Amb. Carlos Pascual
Senior vice president at IHS Markit

A new president takes office in Mexico on December 1. Andrés Manuel López Obrador easily won Mexico’s presidential election on July 1 as a populist representing a party he founded four years ago. His nation’s energy future is among the critical issues he will face.

On this edition of the Columbia Energy Exchange, host Bill Loveless interviews Amb. Carlos Pascual, a senior vice president at IHS Markit, where he concentrates on worldwide energy issues and international affairs. Carlos served as U.S. ambassador to Mexico from 2009 to 2011 and to Ukraine from 2000 to 2003. At the U.S. State Department, he established and directed the agency’s Energy Resources Bureau as a special envoy and coordinator for international affairs from 2011 to 2014. He is also a non-resident fellow at CGEP.

Bill caught up with Carlos recently during a trip Carlos made to Washington, D.C., from his home base in Mexico City. They discussed, among other topics:

  1. This significant change in Mexico’s leadership and its serious implications for the nation’s energy future, especially its proud but troubled history as an oil producer;
  2. The election campaign of President-elect López Obrador and his political party, the National Regeneration Movement, or MORENA, as its known, and particularly his views on energy reforms implemented under his predecessor, President Enrique Peña Nieto;
  3. Whether López Obrador will continue to make Mexico’s oil and natural gas activities open to foreign participation and what steps the new leader thinks are necessary to revive Mexico’s national oil company, Petróleos Mexicanos, or Pemex; and,
  4. Energy trade between the U.S. and Mexico and what may lie in store.

 

Read the transcript

Bill Loveless: A new president takes office in Mexico on December 1. Andrés Manuel López Obrador easily won Mexico’s presidential election on July 1 as a populist representing a party he founded four years ago. His nation’s energy future is among the critical issues he faces now. Hello and welcome to the Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. From Washington, I’m Bill Loveless. Our guest today is Carlos Pasquale, a senior vice president at IHS Markit, a global information provider where he concentrates on worldwide energy issues and international affairs. Carlos served as U.S. ambassador in Mexico from 2009 to 2011 and in Ukraine from 2000 to 2003. At the state department, he established and directed the agency’s energy resources bureau as a special enjoy and coordinator for international energy affairs from 2011 to 2014. Among his other credentials, he’s is a non-resident fellow at Columbia Center on Global Energy Policy. I caught up with Carlos recently during a trip he made to Washington from his home base in Mexico City to discuss this significant change in Mexico’s leadership and its serious implications for the nation’s energy future. Especially its proud but troubled history as an oil producer. We talked about the election campaign of President-elect López Obrador and his political party National Regeneration Movement, or MORENA, as its known, and particularly his views on energy reforms implemented under his predecessor, President Enrique Peña Nieto. Along those lines, we touched on whether López Obrador will continue to make Mexico’s oil and gas activities open to foreign participation and what steps he thinks are necessary to revive Mexico’s national oil company Petróleos Mexicanos, or Pemex. We also examined energy trade between the U.S. and Mexico and what may lie in store now for that commerce with López Obrador in Mexico City and President Trump in Washington. There are questions about environmental policy in Mexico too and they came up in our conversation. Well, here is our discussion. I hope you enjoy it. Carlos Pasquale, welcome to the Columbia Energy Exchange.

 

[00:02:26]

Carlos Pasquale: Bill, it’s a pleasure to be here. Thanks very much for having me.

 

[00:02:29]

Bill Loveless: It’s good to see you again. Carlos, first let’s look at the big picture on Andrés Manuel López Obrador bigger than expected win in the July elections. What did he and his National Regeneration Movement stand for during the campaign and what brought him the victory?

 

[00:02:48]

Carlos Pasquale: Well, what brought him the victory, I think it’s a point there is a tremendous frustration that the Mexican population felt about two particular issues. One is crime and violence. In polls that were done prior to the elections, consistently 70% of population said that, that was the number one, two or three issue. And the second question was corruption. A perception that it had begun to dominate the way that government and the country was functioning and operating and so a huge part of the vote for MORENA was actually a vote against everybody else. A sense that they had tried to _____ [00:03:27] the sense of the ruling party at the time, the sense that they had tried upon and it did not gotten them what they wanted which was a sense of security in life and a sense that there was honesty in the governance of the country. The second piece of it was really a feeling that he was responding to the electorate in some way. And I think there the best thing to guiding are the words of López Obrador himself and what he said is that he is the candidate that’s bringing the forth transformation of Mexico. Now, first one was independence, the second one was the introduction of democratic reforms under president _____ [00:04:07]. The third was the Mexican civil war and the fourth is him. And he said that the reason that he is the fourth transformation is the change in Mexico has to come from the people and that he is the only person that is capable of listening to the voice of the people and translating that into policy, laws and institutions and if it means changing the constitution, then so be it because he understands the voice of the people.

