Energy security in Mexico – Interview with Dr. Rosío Vargas Suárez

On the occasion of the upcoming presidential elections in the United States, the Mexican Center for Strategic Studies and International Relations had the opportunity to interview Dr. Vargas on energy security in Mexico. With almost four decades of experience and mastery in the lines of energy policy in the United States, Mexico-United States energy integration, energy policy in Mexico and Geopolitics of energy, Dr. Vargas manages to perfectly describe the situation of the country in terms of energy. , as well as to identify the possible areas of opportunity in the framework of the US elections.

Luis Adrián: As you know, the energy industry in Mexico has witnessed a strong structural reordering in recent decades, we have already seen it during the administration of Enrique Peña Nieto, the administration of Felipe Calderón and, now, with the current administration of Andrés Manuel López Obrador. It seems that many more changes are coming, therefore I would like to start this interview by asking you

How do you see the current panorama in terms of energy security and in terms of competitiveness?

Dr. Rosío: Good. Well, let me tell you that, really, the matter here is a bit complex because although Mexico with this administration has not initiated an energy policy - let's say at a regional level, but it inherited that integration process - well, here are issues that are a bit delicate, problems that were inherited and one of them that has its positive side, but also the negative side is the process of integration with the United States. Mexico's policy, the logic of involving Mexico in this integration process, since it has had benefits for the country, but it has also had repercussions because the policy was to take advantage of the more attractive energy prices in the United States, Mexico neglected production of natural gas, the use of refining capacity, expanding that refining capacity, then all this had an impact due to an integration in which Mexico has a very high degree of dependence on all fuels from the United States: natural gas and derivative products -above all-, that in 2015 they already generated an imbalance in the negative oil balance for Mexico, despite everything that it continues to export in terms of oil. So, dependence, always in terms of energy security, taken to the extreme is a risk. And this, for example, can be assured by the European countries that depend practically 80-90% on oil from the Middle East. Mexico is at that extreme of a great dependence on natural gas, more than 90% in refined products, we are reducing it but the dependence has reached 70%. So, the policy is to direct to strengthen a national production to reduce that dependency.

The question of competitiveness, the competition that was expected after the energy reform, I would say is limited. And it is limited, precisely, because the main axes of competition between the big players, private and public, occur with the possibility of reducing production costs to a large extent and here, since there is no national production, cost reduction is very limited because practically everything is imported, so one sees the competition at the level of establishments such as gas stations where they simply have a little store that offers you things or has a difference of one or two cents. So, competition has really been very limited and there are players who still have monopoly power at the national level in terms of controlling the domestic market. So not much progress has been made there.

Luis Salgado: Thank you very much for your answer, Doctor. Regarding this dependency that you mention, perhaps in order to anticipate changes in the future,

In what year or at what moment would you think it would be a turning point for Mexico with which dependency has been reduced and more than talking about dependency we could talk about a Mexico provider for the region? Do you see this scenario possible in the near future?

Dr. Rosío: Look, not in the short term. In the medium term, if the correct foundations are laid, if we have this correct perspective from what the integration with North America means, what the movements mean in terms of energy at the world level, the correct decisions can be made. But I believe that one of the most important things that the current administration is doing is working in terms of resilience, that is, supporting the areas of national production in such a way that we can think about reducing this degree of dependency. , but we can also think of being important producers, for example, of derivatives, of oil, which have added value, which are beneficial to the country. We could even think about becoming an energy hub to re-export the gas that Mexico is importing from the United States to Asian countries -which is the market that will grow the most in the coming years-, we could think that this gas could serve for Central America because it is totally dependent on hydrocarbons from abroad. So, I believe that if the role is recognized, the location of Mexico, if this project to strengthen Mexico once again as an energy producer is being worked on, I think we can think about this future project.

Even, well, develop the capacity to produce, for example, these minerals such as lithium, in an arrangement with the private sector that could be interesting. As long as Mexico does not lose that ability to control, to protect natural resources by the State. I believe that there are many possibilities for Mexico, but it is not denying this potential, but recognizing the possibilities that this integration project gives you, including, and recognizing the true state of the energy situation worldwide. Which are the claimant countries? What will be the areas of greatest growth? Where will there be energy problems? What is the limit of natural resources? All this diagnosis is going to be important for Mexico.

