oil as an enabler of a global energy system change is on the horizon. The country expects this move to improve the investment business climate by opening up business opportunities for private players, whilst reducing the need to invest heavily in the sector.