 

[00:04:36]

Bill Loveless: And he had run twice before unsuccessfully.

 

[00:04:38]

Carlos Pasquale: He had run twice before and he had also been the mayor of Mexico City and was known principally in politics for that of what was considered generally successful run as mayor. But I think that the critical point here and the one which the Mexican people, the Mexican economy, the entrepreneurs within the society, international investors are trying to understand and figure out what does it mean? What is the significance of an individual who is fundamentally at the center of all policy? And at times that individual can be a pragmatist and at times that individual can be a populist. At times, he could be a revolutionary. And how to predict that on one issue and that’s I think one of the big questions that is facing the Mexican economy now as López Obrador takes the presidency on December 1st.

 

[00:05:39]

Bill Loveless: The jury is still out in terms of how he might respond.

 

[00:05:42]

Carlos Pasquale: He’s not even president yet, right. And so he’s had a long transition period and in that long transition period, there are many signals that they’ve gotten. Some on the participation and the negotiation of the U.S.-Mexico-Canada agreement where he _____ [00:05:58] to person to the negotiating team fully endorsed it. And I think recognize that if there is not an agreement with a country that’s the destination of 80% of the exports, then you had a big problem. He has taken a relatively pragmatic stance on the continuation of contracts that were issues as part of previous bid rounds on oil and gas. We can talk about that further. And then just a little over week ago, took a decision on terminating and curtailing the construction of an airport that was a third completed and had billions of dollars of investment already and has led to some of the rating agencies downgrading their position on Mexico which has moved the country in a very different direction. Very different signals and that’s one, that’s the kind of thing that right now has raised question marks about what’s the fiscal policy gonna be? What’s the investment and infrastructure gonna be? What are the policies in individual sectors going, how are they going to play out? How populist will they be? And that’s where I think the question marks are still out.

 

[00:07:07]

Bill Loveless: He’s been a fan of reforms in the energy sector that president Enrique Peña Nieto implemented in 2013. Tell us about his earlier views on the energy sector particularly oil and gas.

 

[00:07:21]

Carlos Pasquale: Well, fundamentally, his belief is that the resources, energy resources, the hydrocarbon resources of Mexico belong to the Mexican people. And one of the points that he insisted upon in the U.S. Mexico Canada agreement was the inception of a chapter which is one paragraph long which says that hydrocarbons in Mexico belong to Mexican people. And so…

 

[00:07:46]

Bill Loveless: Which is consistent with the constitution.

 

[00:07:48]

Carlos Pasquale: It’s totally consistent with the constitution and the energy reforms were structured in a way that would acknowledge that point and create still the basis for private investment in oil and gas, midstream power, recognizing that the hydrocarbon resources were still owned by the Mexican people. And so, I think one of the things that’s important in thinking about this is, it’s time and think about the energy industry 10-15 years ago when Lopez Obrador was mayor of Mexico City when some of his team had been in governance and we were talking about peak oil. Right and there is this sense that eventually we would get to scarcity in the world and a perception that the world was knocking on the doors of Mexico to be able to capture Mexico’s energy resources and that Mexico had to prevent that and protect itself from being exploited. And now, we have a world of radical transformation and technology and digitization and resource availability. You’ve had the shale revolution. You’ve had the United States increasing its production from 5.7 million barrels a day to just recently the U.S. was producing 11.3 million barrels a day, right. And so in this world of abundance, what does it mean where there is an intense competition for capital and the development of hydrocarbon resources. And those are some of the issues that yet the team has not quite come to fully understand and that they are gonna have to internalize as they develop their strategies.