Luis Adrián: You mentioned the issue regarding lithium... at the beginning of the year or in the late part of the previous year, the discovery was made in Mexico of what could be the largest lithium reserve in the world. Lithium, as we well know, is a highly valued mineral due to its properties, it is highly used in the energy industry due to the fact that it is used for batteries, to make use of solar energy, for example.

Doctor, what do you think should be the appropriate way, the proper management that the administration should exercise around this discovery?

Dr. Rosío: It seems to me that the potential should be truly seen because there are countries that, like Bolivia, Chile, China, that they know have great potential in terms of lithium. Here I believe that if the alternative were really a public-private scheme, but as long as the tutelage is that of the Mexican government for the question of ownership of the resources. So, I think that the scheme must be very clear and it must be very clear that the resources belong to the Mexican nation. But also, in this I believe that you have to really know the situation of how far a battery allows you, under the current technological development, to solve a problem of thinking that you have the potential. I think that the question of batteries still needs to be worked on a lot, as part of the technological development tasks that we have because although it is a possibility, for example for electric cars, there is also a myth that lithium or batteries solve everything and the reality is that they help to solve, but we still depend on electricity generation from various sources. Then yes. It does help, it is a great potential and you have to see it as that, as a potential for Mexico.

The electrical industry has increased the need to find lithium reserves.

Luis Adrián: I would like to rescue an important part that you mention regarding lithium. You mentioned that any management or any scheme must always start from the robust tutelage by the State and, in this sense, I would like to introduce the famous and well-debated USMCA into the conversation. There are many sectors of society that classify it as the answer, the miracle cure to this issue of binational relations, but it seems that in terms of energy, the T-MEC tends rather to sharpen the dependence that Mexico has with its neighboring United States. Joined. What do you think about it? Because although there are certain items, chapters, points of the T-MEC that ensure that Mexico as a sovereign State has full control over the resources within the republic, it is also true that there are certain clauses that are based on investment protection of the T-MEC partners. So, in this sense, it seems that Mexico, although in principle it has sovereignty over its resources, its hands are tied by these instruments that do not allow it to enjoy total freedom of action.

What do you think about it? Is this an entirely true scenario? Is it more of a myth? Can you give us your opinion please?

Dr. Rosío: The question of energy in the treaty must be seen from a realistic perspective. I believe that we must start from an asymmetric integration process in favor of the most powerful country that not only has the economic and military power, but also really has the leadership and dominance in terms of the institutionality of the legal framework of the agencies that manage the energy issue in North America. This is a reality that cannot be avoided because if not, the result would really be very partial and biased, but in this what I think is important at this moment is that Mexico has a strategic role in this treaty and even has a strategic importance, in the Energy Dominance project that the Trump administration has, Mexico has an important role here. This gives a certain margin of maneuver, it gives Mexico possibilities, the opportunities must be discovered.

What else you say is perfectly correct. I believe that the T-MEC should not be bought as the letter of solution to all the energy problems in Mexico, it is a possibility, but I do believe that it is necessary to see how this T-MEC is designed and I believe that, indeed, it has many chapters -on 22, 28 and 31-, really that they can condition the destination of national assets in favor of foreign capital, international capital, so there is somehow an obstacle to development, a possibility of national development. However, what is also a possibility is chapter 8 where Mexico has the possibility of a sovereign energy design. That chapter 8 should not be disdained either, it is something that Mexico achieved. We must even remember that on the first visit that Rick Perry, who was the previous Secretary of Energy, made to Mexico, he spoke of respecting Mexico's energy sovereignty, which was news that had a low profile, I recovered it in an article and I said "well, this is a friendly rapprochement with Mexico with the administration of President López Obrador." In this I believe what has happened up to now are some disagreements at the bilateral level, because it must be recognized that Mexico has established or was going to respect the energy reform, that foreign investments in Mexico are going to be respected. I believe that the cause of the conflicts should be clear and this has had to do with the entire corruption strategy of President Andrés Manuel López Obrador, it has had to do with leonine contracts, including harmful to the national interest of Mexico as they were the question of natural gas where monumental amounts were paid for a production that has not even reached Mexico. So, they were really leonine contracts for Mexico that have been reviewed. What seems to me is that, yes, the expectations of foreign investors were high, so neither the Mexican State achieved all that had been the objectives of the energy reform nor perhaps investors are seeing their expectations fulfilled and this It is what has generated differences. What does seem to me is that we must put the dialogue on the table, not get to energy problems that could mean a national security problem for Mexico because then there is the possibility of a greater conflict, but also, at a level of international panel the Mexican State would have little chance of winning a dispute at those levels because there are biases, there are preferences for transnational and foreign private capital. This possibility of reaching this type of situation must be viewed realistically, but I believe that dialogues can be established and arrangements can be reached in a friendly manner. The scenarios must also be foreseen by Mexico with all the measures it is taking. I think it would be an obligatory question at the level of Mexico's energy policy. So, as I told you, shortly it would be to recognize Mexico's subordinate integration in the asymmetry, to recognize that the USMCA has opportunities for Mexico because it is a strategic sector for the United States project and, really, to try to solve the problems that already exist and that left the energy reform. That would be shortly.

