The Clock is Ticking

President Lopez Obrador cruised to an overwhelming victory last year on one specific message: he would stamp out bribery and corruption and revive Mexico’s oil and gas industry. But, the clock is ticking on President Lopez Obrador setting a proper course for achieving his nationalistic revival campaign. Six years in office can pass quickly and without early milestone achievements and momentum, leaders may fail to create a legacy either via legislative actions or construction of physical assets such as the Dos Bocas refinery. Let’s check in on where AMLO stands on making his mark. Get the latest right here.

 

Real Progress or Just a Shell Game?

A pillar of the campaign and first 100 days in office was the promise to halt the rampant theft of petroleum products. General estimates confirm that Pemex lost north of $1.5 billion of refined products in 2018 alone. In addition to the lost value of the products, there are considerable costs required to repair the damage caused by illegal pipeline taps and the ongoing security required to prevent even more theft.

With the national budget counting on recouping the value of the stolen product, President Lopez Obrador has stuck to his word and taken sometimes dramatic actions to prevent theft. Early results are in and the reporting looks to be encouraging. According to Pemex reports, fuel theft has averaged “only” 15,000 barrels a day so far in 2019. That is down considerably from a Pemex reported figure of 56,000 barrels per day in 2018. If true, and maintainable, those would be impressive results. But is that the whole story?

Increased security and oversight are good first steps, but a couple of months of data can also be very misleading. Consider for a moment that pipelines were shut down early this year and two extremely damaging explosions occurred. Maybe the volumes just weren’t there to steal.

The long-term success for AMLO will depend on flushing the pervasive corruption out of the system. Until Pemex insiders cease cooperating with criminals on how, when, and where product is available, product will continue to fall out of the system.

 

Battle Lines Have Been Drawn

One ongoing struggle in the sector has been the President versus the inherited leadership of the regulators put in place by the prior administration to oversee the energy reform. One of the President’s early key appointments was the announcement of Rocio Nahle as Energy Minister. One of her first actions was to ask for the resignation of the head of the National Hydrocarbon Commission (CNH), Juan Carlos Zepeda. Zepeda was one of the architects of the landmark energy reform alongside former President Peña Nieto.

Following the removal of Juan Carlos Zepeda, AMLO cast his focus on the leadership of the Energy Regulatory Commission (CRE). AMLO made public allegations and launched investigations against the head of CRE, Guillermo Garcia Alcocer, including conflicts of interest and insinuations of connections to money laundering. As a vocal critic of the President’s vision for the energy sector, Alcocer is clearly in harm’s way. Though he has not removed Alcocer from his position, AMLO used political capital in his war by slashing the budget for the CRE by 30 percent leading to considerable layoffs of senior positions.

The latest chapter in what has become a heated battle was marked by the Senate rejecting all 11 candidates proposed by AMLO to fill the vacant positions as commissioners of the CRE. The CRE has been unable to hold sessions and vote on proceedings following the rapid resignation of four commissioners.

It appears those that hold opposing views to the President need to proceed with caution. The reality is that AMLO’s actions are the equivalent of pulling the emergency brake on the liberalization of the energy market. The auctions of drilling blocks and access to Pemex-owned infrastructure cannot happen without the regulatory entities. And without them, permits and approvals that are required for the construction of new pipelines, tanks, terminals and rail projects, will not be granted. So, while AMLO may not be able to reverse legislation, he can use political leverage to achieve the same results of inhibiting progress in favor of maintaining the strength and dominance of Pemex in the marketplace.

 

New Reform or Same Ol’ Song and Dance?

Progress does continue on one significant front. The administration recently announced the four candidates Mexico is permitting to bid on the construction of the Dos Bocas refinery—which is a centerpiece of President Lopez Obrador’s energy strategy. Recent reports indicate four firms are contending to design and construct the first new refinery in Mexico: KBR, TechnipFMC, a group comprised of WorleyParsons and Jacobs, and a team of Bechtel and Techint. A collection of prestigious and globally respected firms, all are logical partners for Mexico in a project of this size and technical requirements.

With each step in the process the potential to bring this project to reality will shed more light on AMLO and the new administration’s ability to change the course of how business is conducted in Mexico.

Will the proposals be made public? Will the government run a truly fair and open process? Will the contract be awarded to the best economic and strategic partner? Or will the demons of the past creep their way back into the process?

In the past, contracts and transactions like this have been ripe for corrupt parties up and down the line. When multi-billion-dollar projects are on the table, it is easy to let fractional values influence decision-making if that fractional value results personal gain.

Making headway out in the field on loss of products is important but stopping theft from those you know is an easier task than preventing theft and corruption from those you think are on your team. And in the long run, establishing Pemex as a corporation that imbues integrity and functions on a level without question regarding negotiations and the execution of contracts will be a legacy for AMLO well beyond a shiny new refinery.

 

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Best,

Chad Smith
Senior Vice President of Terminal Services