 

[00:09:33]

Bill Loveless: So I realize a lot of decisions have been made as you mentioned as we speak, he’s not even been sworn into office yet but… Do you have any sense of how he might respond when it comes to say the reforms and the investments by foreign companies that have been allowed into the current president? Do you expect he might make some changes? There has been some talk that perhaps there will be some delays in additional offshore auctions. That there will be steps to rejuvenate Petróleos Mexicanos, Pemex, the national oil company. There has been some suggestions of what he might do but still uncertain.

 

[00:10:13]

Carlos Pasquale: So, let’s stare at hydrocarbons and maybe we can explore some of the other areas as well because they’re important. When during the campaign, what he said is that in order to support the continuation of contracts that were avoided under previous bid rounds that he would have to establish that the contracts were one, legitimate and two in the national interest of Mexico. And let’s remember there were a 107 fields that were awarded. 79 contracts that went to all of the super majors and majors and some of the major NOCs. Companies recognized throughout the world. For Mexico, it was a phenomenal accomplishment and attracting the main energy companies of the world to come and invest in Mexico. And to help a number of Mexican companies move from the status of being a service company to being an operator particularly on some of the smaller onshore fields. All right, so that was the context. At the end of September, he met with the Mexican association of hydrocarbon producers and what he essentially said was get on with production, right. And not reviewing those contracts.

 

[00:11:27]

Bill Loveless: That was reassuring to the companies.

 

[00:11:30]

Carlos Pasquale: It was reassuring to the companies. What he essentially the message that he said was Mexico needs to produce more, implement your contracts and produce more. What was not reassuring was the expectation that production could be radically ramped up in a short period of time. And of course, you know, for all of those working in the energy sector particularly those that are looking at this from a perspective of exploration, finding resources, investing in the resources, developing them, depending on whether you’re looking at shallow water, deep water, you know, we can be looking at periods of 3, 5, 10 years. Right, and if your expectation is that you’ve got a six year window of your presidency with no reelection, your performance expectations are must shorter.

 

[00:11:30]

Bill Loveless: Then there is, those expectations are substantial in Mexico right now. I mean their oil production peaked in 2004 at 3.5 million barrels a day, declining to 2.1 million barrels a day last year. That’s a fall of some 43% and as I understand it, Mexico is aiming to produce 3.5 million barrels a day again by 2025. Is that right?

 

[00:12:43]

Carlos Pasquale: So he’s adjusted his targets. The amount that they are producing now is probably a little closer to 1.9 million barrels a day. And they’ve adjusted that target to 2.5 million barrels. It, let’s just say if you were to ask any of the major oil producing companies and in fact just any oil producing companies that there is an extreme stretch target by 2025. And so that provokes another set of questions is how do you get those yet to find barrels because the reality is that there are only two fields where they have had discovery so far and are ready to move into the stage of production in a relatively short period of time. And so, you have this huge gap on yet to find barrels. One is that, you’re gonna have more bid rounds and what is indicated is that we’re gonna hold off, Mexico is going to hold off on those new bid rounds until there is an indication of the ability to implement into the current contracts and that’s gonna, that leaves a space open for interpretation because do you conclude that implementation is sound, if companies are following their contracts, doing what they said that they were going to do but the pace of production doesn’t rise as quickly as was expected. One question mark. And then the second question as you put it what happens with Pemex? And the conundrum here is that in what was called the ground zero of the reform. Mexico granted 83% of the 2P, the proven and probable resources to Pemex. And in order to accelerate production, you have to deal with those fields because those are where the most readily available resources are. Pemex is the most indebted NOC in the world over a $100 billion. It doesn’t have the capital or the technology to be able to bring the best capabilities to develop those resources. The number of partnerships that Pemex has developed under the reform as far as still relatively limited and so one of the question marks is in developing Pemex, can the state do it? The challenge for the state is that you would either have to give Pemex phenomenal tax breaks to be able to have the capital to be able to invest or you would have to drain other parts of your budget and reduce the expectations for investments in social programs that have been highly ramped up as a result of the coming administration. And so, what it leads one back to is that if one wants to develop Pemex, Pemex needs partners. So who are those partners gonna be, how are they gonna be selected. The general expectation is that for those Pemex partnerships, that the government may move back from some of the reform steps that put those partnership selections into the hands of the National Hydrocarbon Commission with the approval of the ministry of energy and the ministry of finance in setting fiscal terms and the contractual terms. That remains to be seen. And we’ll have to see what direction the new Pemex and the new government is going to move in.

