“The purpose of an energy bill is to have more energy at lower prices and cleaner energy. You can see what is happening in the US with the shale gas revolution, and the reduction in the use of coal and fuel oil: electricity prices have come down. I think that sets the precedent for the benefits of more energy, cleaner energy and more affordable energy, and it brings in investment from other parts of the world.”
Emilio Lozoya, CEO of Pemex, speaking to the Wall Street Journal. To watch the video, click here.
This week, the new CEO of Pemex, Emilio Lozoya, spoke to the Wall Street Journal about his vision for the future of Pemex and the Mexican energy sector. One of the more interesting parts of this conversation was regarding his views on the price of energy in Mexico.
Pemex has always had issues with its relationship to the state: the company operates at a loss (in 2011 this was a $6.5 billion loss) because of its enormous tax burden, which accounts for between a quarter and a third of the country’s Federal budget each year.
When Pemex was created, its mandate was to provide Mexico with oil and gas at the lowest possible prices: it was tasked with managing domestic demand for petroleum products only. However, in the 1970s, during some of the best times Pemex had ever seen, the mandate of the company started to change, and in 1974, when the company doubled its prices at Mexican pumps, it became clear that the vision for the NOC had shifted – no longer was it about providing the Mexican people with cheap petroleum, but rather about creating a vehicle that could drive the country’s economic growth.
The latest rhetoric from all sides seems to be that the future of Mexico is cheaper power for all. This was clear in the interview with Lozoya, who spoke at length about the need to increase gas production – a move that will be good for Mexico (that has the potential to eventually export gas production from its shale gas reserves near the US border), but not a wise move from the perspective of an oil company looking to maximize its profits: every dollar spent on gas production could be spent on oil production, and with prices at $3.15 for a million BTUs of gas versus $109.06 per barrel of oil, and it becomes clear where Pemex should be focusing its investments from the point of view of pure profit.
Last week, when Mexico Oil & Gas Review interviewed Senator David Penchyna Grub, President of the Senate Energy Commission, he was also keen to discuss this vision of the future, saying that “we also have a new paradigm in the energy landscape, which is shale gas. If Mexico doesn’t understand the opportunity it has in shale gas to achieve energy independence in natural gas, it will have lost a historic chance to capitalize its geographic convenient location and the abundance of energy resources coming from it.” He then went on to talk about his vision of a meaningful energy reform, which “would impact the power generation industry, and that would impact gas and the costs of alternative energy. The objective is to make the whole sector a competitive one. Mexico has always tried to build an energy reform based only in Pemex, and that’s why we have failed.”
Whether or not it is sensible to be talking about lowering the cost of power, one thing is for certain: if the government wants to build popular consensus around an energy reform, this is one of the best ways to do it. However, talk of moving Pemex away from the idea that its prime directive must be to maximise profit is potentially dangerous. Although the thought of making an annual profit must be a fairly alien concept to Pemex management, if the company abandons all intentions of being run as a business, and just becomes an instrument to drive public policy, then the problems that face the NOC such as its deepwater exploration and annual production challenges will likely never be solved. Additionally, if the country cannot move away from its reliance on Pemex’s profits to fill up the Federal coffers, then the move may be even more misguided.