SUMMARY

THIS REPORT examines two very different topics that are similar in two respects:

1) Both have the political fingerprints of President Andrés Manuel López Obrador (AMLO), and

2) both present challenges to elected and appointed public officials to discern the public interest, to include resource stewardship.

In different ways, the expansionist energy policies of President López Obrador collide with the public interest in Mexico and the United States. We offer two examples: regulatory obstructionism blocking the development of the Zama reservoir in Mexico and regulatory permissiveness that favors approval of Pemex’s proposed operatorship of the Deer Park Refinery.

Zama. In Mexico, the president has gained control of regulatory and oversight bodies with the explicit agenda of skewing rulings to favor state-owned energy companies at the expense of private investors. In their rulings, commissioners vote to keep their jobs and protect their reputations as AMLO loyalists; for example, on June 8, 2021, the CNH commissioners approved Pemex’s plan for Area 0152 which excludes from the drilling program the well Asab-1, information from which would allow an empirical basis for deciding on Pemex’s repeated claims over three years for a share of the ownership of the 600-million barrel-equivalent Zama reservoir that had been discovered by a private consortium led by Talos Energy, LLC.

With a daily extraction target of 150,000 barrels of oil, a market price of $70, and a 78% state royalty, the government forgoes royalties of some $8 million daily by the delay in the development of the reservoir. The commissioners could have made approval contingent on reinstating the drilling Asab-1; instead, they voted approval but with only a non-binding suggestion that Pemex reconsider.

As their comments indicated, the commissioners knew that the drilling of the well was not in the public interest but voted anyway to support the president’s pro-Pemex energy agenda despite the “economic damage” caused by the delay in the development of the reservoir.

Deer Park. The president’s proposed purchase of Shell’s half-ownership in the refinery at Deer Park has the potential to compromise the public interest in the greater Houston area and beyond. Pemex operatorship of the refinery would bring with it Mexican presidential authority that lacks both a limiting principle of commerce and an independent board of directors that would stand in the way between executive prerogatives and the public interest.

Concerning refined petroleum products, the president’s announced goal is to increase Pemex’s ownership of nameplate refining capacity as a measure of national self-sufficiency in motor fuel. The buyout is meant to add luster to his political agenda. The proposed investment is not the culmination of twenty years of preparation by Pemex aimed at creating the human resources, institutional infrastructure, and American regulatory experience that would be needed to operate a refinery in the United States. In Pemex’s business plan for 2021-25, there is no mention of Deer Park.

There are national security risks for the United States that are associated with having the President of Mexico with both the authority and eagerness to micromanage a strategic asset on American soil.

INTRODUCTION

THIS REPORT is about stakeholder discernment of the public interest in the energy sector in Mexico and Houston. The discussion can only be illustrative, not definitive, as the concepts of energy sector, public interest and stakeholder are themselves open to interpretation.

Public interest in the energy sector: risk management

The term “public interest” is undefined, and an Australian court has ruled that the term should never be defined, as its legitimate meaning will vary over time and context. We may ask, Is the energy sector a context in which a definition may be possible?

The public understands that the discovery, extraction, refining, and transportation of hydrocarbons carry the risk of local ecological damage and that the combustion of fossil fuels erodes air quality and affects the global climate. The use of fossil fuels permits modern transportation. Petroleum is used in chemicals, plastics and paints, among uncounted other products. Together with electricity, petroleum makes modern civilization possible.

Without electricity, economic development, education and public health are at severe risk. In Haiti in 2017, only 40% of the population had electricity. In Africa, over 600 million people lack electricity. In Mexico, more than two million people lack electricity and some of them are in neighborhoods in Mexico City’s outskirts.

It would follow that the nature of the public interest in the energy sector is the management of risk at each link of the BTU supply and value chains. It is in the public interest to develop resources, manage risk and create wealth—each with a premium on continuous innovation by economic actors, policymakers and regulators.
While “risk management” may convey the sensation of a system of decision-making based on statistical data, regarding the energy sector there are political and cultural narratives that overlay and shape commerce.

In Mexico, the person and office of the President of Mexico are intimately associated with the administration of the energy sector and the governance and priorities of Pemex. The responsibility of the director-general of Pemex is more akin to a corporate director of public affairs than that of the CEO of a large corporation.

Risk management in Texas

Resource stewardship would be the discernment of long-term value to society by the management of a company’s or nation’s natural resources, from lumber to diamonds. Hydrocarbons in their liquid and gaseous states present special cases and challenges of discernment of the public interest.

In Texas, the Railroad Commission (RRC) was established in 1891 to regulate shipping rates on railroads. The Spindletop gusher in 1901 resulted in a dense thicket of oil rigs owned by independent operators, each producing oil and drawing down the reservoir pressure that was shared with others. (Search online: Spindletop).

By 1917, the RRC had morphed into an energy regulator, establishing that oil and gas pipelines were common carriers. The Commission also established spacing rules for oil wells as a means to protect the reservoirs from coning and what came to be the doctrine of correlative rights.

Not only do the owners of a connected resource have rights, but also so does society. California’s Oil and Gas Conservation Act of 1931 prohibited “the unreasonable waste of natural gas.”

Resource stewardship

Resource stewardship extends beyond matters of who owns what. It includes consideration of the operatorship of a natural resource. In 2005, Democratic House Leader Nancy Pelosi led an effort to block the Chinese National Overseas Oil Company (CNOOC) from acquiring ownership of Unocal.

The American oil and gas resource regime evolved into a magnificent engine of wealth creation: it allowed for a diversity of investment vehicles and resource plays: A small company makes a big discovery and sells its interest to a large company that can develop it; down the road in the economic life cycle of the reservoir, the big company sells its interest, in whole or in parts, back to smaller companies with lower overhead costs. All parties have a common interest in producing the last economic barrel within their respective business models.

The time value of money also enters into the discernment of the public interest: A policymaker or regulator that restricts or delays the timely development of a resource is destroying economic value.

These issues of correlative rights of the parties and the interests of society regarding conservation, development, and environmental and resource stewardship will come up in our inquiry into the nature of the public interest in the proposed buyout and operatorship by Pemex of the Deer Park refinery and the pending determination by Mexico’s energy minister of the ownership and operatorship of the Zama reservoir.