"Inadequate supply of inputs or an adverse economic outlook may discourage companies from investing in a specific country, but when there is political will to welcome private capital, firms time and again find ways to navigate through uncertainty."

Adrian Duhalt

POST-DOCTORATE FELLOW – MEXICAN ENERGY STUDIES, BAKER INSTITUTE

November 25, 2021

How would you define Mexico’s current petrochemicals landscape?

Mexico’s domestic demand for petrochemicals is considerably large. However after years, if not decades, of overlooking the strategic character of this industry, Mexico, in a similar way to other Latin American countries, has turned into a consumer market rather than a producer market, meaning that a significant share of the country’s consumption of petrochemicals (and products of petrochemical origin) is sourced abroad.

Between 2016 and 2020, Mexico’s petrochemical imports averaged US$21.03 billion per year, a value that exceeded the US$19.84 billion of Pemex’s average crude oil exports over the referred period. Likewise, it is important to note that Mexico’s petrochemicals sector boasts several inherent advantages, and hence there are important reasons for the government to pay attention to the industry. In addition to the sizeable domestic market, another advantage that stands out is related to the regions of the country where the petrochemical industry thrived in the past and still feature valuable capacities, including a pool of chemical firms and service providers, as well as a specialized labor force.

However, the focus of the current government revolves around energy sovereignty, and the means to achieve so is to increase crude production and upgrade the refining infrastructure. In other words, Mexico’s bet is on activities where expected goals are yet to materialize. In the meantime, imports continue to soar amid the industry's uncertain outlook.

To what extent are issues surrounding Pemex impacting the competitiveness of Mexico’s chemical industry?

Amid a context of scarce resources, the government of Mexico has made the allocation of taxpayer’s money to exploration and production activities and the construction of the Dos Bocas refinery its priorities, as hinted earlier, and that has entailed to defer any policy initiative oriented to boost the existing petrochemical assets of Pemex. As a consequence, the company has been unable to reverse production declines at its own petrochemical complexes, whose role was for the most part designed to yield and therefore supply raw materials that private firms transform into intermediate or final petrochemical products. The financial constraints of Pemex, which is considered the world’s most indebted oil and gas company, is not the only determinant to explain the unfavorable standing of the state-owned petrochemical industry. Amid a falling production of natural gas, key inputs like methane (dry gas) and ethane, central for the making of ammonia and ethylene and which are the two most valuable petrochemical chains of Pemex, are in short supply. In other words, financial and supply issues at Pemex not only impact its own petrochemical facilities, but also those of the private sector.

How could public/private partnerships increase domestic availability of petrochemical raw materials?

In this discussion, the role of the private sector to turn things around in the petrochemical industry is clearly underestimated by Mexico’s government, whose stance is mostly centered on bolstering Pemex’s position as the backbone of the domestic hydrocarbon industry. This argument is put into question by the recent announcement made by a private firm concerning the construction of a terminal to import ethane, a project that, although principally planned to increase production of derivatives at said company, could also benefit Pemex and other users. This is a strong example of a partnership between a private company and the Mexican government, something energy pundits would certainly like to see more of.

Inadequate supply of inputs or an adverse economic outlook may discourage companies from investing in a specific country, but when there is political will to welcome private capital, firms time and again find ways to navigate through uncertainty. In Mexico’s case, the lack of this type of political will is another factor hampering petrochemicals and the energy sector at large.

Which countries are best positioned to take advantage of increased demand for petrochemicals?

The International Energy Agency (IEA) estimates that by 2050, 55% of demand for crude oil in its net zero scenario will come from the production of petrochemicals. As a matter of fact, crude oil demand from petrochemicals experience increases in all of the scenarios contemplated by the IEA.

Population and economic growth are set to drive demand for petrochemicals in the decades to come, and in that sense, Asian countries are projected to lead the way vis-à-vis other regions of the world, including Latin America. China, India and even Saudi Arabia have understood that, due to the race to electrify mobility, demand for crude oil will be under great pressure and that consumption of petrochemicals will in due course become the main driver of additional crude oil demand. In other words, governments and companies from Asia anticipate that opportunities for value creation lie in petrochemicals and they are already making heavy investments towards capturing a larger market share along different chains.

That is not the case in Latin America, where many countries are seen as captive export markets for US-based petrochemical producers – and risk remaining that way if the region’s political elites fail to grasp that the hydrocarbon industry is poised to undergo deep transformations as the transition to a lower emissions economy gains momentum.

Where do you see most investment potential for new, green sources of feedstock, and what role do you see Latin America playing in this transition?

While hydrogen is an option that is clearly gaining momentum among firms and governments, I am particularly intrigued by the potential of green ammonia and its different uses. It has been suggested that it can become the zero-carbon fuel for the global shipping industry in the future and even serve as hydrogen carrier and energy storage medium. But, apart from both these applications, another pressing issue that makes me anticipate that green ammonia is destined to be a great ally of the world’s decarbonization efforts, is related to the production of nitrogen fertilizers to feed a wealthier and larger population. Just look at the following numbers. By 2050, the UN estimates that the world’s population is expected to reach 9.7 billion, which is an increase of 2.2 billion people from today’s figure. There is no doubt that the world will demand more ammonia in the decades to come, but its production must be more sustainable than current practices.

The shift to a lower emissions economy is taking place at different speeds across the world, and Latin American is no exception. The current policy structure in Mexico, for example, is heavily oriented to bolster fossil fuels, while, on the contrary, the conversation around the energy transition is steadily making strides within the official narrative in countries like Chile and Costa Rica, to name a few. Contrasting strategies are also observed among the region’s National Oil Companies. Mexico’s Pemex is building a refinery in the president’s home state and announced the acquisition of another one in Texas earlier this year. Colombia’s Ecopetrol has devised a plan to reach net zero carbon emissions by 2050. However, in the realm of critical minerals such as lithium and copper, Latin America can play a relevant role internationally. That is where the opportunities and challenges lie.

What advice would you give to the Mexican government in terms of where they should direct petrochemical investment?

The government needs to conduct an assessment into the current status of the petrochemical industry. Also, attention needs to be paid to global trends like the expected expansion in ammonia and plastics consumption – two value chains that happen to be the most important ones for Pemex and in which the country is heavily dependent on imports. Hence, if the government of López Obrador seeks to craft a scheme to boost the industry, both these chains are obvious candidates where to launch initial actions. To that end, policy makers have at their disposal foundations to act upon, including existing production facilities, a skilled labor force in different regions, a large local market, and a strategic geographical location.

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