At the Wellhead: once again, an effort to try to fix Mexico’s oil industry

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Juan Jose Suarez Coppel, the director-general of Mexico‘s Pemex, has often said he wishes the state company was “more like a normal business.” It most certainly is not.

Unlike other state-controlled oil companies, such as Brazil’s Petrobras and Norway’s Statoil, Pemex is run like a government department. Its executives are hired and fired by Los Pinos, the Mexican White House.

Its budgets are imposed by Congress, such as those of the Public Health and Education departments. In fact, Pemex has its very own public health department, with some 12,000 doctors, nurses and administrators, to attend to the company’s staff and their families.

But the biggest difference of all is the state’s stranglehold on oil. Even with the extremely timid 2008 energy reform, Pemex has almost no way of releasing Mexico’s energy potential by inviting foreign companies to find and produce oil for the companies’ mutual benefit with upstream contracts that involve production sharing.

But now Suarez Coppel has launched a bid to free Pemex from these restraints. What is arguably the world’s most introverted large oil company aims to break out of its shell.

The main vehicle for the new strategy, though not the only one, is the awakening of Pemex’s near-dormant relationship with Repsol. The oil industries of both Mexico and Spain were recently electrified by the announcement of an alliance between Pemex and Spanish construction company Sacyr Vallehermosa, which set about the formation of a joint holding of 30% in Repsol. The alliance has been sharply criticized in both countries as it bids to reorganize the management of Repsol.

But whatever the motives of Sacyr Vallehermosa, a Pemex document–first circulated only internally and viewed by Platts, but last week released to the Madrid Stock Exchange–views moves via Repsol as a major element of the Mexican company’s internationalization strategy.

Also part of the strategy are plans to expand very modest sales of crude oil to China and India, to be aided by the establishment of a new Singapore office of PMI, the international trading office of Pemex. Sales to Asia will be an element of back to the future for Mexico’s commercial strategy. During the oil boom years of the 1980s, it refused to sell more than 50% of its crude to the US. Since that eminently political restriction was abolished, the proportion has increased to 85%, much more than is commercially sensible, Mexican officials say.

On upstream initiatives, the document says that, as a Repsol partner, Pemex could take part in deepwater projects in both US and Cuban waters in the Gulf of Mexico–a major departure for a company that has never drilled out of its home country.

In addition to sharing with Repsol the risks and potential rewards of deepwater drilling, such an alliance would provide valuable experience for Pemex engineers when the company itself drills in Mexico’s territorial waters in the deep Gulf. In private, senior Pemex officials say that if Repsol rejects its deepwater overture, they would find suitable alternative partners for the project.

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Pemex, meanwhile, has a severe refining shortage. Half of all Mexico’s gasoline is imported. Plans for a $10 billion refinery near Mexico City are at an early stage. Pemex has looked at acquiring a US refinery to process Mexico’s Maya heavy crude; it already has one US plant in a joint venture with Shell at Deer Park near Houston. But Pemex executives say they have not found a suitable candidate.

Now, the Pemex document says, Repsol’s refining capacity in Spain and Peru could be leveraged for crude swaps, with Mexican crude being run in Europe and South America, and foreign crude imported for processing in Mexico. One potential commercial opportunity, the document adds, would be swaps of Mexican Maya crude for use in new coking units in Spain in exchange for Russian residual fuel to supply Pemex clients in the Gulf and optimize the Pemex refinery system.

The document also points to Repsol’s sound record in research and development. Certainly Pemex urgently needs know-how to face its greatest upstream challenges in Mexico, the huge but geologically very difficult onshore Chicontepec field and the deep waters of the Gulf under Mexican jurisdiction.

The document highlights Repsol’s geographical breadth. Repsol’s key markets are in Latin America and North Africa, and its main areas of growth are Brazil and the US, which now absorb over 80% of investment.

Could the strategy work, or will it be yet another false dawn for the Mexican company? For a political animal such as Pemex, the outcome of next year’s presidential election in Mexico could hold the key.

A new government could fully back the initiative, or it could halt it dead in its tracks. For now, the debate on the oil industry has gone under the political radar amid fear and acrimony about the nation’s bloody war on drugs and the future of the umbilical cord to the unsteady US economy.–Ronald Buchanan in Mexico City

Original Article

Posted on September 27, 2011, in Mexico, Natural Gas, Oil & Gas - inland, Oil & Gas - offshore and tagged , , , , , , , , , , . Bookmark the permalink. 3 Comments.

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