OPINION: President Andres Manuel Lopez Obrador’s nationalist vision of what an oil company should look like and over-reliance on generous oil revenues may be catching up with the Mexican government.

Financial data for January showed revenues falling 12% below what they were a year ago.

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Oil revenue was down 16% on the year, while lower consumption of gasoline contributed heavily to a 5.8% fall in tax revenue.

Lopez Obrador has so far resisted pressure to raise taxes, instead tapping into wealth funds and clamping down on tax evasion.

There have also been some budget cuts, but items on Lopez Obrador’s own list of priorities have largely been spared.

Top of that list is an expansionist strategy for state-run oil giant Pemex, with projects such as a new $9 billion Dos Bocs refinery and a promised overhaul of six existing refineries.

The Dos Bocas project explains why the Mexican Energy Ministry’s spending was 31% higher than last year, according to a research note by risk consultancy Eurasia.

A 61.5% splurge in financial investments was propelled by a one-off capital transfer to Pemex.

Pemex reported a 2020 full-year loss of almost 500 billion pesos ($23 billion) — 38% more than in 2019 — and refining was not the only villain, with exploration and production accounting for almost 42% of the damage.

Even as Pemex was transferring the equivalent of $28 billion to the federal government in direct and indirect contributions, the company was also piling up debt and requiring government support to stay afloat.

Pemex chief executive Octavio Romero acknowledged that the company was facing the “worst crisis” in its history and the company was forced to resort to resilience measures in the second half of the year.

As a result, it managed a net profit in both the third and fourth quarters, driven by a focus on low-risk exploration and low-cost development projects.

Lifting costs fell and production remained stable at around 1.7 million barrels per day.

Resurgent growth and stronger oil prices could trigger a spending revival, but Lopez Obrador now has an opportunity to release Pemex from the mantra of expanding production and to start taking a more holistic view of his nation’s energy sector.

Fiscal reforms are unlikely before mid-term elections for June but, with Joe Biden in the White House and the US on board with the battle against climate change, Lopez Obrador has time to rethink his own antipathy towards renewables and the private sector.

First on this list should be a review of new power sector regulations that encourage federal power utility CFE to put more of Pemex’s costly high-sulphur fuel oil into the energy matrix.

Another step could be to rationalise refinery investments, focusing spending on those units best able to produce cleaner fuels, and introducing more renewables projects into the mix, such as biofuels and hydrogen.

Finally, Lopez Obrador should look to Brazil’s Petrobras as an example of a state-controlled company that has focused on the most resilient projects in a domestic market it knows well.

Pemex’s own recent resilience efforts also appear to have yielded some results but with a retrenching toward shallow-water and onshore projects

Policy makers need to think again. They should see that deep-water exploration and production offer the keys to developing these more resilient projects.

And, to do that, Mexico needs international partners.

(This is an Upstream opinion article.)