Luis Adrian: Sure. You mentioned a very important part, which is to foresee scenarios

Do you envision a possible scenario in which our neighbors, members-partners of the USMCA, relocate a large part of their investment in some other area? Does Mexico have any contingency plan to deal with the actual withdrawal of portfolio from these countries?

Doctor: Well, the withdrawal could be nothing more than North American capital, but look, I think that this is what I'm telling you, maybe as a Geopolitics professor who tends to see more of the world than just the domestic issue , I would tell you that the first thing that should be done is to have an approach to the international situation. So, well, look, to me the speech of ''bye bye investments'' for me is more a pressure speech for Mexico than the reality for these capitals, I mean, I wonder...with this pandemic situation if I If I were an entrepreneur, I would have to re-evaluate due to the economic conditions of the country in which I wanted to place my investments again, for example, the case of Spain with all the outbreaks of coronavirus. The United States has a brutal drop in GDP of 31.4%. Never in the history of that country, I believe, had a situation of this type occurred. South America: Ecuador has a 14% drop, the countries are in a real crisis asking the IMF on their knees to please give them loans to get out of this conjuncture situation. So, it is not easy and I believe that the elements of attracting direct foreign investment would really have to consider many more elements than simply the turn of an energy policy, for example, there is the question of social stability, economic growth, the exchange rate, the investment guarantees, just to give you an example, the Spanish state -I explain why much of the capital that is here dissatisfied is Spanish-, in 2003 canceled all its renewable energy subsidy policies with the brutal fall of almost 20 percent that they have in GDP, with the outbreaks that they have throughout the country, especially in Madrid, I wonder if Spain could be an alternative for them. I don't think the matter is so easy, touching precisely on the Spanish case, I believe that there is a lot to be seen...going to the problems in the case of Mexico, especially the question of renewable energies, which seems to be the apex of the problems Mexico-Inv. Extr. and in this it does not only have to do with Mexico, it is a situation that the world has already begun to see and that there is going to be a tendency in the world to review all these investments in renewable energies because, as in the case of Spain, it What has happened in Mexico and what happened with the coronavirus: there is excess production capacity in this type of energy. In addition, too localized, they were located in certain geographical areas where the demand is not great, it dropped, even with the covid. We had a demand that collapsed in certain areas in certain countries and that allowed us to see negative prices for energy both in natural gas -which had already existed- and in oil, but for many sources of energy; there was also this situation of low demand and, in addition, problems that transmission capacity is not built or in the case of Spain the State decided to remove the subsidies, there is an offer that is five times greater than what is the demand , What does this mean? there is no market and, sometimes, you have scenes, I have seen videos where there are plants, like this, huge fields of solar panels oxidizing, even many people were promised that if they put up, that if they invested in solar panels so that they would adopt this modality of adapting to the network, because all these people were disappointed because the State canceled that purchase of energy that all the domestics that were investing to be able to connect to the network and sell it to the Spanish state, because it left them defrauded, so this is a problem worldwide because many states have subsidized this type of energy and this type of energy continues to have the problem of intermittency. So, they are expensive energies that have to be subsidized, that have to be prioritized in the dispatch, that have to be supported, they bring about a series of conflicts for the electrical networks, they are expensive and they do not really allow having a reliable electrical system in many cases.

