"The big question is how to leave oil behind without the prices generating an economic and political crisis"
Mexican consultant Pablo Zárate is a recognized voice on both sides of the border. In dialogue with LPO, he questions AMLO's policy, explains oil profits and talks about the new global context.

 Pablo Zarate was born in Mexico, but his work led him to move to Houston, the world's oil capital. Director in the Strategic Communication segment at FTI Consulting, Zarate is a recognized consultant in the world of energy on both sides of the border and he has direct dialogue with many of the big businessmen who have interests in Texas. A weekly columnist for El Economista, he received LPO on the 35th floor of the Downtown tower where he works every day.

How and why did you come to Houston from Mexico?

It was because of the recognition that the energy resources of our region are perfectly integrated with the North American platform. The connection with the United States in terms of investment and trade, the oil and gas flow between our countries is super important, also the electricity trade between the border regions. The standardization of the region is one of the relevant phenomena, the regulatory parameters imposed by the United States end up affecting Mexico much more than the other way around.

When you think about the issues of heavy industry, infrastructure and energy, it is evident that there is an impressive connection between Mexico, let's say Latin America, and the United States. If you double click on that link because of the presence of the companies, because of the flow of investors, because of how capital flows from New York, from Houston to the region, well, in reality there are two very clear connection points. One is Texas, the energy capital of the world and, from the Latin American perspective, Mexico has an extraordinary position and would be called to be one of the centers of gravity of the regional energy conversation. Over time, politics has prevented this from consolidating and when Mexico begins to have a leadership position it suddenly begins to lag behind, but there is no doubt that it influences important regional aspects, in some cases for the better and in others for the bad.

You work in industry consulting, but you also had experience in the public sector. Does that allow you to know how the State thinks?

The heart of what we do is precisely to help companies think about their stakeholder engagement strategy. It is specialized communication to be able to approach the different interested parties and present the best arguments to have constructive relationships, even with the stakeholders that would seem to have a slightly more adversarial relationship. To find commonalities, to find that right balance, of course it helps to have had a government perspective, what is the logic and what kinds of things are sought. But it is also necessary to say that, throughout the different cycles in Latin America, one administration is completely different from another and in each of the changes, you have to reset the parameters again and understand everything practically from zero. That implied the beginning of the López Obrador administration.

"The big question is how to leave oil behind without the prices generating an economic and political crisis"

For many people, New York and Washington are the center of power in the United States. Why would you say that Texas is the gateway for Latinos, for companies, for businesses?

From investors' perspective, there is no doubt that New York is the center of gravity of that equation. But when you think about the irons, about the industry, Texas is extraordinarily important. We are clear that what happens in Washington and New York is very important for the region, but suddenly we forget that many of the industry leaders are sitting in Texas and many of the companies that have very important investments, which are sometimes the major investors in the country, they are not sitting in Washington or New York but in Texas.

They sit permanently, they live in Houston and make decisions in Houston.

Sure, and they also make decisions based on an ecosystem of actors to which they belong. What is directly influencing the decision-making of the captains of industry who are sitting here in the Texan ecosystem. And that ecosystem has points of connection with Washington and New York, but it is profoundly different.

How is it different?

First of all, it is a point where there is still a greater sense of business pragmatism, the importance of the macro context for decision-making is recognized, but that is not all. You think a lot about logistics, you think a lot about the physical components, about how the molecules are moving, you think about how you can take energy from one place to another efficiently and that leaves you good profitability. Then you think more about capital flows and perhaps here you think more about the flow of the molecule.

["Texas is the ninth largest economy in the world and it has the power of a country"]

The Latino community is very heterogeneous. There are many immigrants who fight for a place out of adversity, but there are also others who are part of the world of leadership and are in decision-making. Is it premature to talk about a Latino power integrated into local power, or can this already be seen in places like Houston?

I think it is very clear. It can be seen in think tanks, which are an important component of both the industrial and academic dissemination community. Universities like Rice, where the Baker Institute is a central institution, are proactively thinking about Latin America. Something similar happens in other universities. UT has a super influential and relevant program. If you go to California or Los Angeles, you do not necessarily have that. We also see it in the elections, in how the candidates seek the vote of the Latino community, even in the consultants they hire and the messages they give. Finally, there are many Hispanic leaders who are here, there are many in the decision-making of large companies based here, that are pillars of their community.

Also in the world of oil companies.

Here in Houston there is a very relevant community. Both in Houston and in the Woodlands, which is an affluent region with a very significant Mexican presence. You go to Katy, a very important Venezuelan community, with Oil and Gas. It is very interesting that it is at all levels. From immigrants who are starting their economic life here to people who have a trajectory of many years, bankers, lawyers, if you take a look at the top law firms, they all have a Latin American practice with a very important desk of Latin Americans in Houston.