 

[00:16:16]

Bill Loveless: Yeah. Just thinking, maybe it isn’t necessarily a bad thing that there might be some delay in additional auctions just given the uncertainty that comes with the arrival of a new administration as well as perhaps some, you know companies are gonna be looking international companies are gonna need some time to sort this out.

 

[00:16:36]

Carlos Pasquale: I think that the issue that the international community is looking at is the new administration going to work on international capital and the participation of international companies and bringing their capabilities, resources, management technology to be able to develop the resources in Mexico or not. That’s the fundamental question. And I think there is a sense of reassurance on the one hand by for companies in being told that they can go ahead and implement their contracts. The decisions that were recently taken on stopping construction of a new airport has created real questions because there were existing contracts, existing financial investments that relationships have to be abrogated. So, that’s created concern. There is interest on what can happen with Pemex. There is huge interest in partnerships with Pemex and how they can be developed. There is a great potential there. But again, many question mark still on how that’s gonna occur? What pace it’s gonna occur at and under what terms?

 

[00:17:47]

Bill Loveless: You know another topic he’s taken up on the oil front, the petroleum industry front is refinery construction. What he sees as a need to increase and expand Mexico’s refinery production in light of the heavy reliance of the country on imports of gasoline from the United States. He wants to spend billions on a new refinery as well as improving existing ones. Do you think that happens?

 

[00:18:18]

Carlos Pasquale: He’s been unequivocal about his commitment to building a new refinery and there are real issues that need to be addressed and the utilization rate of the refineries in Mexico is significantly below 50%. The inefficiencies in their production slate are enormous and there is very little question that some improvement is necessary in refining capacity and capability. The question becomes how to do that in the most cost effective and efficient way which is also taking into account changes that are happening in the global marketplace. Who the main competitors are and how to get the best value added out of those resources. So, Mexico today is importing over 50% of its gasoline from the United States. It’s importing over 50% of its natural gas from the United States. And so here is an interesting dynamic. Back in March, _____ [00:19:21] market together with _____ [00:19:25] and the University of California, San Diego and the _____ [00:19:27] newspaper. We ran a poll of Mexican public opinion on the energy reforms what it happens. We asked this question, do you think it’s risk for Mexico to import more than 50% of its natural gas and its gasoline? And about 70% of the population said, yes that is a risk. We also asked what should Mexico do in terms of buying its gasoline and its natural gas and about 70% said wherever it’s cheapest. So, people are fundamentally cognizant of their pocketbooks and they recognize that they may want to have less dependency but at the same, in another country but at the same time, they want to pay less. And so, I think the challenge for this incoming government is going to be in the short term, there really aren’t many alternatives to be importing gasoline and natural gas from the United States, if they want to be able to supply the market. In terms of price, there aren’t significant alternatives. Looking ahead to long term, what is a cost effective way to address the challenge? Is it to build a new refinery on the scale that’s been proposed or are there different ways of analyzing and addressing this problem? And that’s one of these questions that still hasn’t been analytically delved into but the political commitment to building the refinery is there and how that’s gonna play itself out at a point in time when there are gonna be financing constraints on infrastructure. That’s gonna be a significant challenge for the new administration over the next year too.

 

[00:21:17]

Bill Loveless: Speaking of energy trade between the two countries and its very favorable on for the U.S. right now in terms of gasoline as you mentioned as well as other energy commodities. What is the new trade agreement mean for Mexico, the new trade agreement between the United States as well as Canada? What effect it will have on this energy trade and the president has indicated he is supporting that trade agreement. But how is it likely to go forward in implementing it?

 

[00:21:54]

Carlos Pasquale: There are several provisions that are important in the U.S. Mexico Canada agreement and let’s also remember it’s not ratified yet. And so, the next step is that it can potentially be signed by the outgoing president Enrique Peña Nieto on his last day in office, November 30th. That meets the time requirement for the U.S. administration to notify the congress 90 days in advance of actually signing the agreement. So that became the importance of completing the negotiations by August 30th. The importance of Canada coming on board by the end of September was that a text had to be presented to the congress within 60 days of being able to sign it. So that brings us to the November 30 day where Enrique Peña Nieto can potentially sign this and then after that, there is another 105 day period of submitting reports to the congress. Hearings will take place and we’ll see what the ratification process looks like. So just to give that a little bit of context.