A paradigmatic case in Germany, for example, which is a power in renewables, I am going to tell you that at this moment the consumption in all the primary energy demand in Germany is only 3.1 percent from renewables, right now at the level And if you look at Exxonmobil, the international energy agency, Shell, BP, it doesn't go beyond five percent of primary energy supply, then why? Well, the world has not yet managed to solve many technical problems and one of them is the problem of intermittency. So, this is a task for everyone that we have to work technologically to solve this type of problem, but with this, what I am telling you is: there are cases in which they are only a case of political will or animosity , not even legal, they have to do with technological issues, they have to do above all with the electrical plane where I tell you as one of my professors from the electrical industry told me that Kirchhoff's laws did not necessarily get along with the Adam Smith's laws, that is, there are other types of laws that must be considered and not just a legal issue that allows us to solve these problems.

Luis Adrián: And it's good that you mention this matter because you know that the two contenders, Donald Trump and Joe Biden, have a different agenda. In this regard, Joe Biden unveiled a new plan, the green New Deal, in which the candidate promises, offers, an investment of two billion dollars towards a transition to the use of renewable energy. In this scenario, assuming that Joe Biden is elected as the new president of the United States.

Do you consider that there could be a North American influence towards Mexico in the sense that perhaps the management, the administration of López Obrador will turn a little towards the use of these energies or do you consider that this management of López Obrador is going to hold firm during the entire six-year term?

Doctor: I think there are two important things there, one is the question of the energy future of the United States, which is decisive for Mexico, the electoral question, of course, which is a matter of the situation, and the question of integration with Mexico. . What you are referring to about Joe Biden's proposal of two billion dollars is true, it is true, but if you review the recent press on the first of September where Joe Biden made a visit to Pittsburgh, there he did a very interesting statement that reflects a little what the trend of the Democratic party is going to be. Joe Biden said ''I'm not banning fracking'' (I'm not banning fracking_''), it's very interesting because many of the great Democratic personalities have just been on the green-flag end: Alexandria Ocasio-Cortez, including the Vice President proposal also has that option, Bernie Sanders, but in reality what is the trend in the United States is an approach towards a bipartisan consensus on crucial, strategic issues for the United States, but also on issues of the most important industries of the USA. For the United States, energy dominance is based on fracking, that is, the United States is an oil and gas power, whose power is deployed through liquefied natural gas and that power, precisely, is what allows Donald Trump to glimpse the possibility of world energy dominance, that is, it is not a small thing, what they have with hydrocarbons. So, they are not going to give it up and what we can see is a gradual rapprochement between these two positions based on this bipartisan consensus where we are going to see, as the elections are defined, this rapprochement around the groups of strongest interest and in them is the oil industry of the United States. What seems to me to have been another thing that has been idealized a lot in Mexico is the fact that it is not recognized that the United States has actually been using both sources of energy, including the green energies as part of their image, of their sustainability and in that they really build potential, they have technological development and I do not think it is a conflict to integrate the two energies, that is, invest the two billion in green energies and continue developing fracking - This is how they have been handled up to now. There is a policy and a term that they use where they converge all these sources that all of the above (everything else), that is, they go for fracking but also for everything else, and in terms of energy security this is what that gives them energy security. No country is giving up anything right now, energy security strategies come from the use of all the sources of all the resources that the countries have and if they do not have them, they have to import them, but right now with the decline of conventional resources each country uses all the potential it has. We are going to see that Biden's agenda is qualified, Trump's agenda is very clear for Mexico and Mexico serves this energy project of Energy Dominance from the energy integration of North America. We are part of this project, so Trump will continue to favor integration.

Luis Adrián: The press has said a lot, the media, Mexico has been and has used this word and I refer to it because it makes me a little curious, they say that it has been "flirting" a lot with China, in the commercial sector and in various areas.

Do you consider a future scenario in which, in terms of non-trade relations, but in terms of relations within the energy industry, China could compete with the United States as a partner?

