By prioritizing domestic output, Mexico’s AMLO emerges as oil war’s winner

MEXICO CITY (Bloomberg) --Mexican President Andres Manuel Lopez Obrador scored a political victory on Sunday by convincing oil nations to let him cut production far less than other OPEC+ members, reinforcing his nationalist project to revive state-owned producer Pemex.

Mexico will only cut 100,000 barrels -- just a quarter of its pro-rated share of the 9.7 million barrels a day reduction agreed by the oil-producing nations forming OPEC+. After three days of resistance by the Latin American country, the group abandoned the initial proposal of cutting 10 million barrels per day as the most seasoned oil countries including Saudi Arabia couldn’t convince Lopez Obrador to implement a deeper cut.

The U.S., Brazil and Canada, the other larger oil producers in the Americas, will instead contribute with a combined 3.7 million barrels as their production declines.

The outcome is a win for a president who showed once again that his domestic goals rise above all else, particularly when it comes to the energy industry. Reversing 15 years of oil production declines at state oil company Petroleos Mexicanos, or Pemex, has been one of the main goals of the Lopez Obrador administration, which explains the president’s reluctance to accept bigger voluntary reductions even if it meant angering other nations and risking the failure of a historic oil deal.

The victory comes at a time when Mexico is facing a significant economic contraction and increasing discontent from the country’s business elite over a lack of significant stimulus measures to combat the devastating impact of the fast-spreading coronavirus pandemic. It’s a cautionary tale for companies and lobby groups calling for a strategy change by a leader who has stubbornly gone his own way, including an initial refusal to enact stringent actions to combat the disease.

“This confirms that even in an international negotiation, the president continues to be very focused on his agenda, his priorities, including Pemex,” Eurasia Group analyst Carlos Petersen said by phone on Sunday. “His beliefs come before any other analysis or forecast of the economy, and room for change or adjustment in the near term seems very slim.”

Government officials in Mexico City didn’t wait to celebrate the outcome. In a tweet, Mexico’s Foreign Minister Marcelo Ebrard congratulated Energy Minister Rocio Nahle for “defending the interests of Mexico” by refusing to accept a bigger oil production cut as part of the OPEC+ pact. “The strategy designed by Lopez Obrador worked. Good news!!!”

AMLO is expected to comment on the oil agreement during his daily press conference on Monday morning.

AMLO, a grassroots populist who spent decades decrying Mexico’s crony capitalism, has relied frequently on his reputation as a president who advocates for his people, especially poorer workers, and who says he came to power to fundamentally change government-business relations. He’s yet to leave the country since his inauguration in December 2018, having missed all multilateral meetings including the United Nations General Assembly.

His legendary obstinacy, as demonstrated during the exhausting OPEC+ negotiations, is likely to play well with voters who like his “Mexican people first” message in a country where displays of patriotism are frequent.

Yet some analysts argue that AMLO’s fierce defense of his nationalistic energy policy -- which is at the heart of his ambitions to upend Mexico’s public life in the model of the country’s revolutionary past-- came at a huge cost: by refusing to cut production, Pemex may continue operating unprofitable fields. And by holding out on a key global negotiation, Mexico could face reprimands from other nations in the months to come.

“There are no reasons to celebrate,” Carlos Elizondo, a former Pemex independent board member, wrote in an opinion piece published by Reforma newspaper Sunday. “The cost of getting away with it in front of the international community will be high, particularly at this moment of crisis.”

Mexico’s own future inside OPEC+ is uncertain now, as it’s expected to decide over the next two months whether to leave the alliance, delegates said. A representative of Mexico’s energy ministry did not respond to a request for comment.

Pemex Risk. AMLO already said he is aiming to export less crude, instead sending it to the country’s refineries as part as his big plan to rid Mexico of dependence on foreign energy markets. His longer-term bid to revive production at Pemex, whose debt is the highest of any oil major at more than $100 billion, could result in even bigger losses.

The company is building an $8 billion refinery in AMLO’s home state of Tabasco to reduce fuel imports that have soared to account for as much as 65% of Mexico’s demand. This, even as the country’s six existing refineries are operating at less than 30% of their capacity and lose more money as they increase production because of a lack of investment in maintenance and refurbishments.

Pemex will have a negative cash flow this year of $20 billion if Mexican oil trades at $30 a barrel, according to Anne Milne, a strategist at Bank of America.

Investors fear that Moody’s Investors Service could downgrade Pemex’s bonds to junk after Fitch Ratings Inc. cut Pemex bonds even deeper into junk earlier this month. S&P Global cut its rating in March.

At the same time, the government has canceled oil and gas auctions and joint-venture contracts with Pemex that enabled the state driller to share in the financial and technical burden of developing Mexico’s vast, mostly unexplored deep-water oil territory.

While AMLO prioritizes his energy strategy, some analysts say his refusal to follow the OPEC+ general agreement could come at a cost. AMLO “has put Mexico in an internationally awkward position with other players, said Eurasia’s Petersen. “We don’t know what the unintended consequences of this might be.”