We are clear that what happens in Washington and New York is very important for the region, but suddenly we forget that many of the industry leaders are sitting in Texas and many of the companies that have very important investments, which are sometimes the major investors in the country, they are not sitting in Washington or New York but in Texas.

Before COP27, which was held in Egypt, you wrote about the meeting between Mexican Foreign Minister Marcelo Ebrard and John Kerry. Why does Mexico ignore the United States mandate at the environmental level? What's there in the background?

Although it may be seen as a contradiction, President López Obrador understands himself as a man of the left who tends towards environmentalism, but he disassociates himself from those traditional axes and puts a very clear focus on rescuing Pemex and investing heavily in the Mexican platform and in the Comisión Federal de Electricidad (CFE - Federal Commision Electricity). AMLO's entire energy program focuses on criteria and priorities that are far from those of North America from the Free Trade Agreement between the United States, Canada and Mexico. One way to explain it is that the need to put Pemex and the CFE first overwhelms any other consideration for the president and that implies discrimination against new, more environmentally sustainable technologies. This story weights heavily on relations between the two countries because it generates very important points of tension. First, with US and Canadian private investors who invested heavily in the Mexican energy sector and suddenly feel discriminated. Second, this discrimination of private investment implies discriminating against new technologies and renewable energies. And that ends in a direct clash with the declared priorities that the government has before the environmental community.

It could be said that, in practice, AMLO's energy policy has more similarities with that of Trump than with that of Biden.

Well, some important criteria have been blurred. It is difficult to find parallels because in the United States there are no state companies that produce energy, neither in oil nor in electricity. So, the scheme is open to investment, even with some historical peculiarities of the United States, such as private ownership of minerals. On the environmental side, we see a Biden priority that AMLO does not have, which is renewable energy. We could find some parallels between Trump and AMLO with the oil focus, but I think that would also be unfair. Trump's policy is decisively pro-investment, it is to create an ecosystem that allows oil tankers to extract the greatest amount of oil and AMLO suspended the rounds, suspended the auctions... AMLO's statism does not have a clear and direct parallel.

"The big question is how to leave oil behind without the prices generating an economic and political crisis"

In one of his last notes, he said that oil companies like Chevron and Exxon have record profits in the third quarter. Is it a product of a beneficial global situation, or is it the product of that forced learning that includes an adjustment in costs?

That is a much more complicated and global sphere, which is that of the energy crisis we are living. It would be a mistake to say that the crisis is exclusively due to Russia's invasion of Ukraine or that it is something short-term. Over the last few years, different governments have discouraged some spaces for energy investment, favoring others. And that has generated an imbalance between the energy needs of the world and what we are able to produce right now. The upward pressure on prices is something that has been aroused for quite some time by a series of policies that chose winners in some sectors, and other sectors said we have to discourage investment. It think that context is fundamental to understand the moment, a bullish price context in which the rise in hydrocarbon prices generated significant profits for some companies with big questions about what that means for the long term. Does it mean that those who discouraged investment are realizing their mistake and rebalancing things, or are they getting more radical and saying that some parts of the industry have to phase out? In that sense, Texas is quite different from Europe and other energy markets.

Why do you say that?

In Texas, you have an understanding, due to the closeness and proximity to the industry, that maintaining the greatest number of supply alternatives is the correct energy policy, you are looking for energy abundance.

All at the same time.

Exactly. Elsewhere, the opposite is true. There is a policy that says we have to get rid of -that is what Biden said in his speeches from the beginning-: we have to leave the oil industry behind and move elsewhere. The big question is how to do it in a way that does not create very violent cycles in prices and how to prevent those prices from generating economic and political crisis. In that sense, I think that political leaders continue to disappoint. Most are still struggling to find answers because there are no easy solutions and many are being driven more by political pressure than pragmatism.

The big question (that Biden's policy generates) is how to leave oil industry behind in a way it does not create very violent cycles in prices and how to prevent those prices from generating economic and politocal crisis.

In this context of extraordinary profits, Pemex increases production but registers operating losses due to refining problems.

That is how it is. The oil industry understands cycles very well and companies that lose money have patience. When the tide is out, there is tremendous pressure on companies and they have to adjust costs. Many of them lose money, but then start to show that they got the message, adjusted, and are making a profit. That is not what Pemex does. What Pemex does with the arrogance of feeling protected by the Mexican taxpayer's money, that is, I am going to survive, does not make significant adjustments, does not show that it is understanding the message of the context and, therefore, in recent years it has become a company that does not respond to signals from abroad. What does that mean? Losing money in down cycles and also losing money when prices go up extraordinarily. That suggests that the viability of the business is really in question. It is no longer that Pemex cannot operate with a barrel at 60 or 65 dollars, Pemex is not being able to operate and earn money with a barrel at 85 and 90.

