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 forms the cornerstone of the energy strategy he will bequeath 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 biggest global 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.
A giant in debt
Pemex, the state-controlled oil giant, 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 from taxpayers’ money. The disarray in Mexico’s energy industry highlights a dilemma that will shape the country’s — and Sheinbaum’s — fate for years to come. Sheinbaum, a doctor in energy engineering, has signaled that she wants Mexico to shift toward clean energy sources. But the biggest obstacles in her way may be her mentor’s nationalistic, oil-focused energy policies and her reluctance to confront the man who helped put her in office. “It’s a source of pride to see how Mexican hardworking engineers have accomplished this feat,” Sheinbaum said at the refinery’s inauguration. 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 transforming the country’s crude into gasoline rather than relying on U.S. refineries, is not yet fully operational, according to the International Energy Agency. Beset 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 in cost from its initial budget of $8 billion, adding to the 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 payment to these companies have led some of them to stop working for Pemex this year, contributing, along with low investment in exploration, 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’s management also did not respond.
The weight of the past
On the campaign trail, Sheinbaum dropped hints about her energy plans before winning a landslide victory in June. They include building solar plants, exploiting the lithium used in electric vehicle batteries by Pemex and building 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 powerhouse, with oil at the center 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 underinvestment in exploration. Although Mexico continues to export oil, it must import everything from natural gas and diesel 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 output 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 the nationalization of oil in textbooks. Monuments celebrate state control of the oil industry, and polls show widespread resistance to any hint of privatization of Pemex. The March 18 national holiday commemorates the day when, in 1938, a leftist president took control of foreign-owned oil assets. Upon taking office in late 2018, López Obrador deftly pushed oil nationalism by calling the previous government’s attempts to open the energy industry to significant foreign investment sellouts. Prioritizing fossil fuels, he publicly mocked wind turbines after his government canceled tenders for solar projects. His supporters point to political reasons for betting so heavily on oil.
An uncertain future
Octavio Romero, Pemex’s chief executive, argues that Mexico had to undertake costly refinery projects for national security reasons, because of the country’s reliance on refined fuel imports from the United States. “What happens if for some reason, political or natural disaster, the access points — mainly ports — where imported gasoline comes in are closed?” Romero said in April. Yet the costs of stabilizing Pemex are rising. In total, Mexican authorities have granted Pemex a staggering at least $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 perks like its own clubs, hospitals and schools. Some executives enjoy perks like 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, a former Mexico head of Swiss banking giant UBS, said that if authorities didn’t 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 a time to let bondholders take a hit on Pemex, this could 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 instead intends to refinance the debt in hopes 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. She said she 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. “Demand growth must be absorbed by renewable sources of energy,” Sheinbaum said. Details remain scant, however, as to how she will execute the change, especially at a time when her financial room for maneuver will be limited. Another legacy of López Obrador will be a budget deficit of nearly 6 percent of gross domestic product, the largest in 24 years. Pemex’s debt alone represents about an additional 6 percent of GDP.
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