 

[00:23:00]

Bill Loveless: But there are several provisions that are important. There is a question of whether or not there is still would be an ability to take disputes, investment disputes to arbitration. The U.S. administration oppose that. Eventually there were concessions made. It was reinforced that for energy investment disputes can be taken to third party arbitration. That was extremely important for U.S. and international investors bringing billions of dollars into Mexico and feeling that they had an alternative to just actually arguing out these disputes in Mexican courts.

 

[00:23:40]

Carlos Pasquale: There is a provision in it that reinforces the principle of free trade of commodities and products which would include energy products. That’s never been tested before. Mexico had previously excluded from what used to be chapter 6 of NAFTA, the energy chapter and that was the chapter that guaranteed the free trade in energy products. It’s now incorporated under a broader provision for free trade in commodities and products and so we’ll have to see how that goes. There is a significant amount of attention on that particularly in natural gas. And, it’s an interesting question and I digress from it because it’s so big. Not only is Mexico, not only does Mexico import more than 50% of its natural gas from the United States, Mexico is the principle destination for U.S. natural gas exports. We’re exporting 4.8 billion cubic feet a day of natural gas.

 

[00:24:43]

Bill Loveless: I think that’s oven overlooked too. There is so much discussion of LNG exports from the United States but so much gas is going into Mexico.

 

[00:24:49]

Carlos Pasquale: So the peak of U.S. LNG exports which came about a month ago was 4.3 billion cubic feet a day. And before that over the course of this year, we were averaging about 3. So Mexico consistently exporting 4.8 billion cubic feet a day. So to put that into context. And if the U.S. didn’t have that outlet for its exports of natural gas, potentially there would be such a significant oversupply of natural gas in U.S. markets that one would see a plummeting of  Henry Hub prices would have a negative effect on investment in centers and eventually would have an impact on U.S. production because of the negative impact on investment, right. So there is an interdependence there that often doesn’t become recognized and so for the United States, Mexico’s recognition, the incoming administration’s recognition that there is a positive interdependence there is extraordinarily important for both countries. So, what we are gonna have to see is between the arbitration provisions, the provisions for free trade and commodities. Whether or not there is an environment that can still sustain the protections that are necessary for investors that really want to go into the energy sector. Those are really the two big questions.

 

[00:26:09]

Bill Loveless: And to be clear on to this agreement, there would be no tariffs on U.S. exports to Mexico, energy exports to Mexico.

 

[00:26:18]

Carlos Pasquale: That is a provision in the agreement. The biggest unknown is how one might affect the importation of commodities depending on price. And here the issue is really on gasoline. And so one of the things that was a campaign promise of López Obrador was that his administration would freeze gasoline prices. Since the election there has been some, let’s say, there has been less said about that issue. More uncertainty about what fluctuations of oil prices in global markets might do to the price of gasoline. What fluctuations in the exchange rate might actually do. But let’s say that there was a freezing of gasoline prices then what kind of impact would that have on the major investments that now have been made in the downstream. It used to be that when you drove around Mexico, you saw one sign, if you wanted to fill up your tank with gasoline and it was Pemex. And now, you can drive around and there are 36 different companies that have their signs up. And so if you were to freeze gasoline prices what happens to that investment? What happens to the supply chains that were being invested in, in terms of pipeline, rail and truck to bring in products from the United States and even what happens to the potential investments in domestic refining if the frozen prices are not enough to actually sustain the economics of the new refinery. So, those are, it is one of the big questions that the incoming administration is grappling with because it was such a central campaign promise that it becomes a conundrum of how to manage it and control it going into the future.

 

[00:28:15]

Bill Loveless: It would have been talking about his potential energy policies or how he will carry them out. What about his environmental policies? Will he honor Mexico’s international commitments? Will he focus much on cutting carbon emissions?

 

[00:28:32]

Carlos Pasquale: There will not be a focus on this. It’s not been a major issue of his and of his team. It wasn’t during the campaign and it hasn’t been thus far in the transition process. What actions, they will take remain frankly completely unclear. A big issue will be the introduction of the IMO standards. Next year and the impact that, that will have on the production of heavy fuel oil in Mexico.