Doctor: I think not. Mexico has not worked much for a rapprochement with China, Mexico is no longer an oil power. China is a power demanding energy, demanding oil, there is no structural complementarity, which does not mean that there are no business opportunities, but even so I believe that they have been very fruitful and there is, for example, the experiences of the Toluca train, to give an example, and the two concessions in the Gulf of Mexico, which the Chinese ended up canceling. These concessions that had been given to them for exploration and exploitation. I don't think there are many possibilities, what could be a possibility is what I was saying about Mexico becoming a natural gas hub or that more regasification plants be built than there are to re-export this gas that comes from the United States towards Asia because the market with the greatest demand in the future is the Asian market with China leading all this demand, but in terms of oil the greatest production, in the greatest participation worldwide and, above all, after 2030, will be from the Middle East and the Middle East is there to supply the Asian markets. So all these movements are what we are going to see in the future. In the United States, precisely with liquefied natural gas, its objective is through these methane tankers with which it can re-export the gas to the whole world, since it is to go to all these markets with the greatest demand, to go to Europe, but also to Asia and in terms of greater future growth, since Asia is the privileged market. So, the answer would be, I don't think there are many possibilities with Mexico, yes we can do business, but there isn't a strong structural convergence.

Luis Adrián: Thank you very much for your time, Doctor. I would just like to ask one last question to conclude this interview, you mentioned Trump very briefly while we were talking about Biden's agenda, but in general terms, in summary terms,

What does it mean for Mexico and what does it mean, perhaps, for PEMEX, a second term of Donald Trump?

Doctor: I believe that for Mexico it means continuing to be this strategic partner within the competitiveness strategy of the United States, a strategy that has sought, that is seeking reindustrialization that is seeking the hegemonic repositioning against its two rivals: Russia and China, which is looking for Energy dominance and this is not a small thing, in reality little is known in Mexico, even internationalists have not addressed it in depth, but if I were to say one of the strongest activities in the future In the United States, despite the recent drop due to Covid-19, the production of the United States continues to be the production of hydrocarbons and Energy Dominance. They not only mean markets, they not only mean business for your industry, it also means controlling the price of oil at the international level, which is not a small thing, that is, with the power it has, the diplomatic exercise it has, its foreign policy, In reality, what Mr. Trump has been doing is managing the price of oil in favor of the interest of the United States. And in this there is a whole precedent in the relationship with Saudi Arabia, right now the rapprochement with Qatar, all the game they have in the Middle East, is something that perhaps we do not directly link to this energy project, but that continues to be the objective of control areas of enormous oil resources, there is the case of Venezuela...then, the energy dominance project is going to be very important through integration with North America as a space, as a privileged market, that is, not now They necessarily look to us as suppliers, as Mexico's role has historically been, to be the guarantor of energy security: the US together with Canada. Today, the space of Mexico is more like a market, like this hub that will allow it to reach other latitudes, but in this we must not ignore the strategic role, of geopolitics, of the place that Mexico occupies, the strategic role for this project of competitiveness that he has with his rivals and to a certain extent the good relationship of President López Obrador who, although he has his flats, President López Obrador does not have a principled animosity as we had in the case of other administrations with respect to the presidents, to the heads of the executive in the USA. So, these elements can play a relatively harmonic relationship with the entire situation of structural asymmetry that Mexico has. Here I believe that we should take the best advantage of these opportunities offered by the situation and, despite the negotiation that has its critical points in the T-MEC, for Mexico, I believe that Mexico's task would be to discover these capabilities of negotiation that all these elements give you, of being part of this strategic project, discovering options, discovering these negotiation margins that many times we internationalists have not done because we have simply bought all the theorizing of asymmetry, all the theorizing of hegemonic power that today it is quite weakened, but this reading should also be done in terms of the potential that Mexico can develop of what Mexico would have to do to reposition itself and have a more leading role in North America. So, it is necessary to make a realistic reading with all these structural, conjunctural elements, of asymmetry, of opportunity to draw conclusions.

Dr. Rosío Vargas Suárez obtained the degree of PhD in Energy Engineering, from the Postgraduate Engineering, UNAM (2003). She is a Master in Economics and International Politics from the Center for Economic Research and Teaching (CIDE), 1981-1983, as well as a Graduate in Economics from the Autonomous Metropolitan University, (1976-1980). She currently works as a full-time permanent "B" researcher, attached to the Global Studies Area, CISAN, UNAM.