Mexico City.– On a sweltering August day, Claudia Sheinbaum attended alongside her mentor, President Andrés Manuel López Obrador, the inauguration of one of the most expensive infrastructure projects in Mexico’s history: a $16 billion oil refinery.
The sprawling complex in López Obrador’s home state of Tabasco is the cornerstone of the energy strategy he will pass on to Sheinbaum, a climate scientist, when he takes office in October.
As countries around the world feverishly bet on clean energy sources, Mexico has made a colossal bet on fossil fuels, and the costs of that strategy are now coming to light.
In 2024, Mexico’s oil production fell to its lowest level in 45 years, one of the world’s biggest declines so far this century. Blackouts plagued the country after López Obrador snubbed wind farms that could help meet electricity demand. Natural gas imports for the strained grid are skyrocketing, making energy independence an increasingly distant dream.
State-controlled oil giant Pemex is now the world’s most indebted oil company after embarking on a spending spree to build projects. To avoid defaulting on its nearly $100 billion debt, the company has needed multibillion-dollar bailouts using taxpayers’ money.
The disarray in Mexico’s energy industry highlights a dilemma that will shape the fate of the country — and Sheinbaum’s presidency — for years to come. Sheinbaum, a doctor of energy engineering, has said she wants Mexico to shift toward clean energy sources. But the biggest obstacles in her path may be her mentor’s nationalistic, oil-focused energy policies and her reluctance to confront the man who helped put her in office.
“It is a source of pride to see how Mexican engineers have achieved this feat,” said Sheinbaum at the inauguration of the refinery.
She barely mentioned her own plans for an energy transition at the event. Instead, Sheinbaum expressed unconditional support for López Obrador’s oil-focused policies, calling the refinery, called Olmeca, “majestic” while criticizing previous leaders for exporting Mexico’s oil and opening up the energy industry to private investment.
But the refinery, meant to boost Mexico’s energy self-sufficiency by turning the country’s crude into gasoline rather than relying on U.S. refineries, is not yet fully operational, according to the International Energy Agency. Plagued by delays and cost overruns, López Obrador had already inaugurated the project in 2022, when it was supposed to start operating in 2023.
In total, the Olmeca refinery doubled its cost from its initial budget of $8 billion, increasing financial pressure on Pemex. The company owes its financial creditors nearly $100 billion, and billions more to service providers who help it produce oil. Delays in paying these companies have led some of them to stop working for Pemex this year, which, along with low investment in exploration, has contributed to the decline in production.
“In a word, it’s unsustainable,” said Adriana Eraso, a corporate analyst for Latin America at Fitch Ratings, of Pemex’s strain under its debt load.
Neither Sheinbaum nor López Obrador responded to requests for comment. Pemex management did not respond either.
During the election campaign, Sheinbaum hinted at her energy plans before winning a landslide victory in June. These include the construction of solar plants, the exploitation of lithium used in electric vehicle batteries by Pemex, and the construction of charging infrastructure for electric vehicles.
Sheinbaum has also proposed a cap on Pemex’s oil production, a change of course that would entail ending one of the founding myths of modern Mexico, dating back to the nationalization of its oil resources in 1938: that Mexico is an oil power, with oil at the heart of the economy.
“When I talk to people in my social circle, they tend to believe that Mexico is still a major oil-producing country,” said Adrian Duhalt, an energy expert at Rice University, citing family and friends who work at Pemex or have retired. “That’s no longer the case when you look at the numbers.”
In the early decades of the 20th century, Mexico was the world’s largest oil exporter. But the country’s crude production has plummeted from 3.2 million barrels a day at the start of this century to about 1.5 million, largely reflecting scant investment in exploration. Although Mexico continues to export oil, it must import everything from natural gas and diesel fuel to jet fuel.
As a result, Mexico’s weight in global energy markets has declined as other countries in the Americas — the United States, Guyana and Brazil — have gained prominence. Today, Mexico’s crude oil production is dwarfed by that of the state of New Mexico, which alone produces two million barrels a day, with a population one-sixtieth that of Mexico.
And yet students in schools continue to learn about oil nationalization in textbooks. Monuments celebrate state control of the oil industry, and polls show widespread resistance to any hint of privatization of Pemex. The national holiday on March 18 commemorates the day when, in 1938, a leftist president took control of foreign-owned oil assets.
Upon taking office in late 2018, López Obrador skillfully pushed oil nationalism by branding the previous government’s attempts to open the energy industry to significant foreign investment as sellouts.
Prioritising fossil fuels, he publicly mocked wind turbines after his government cancelled tenders for solar projects. His supporters point to political reasons for betting so heavily on oil.
Octavio Romero, CEO of Pemex, says Mexico had to undertake costly refinery projects for national security reasons because of the country’s dependence on refined fuel imports from the United States.
“What happens if, for some reason, political or due to a natural disaster, the access points – mainly ports – through which imported gasoline arrives are closed?” Romero said in April.
Yet the costs of stabilising Pemex are mounting. In total, Mexican authorities have granted Pemex a staggering $70 billion in aid in the form of capital injections and tax breaks since 2019, reflecting how the company has gone from providing the bulk of government revenue to requiring repeated bailouts.
Pemex, for its part, remains known for retaining privileges such as its own clubs, hospitals and schools. Some executives enjoy benefits such as enviable pensions and tuition reimbursement at private universities for their children.
Some argue that the government should withdraw its support for Pemex and let it default, arguing that for now the country’s relatively resilient economy could absorb the aftershocks.
Damian Fraser, former Mexico director of Swiss banking giant UBS, said that if authorities did not act now, a Pemex default later could unleash economic chaos by raising borrowing costs for a constellation of companies in a country that has eclipsed China as the United States’ largest trading partner.
“If there was ever a time to let bondholders take a hit on Pemex, this might be it,” said Fraser, who now runs Miranda Partners, a consulting firm that advises companies on doing business in Mexico. “The government is primarily bailing out oil workers and Wall Street at the expense of expanding Mexico’s social programs.”
But for Sheinbaum — or any Mexican leader — withdrawing support for Pemex could be extremely unpopular. So far, she has made clear that she has no intention of letting Pemex default, but rather intends to refinance the debt in the hope of freeing up resources to direct toward clean energy sources.
Sheinbaum laid out some of her plans on March 18, the 86th anniversary of Mexico’s oil expropriation, presenting them as a way to bolster Pemex, keep imported energy to a minimum and prevent energy prices from rising beyond inflation.
He said he would limit Pemex’s oil output to 1.8 million barrels a day, not far from what it produces now, as a way to decouple energy consumption from economic growth by focusing on clean energy and improving energy efficiency.
“The growth in demand must be absorbed by renewable energy sources,” said Sheinbaum.
Details remain scant, however, as to how he will execute the change, especially at a time when his financial room for maneuver will be limited. Another legacy of López Obrador will be a budget deficit close to 6 percent of gross domestic product, the largest in 24 years. Pemex’s debt alone accounts for about an additional 6 percent of GDP.
The resource nationalism that permeates Mexican politics also raises questions about how far Sheinbaum can go in a country where oil remains central to national identity.
“People can’t mobilize around lithium like they can around oil,” said Lisa Breglia, a George Mason University scholar who specializes in Mexico’s oil industry. “Until the last drop of oil in Mexico, people will continue to take to the streets.”
#Sheinbaum #inherit #Pemex #problems #AMLO #solve