["Si por neoliberal se define al que desmantela el Estado, no hay nada másneoliberal que AMLO"]

To solve the rifining issue, Pemex bought Deer Park, a refinery that belonged to Shell and began to build Dos Bocas, which was planned with a deadline that could not be met, it is demanding more funds that expected and is not finished. What connects these two attempts?

It is very interesting because when the Energy Reform took place in Mexico, in 2013, 2014, there was a kind of consensus among specialists that Pemex had to stop believing that because it was a state company, it could do everything right. The consensus was to redefine the size of Pemex in production, bet on value instead of volume, and drop businesses where you are obviously not competitive. It does not take a financial genius to see that Pemex bloated refining workforce, there's no way to compete with refiners on the US Gulf Coast. In Mexico we have a famously powerful union and a famously inefficient company that also has refineries scattered throughout the country. The refining business is an optimization business and dropping a few cents on every gallon you produce makes all the difference between being profitable and not. Companies like Pemex, which have poor maintenance rates and high scheduled stoppage rates, cannot compete with that. At that time, less and less refinement began and Pemex began to stop losing so much money. AMLO came to change that, and in all that he saw a neoliberal trick of handing over oil to foreigners. He comes with that narrative and says: the key is refinement. Almost any specialist will tell you that Pemex does not have those capacities, nor the know-how, nor the logistics to be a refining power. The original figure for the amount agreed for the construction of Dos Bocas was 6 billion dollars, right now I think that in official recognition we are at 12 billion dollars and Bloomberg has said that it is almost 15 billion.

Is that the cause of Pemex's losses?

The cause of Pemex's losses is that it does not have a competitive refining platform. That has nothing to do with Dos Bocas. Dos Bocas is a bottomless pit. We are talking about the daily operation of Pemex.

It is no longer that Pemex cannot operate with a barrel at 60 or 65 dollars, Pemex is not being able to operate and earn money with a barrel at 85 and 90. This suggests that the viability of its business is really in question.

Despite the counterpoints and differences in the business, there is dialogue between the Houston industry and AMLO government. How do you explain it?

We always have to think about more nuanced things. In the macro dimension of public policy, perhaps the dialogue is not flowing as it should, but in the trade perspective, the flow of molecules between the United States and Mexico must happen because it is the way our economies continue to work. Mexico is an extraordinarily important country for Texas gas, extraordinarily important for Texas refiners, the United States is an extraordinarily important market for Mexican crude, and that reality is much stronger than any political perspective we may have.

At the beginning, (Manuel) Bartlett said that the gas pipeline contracts were absolutely leonine and that he was going to initiate arbitration: He ended up negotiating things and the terms are very similar in financial matters. What is a gigantic loss is the destruction of value going forward. Mexico was in the electricity sector attracting investments of 6, 7, 8 billion dollars per year, which is a record and an extraordinary amount of money. If that exceeds a billion dollars, it would be quite surprising. We have turned off the engines for the development of infrastructure in a region where we really need the iron.

Mexico is an extraordinarily important country for Texas gas , the United States is an extraordinarily important market for Mexican crude, and that reality is much stronger than any political perspective we may have.

Faced with industry and market criticism, editorials such as the one of the Wall Street Journal that question him for his policy anchored in the seventies, AMLO responded: we want them robbing as far away as possible. Is he seeking to strengthen in the negotiation, or does he really think that any association will be harmful to Pemex?

I think there is a territorial reading of things. It is not clear whether Pemex belongs to Mexico or Mexico belongs to Pemex. AMLO thinks that the Mexican market belongs to Pemex and CFE. CFE made an outlandish calculation of what they consider to be subsidies to private industry and remarked that there was a portion of the market that CFE was not occupying. CFE considers that to be a subsidy, which can only be explained if you have taken the philosophical position that the market is yours. Allowing the other participate in the market implies subsidizing it: the government says this is mine and I am lending you. That logic does not have support in the contractual reality of things because in many cases you are not even talking about concessions but rather generation permits in the electricity sector.

Carlos Slim says that Pemex's present is not this administration's fault but of the previous ones that squandered a surplus of 420 billion dollars during Calderón's time. Why does a relevant actor like him defend AMLO?

Without specifically talking about Slim, I think that in the Mexican imagination there has always been this notion that Pemex would be great if it weren't for the robberies and outrages. As if the entire structure were optimal and everything that is done in the company was world-class, without having concrete evidence of that. We Mexicans look back at the 1970s and 1980s, which was when we discovered Cantarell and saw that oil boom ans we say, well, here is the proof. But the situation is very different today.

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