 

[00:29:07]

Bill Loveless: Explain the IMO.

 

[00:29:10]

Carlos Pasquale: International Maritime Organization has adopted regulations that will essentially set standards for emissions on bunker fuel that can be used for ships and refueling of ships. And so with those new standards, it will essentially reduce if not completely eliminate the use of heavy fuel oil in bunkering and will require a greater mixture with lighter fuel products. And the challenge for Mexico is that half of its refining slate is in heavy fuel oil. And so a challenge that the administration is thinking about is here is a product that they have. What do they do with it? And if you can’t use it in shipping where does it go? Do you mix it with condensates to be able to have a lighter product that you utilize in your domestic system? What’s the cost of that? Do you use that HFO in electricity generation but while that will have a really negative impact in emissions and will potentially even be more expensive than the use of natural gas at Henry Hub prices. And so that’s become a challenge that the incoming administration has not yet fully focused on but will be an issue for them over the coming year.

 

[00:30:44]

Bill Loveless: That said, he has indicated that he would support the Paris climate agreement or the country’s agreement on that pact.

 

[00:30:55]

Carlos Pasquale: We’ll see the steps that the new administration takes. In the transition process, the incoming minister of energy Rossio Nathaniel, the incoming director of the national electricity company, _____ [00:31:18] have not focused a great deal of attention on the future generation capacity of the country. It’s a more complicated sector in many ways than oil and gas in part because you have a capacity market and energy market, a clean energy certificate market. You have a market for licenses for transmission and how that whole package of new markets works together, how you create the incentives for future investment are still, I think not fully understood by everybody who is involved in the transition and frankly, very little understood by Mexican society as a whole because it’s a complicated set of market and relationships that have not been internalized widely by the population in what it means.

 

[00:32:17]

Bill Loveless: The new president has a larger than life personality and profile given his long years in politics in Mexico and of course, Donald Trump as here in the United States. Trump talks of an energy dominance in terms of the U.S. riches and oil, gas, the forms of energy. Does that play at all, resonate at all or in Mexico right now with the new regime.

 

[00:32:45]

Carlos Pasquale: I think the new regime has not fully absorbed the changes that have happened in global markets and when you think about it, when the United States was producing 5.7 million barrels a day a decade ago and in the range of 11 million barrels a day today. That’s well over two times that difference is well over two times the production of Mexico. It’s been difficult for them to internalize that as their production has gone down the extent it has. The United States has added more than two Mexico to its productive capability. And Mexico still has in the incoming administration, still not fully integrated the importance that the production of unconventional oil and gas have had in the United States. The incoming administration took a position that it will not support fracking and the development of unconventional resources. That will be a challenge because in fact there is fracking that’s already utilized in some production, onshore production in Mexico. There are certain questions that they are gonna have to come to terms with. Because interestingly, the main areas for unconventional potential are in Tamaulipas, Veracruz, Tabasco along that gulf coast which are areas that are part of the incoming president’s core constituency. And as we saw in the United States, the development of the shale economy contributed to the creation of a value chain of four million jobs in the United States. It’s a significant issue for Mexico to pay attention to. And I think it will be one of the questions to look out for into the future. Will the administration as it comes to understand that better might it create some openings for unconventional development. Can it take the Tampico-Misantla Basin, it is the remnants of a basin that was partially exploited huge significant resources still there but the potential for stacking unconventional and conventional place together that I think the industry has great interest in. Those are some of the questions that need to be answered still of whether they’re gonna be able to exploited into a future.

 

[00:34:47]       

Bill Loveless: So much to look forward to on energy south of the border. Carlos Pasquale, thank you for joining us on the Columbia Energy Exchange. It’s always a pleasure to sit down, have a conversation with you.

 

[00:35:20]

Carlos Pasquale: Bill, my pleasure as well. Thank you so much.

 

[00:35:23]

Bill Loveless: That’s our show for today. Thanks for listening and give us a rating on your favorite podcast platform if you have a minute to do so. For more information on the Columbia Energy Exchange and the Center on Global Energy Policy, go to our website at Energypolicy.Columbia.edu. or find us on social media at Columbiauenergy. For the Columbia Energy Exchange, I’m Bill Loveless. We’ll be back again next week with another conversation.