Every couple of minutes, a large truck splattered with mud rumbles through the gate to what was once an expanse of mangroves. After recent rains, a lake has formed where the lush vegetation once flourished. Further on, more than 20 yellow diggers are hard at work scooping up sludge, which lorries dump in a nearby field.

For Mexican president Andrés Manuel López Obrador, who wants to turn this swamp into his signature infrastructure project—an $8 billion oil refinery—the location in his southeastern home state of Tabasco could not be better. The town is called Paraíso, or paradise.

The president sees it as the promised land for Pemex, the struggling national oil company; for Tabasco, whose economy shrank 11% in the first quarter; and for people like Concepción Álvarez, who has parked his cart selling juices and snacks outside the gates to the site. “This is going to change things. It’s going to create jobs,” he said.

The planned refinery, beside the Dos Bocas port, is much more than just a prestige project. It is a powerful symbol of the new economy López Obrador wants to build: state-directed, centrally-driven, reliant on national production and free of foreign influence.

Pemex is the centerpiece of López Obrador’s aspiration to overturn what he sees as more than three decades of “neoliberal” economic policy. One of his first moves after taking office was to order the oil company to add the motto “For the recovery of sovereignty” to its Mexican-eagle logo.

“Pemex means so much to López Obrador because he is from an oil state and came of age in the 1960s, when Pemex was very powerful,” says one former senior government official. “It’s the cornerstone of his presidency and his economic policy.”

But many businesspeople, former senior government officials, ex-Pemex executives and investors believe the rescue strategy for the oil company is deeply flawed. The likely outcome of the plan, they say, will be missed targets and wasted resources. That could lead to downgrades of both the company’s and Mexico’s sovereign debt and risk further economic stagnation.

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Critics also point out that a mixture of hubris and mismanagement at other state oil companies has been a central factor in Brazil’s recent downturn and Venezuela’s dramatic economic collapse.

“What he’s doing is taking scarce resources from elsewhere in the budget and plunging the money into Pemex desperately hoping to boost its production and make it the incubator of growth,” says Duncan Wood, head of the Mexico Institute at the Wilson Center in Washington. “It’s a very strange idea that oil, the archetypal 20th century commodity, can drive growth in a 21st-century economy.”

López Obrador, also known as Amlo, won a landslide victory last year, crushing his opponents with a promise to usher in a “fourth transformation” of Mexico, overturning 36 years of free-market economic policy which opened the country to international trade and investment and had as its centerpiece the 1994 North American Free Trade Agreement, or NAFTA.

“The economic policy followed during the neoliberal period from 1983 until now has been the most inefficient in Mexico’s modern history,” López Obrador fumed at his inauguration in December 2018. “In this time the economy has grown by 2 percent a year and--the majority of the population has been impoverished--neoliberal economic policy has been a disaster.”

The president’s view that Mexico has experienced disappointingly low growth is widely shared. But his solution is more controversial. It bets heavily on additional government investment into the state oil company to boost the economy rather than using the private sector. Elsewhere, public spending has been cut and the savings redirected towards new social programs. Further economies are promised from a crackdown on corruption. Nationalism is a constant refrain. “We will sow oil and reap self-sufficiency in food,” López Obrador promised last week.

The 65-year-old president wants to return Mexico to what he sees as the golden period of his 1960s youth, when the country was a closed, state-directed economy growing by 6% per year.

Pemex occupies a special place in the Mexican psyche because of its creation as a state monopoly by Lázaro Cárdenas, one of López Obrador’s heroes, who expropriated the assets of US and British oil companies in 1938.

A giant by any measure, Pemex is Mexico’s biggest company by revenue and Latin America’s second largest. But it is also a record-breaker for the wrong reasons: its $104 billion of loans makes it the world’s most indebted oil company, while its workforce of 125,000 is more than double that of Petrobras, its Brazilian state-controlled rival, whose revenues are 10% higher. “A lot of that labour force is more of a burden than an asset,” said Valérie Marcel, an expert on national oil companies at Chatham House in London. “The lack of investment in skills is a big issue.”

Pemex’s production peaked at 3.4 million barrels per day  (MMbbl/d) in 2004 but lenders worry that Mexico’s huge Cantarell field is now depleted and Ku-Maloob-Zaap, the top producing field, is declining faster than expected. Obliged to hand over most of its income to the finance ministry—oil revenues still funds a fifth of the national budget—the company has been starved of investment. A lack of expertise in deep water exploration and fracking mean it has missed opportunities to make big new discoveries and replenish its diminishing reserves.

“Pemex has been badly run for years,” says one former senior executive. “It was losing money every year and funding itself with debt and it didn’t adapt to the fall in oil prices by cutting costs.”

The previous government tried to solve the problem by reversing decades of resource nationalism, allowing outside capital to develop new fields. Contracts also brought a tax take for the government worth as much as nine out of every 10 barrels produced.

López Obrador has scrapped that approach, ridiculing what he says were previous promises that Mexico would by now be producing more than 3 MMbbl/d. “We must not forget that the technocrats deceived us by saying that the energy reforms were a panacea, that if they were approved we would be much better off,” he said last week. “What they did was very irresponsible.”

He regularly takes aim at the private oil companies which won bid rounds launched under the 2013 energy reform, saying they are not investing or producing enough.

The reform also allowed Pemex to partner with private companies to share risk. Ignoring concerns from some in his own government, the president has put both joint ventures and exploration concessions on hold until he is happy that they are delivering results. Pemex will offer far more limited service contracts in November, but with little upside for the private partners, they are widely seen as unattractive.

Instead, López Obrador is relying on Pemex to boost exploration and production. He hopes to restore its reserves, invest in the ambitious Dos Bocas oil refinery and repair Pemex’s six loss-making existing refineries to make Mexico self-sufficient in fuel, severing dependence on US imports.

The president has put his faith in two people he calls “first-rate public servants”. Rocio Nahle, the energy minister, is a leftwing nationalist and former Pemex engineer, while Octavio Romero, an agronomist from the president’s home state with no oil industry experience, is the Pemex chief executive. Completing the team is Alberto Velázquez, a university economics professor, as Pemex finance chief. None responded to requests to be interviewed for this article, nor did López Obrador.

The new Pemex management made a rocky start with a presentation to investors in New York in January, where their sketchy plans alarmed participants, according to some of those present.

Pemex’s 2019-2023 business plan, presented in July, went down equally badly. Investors promptly sold the peso and Mexican debt, saying they were not convinced by its forecasts. The plan paints a rosy picture in which fresh investment in exploration and production rapidly leads to additional oilfields coming on stream and fresh discoveries. Additional investment in repairs to refineries would almost double domestic capacity to process the crude oil by 2022.

“The principal problems of Pemex are governance, incentives and cost,” said Justin Leverenz, portfolio manager at the $42 billion Invesco Oppenheimer Developing Markets Fund and one of the biggest investors in Mexican equities. “Looking at the cash flow and the balance sheet, and without the possibility of radical structural change, it’s pretty clear Pemex is heading to a bad future.”

Recent slides prepared by the company show 20 new fields starting to pump from this year, helping power a rise in production to nearly 3m barrels per day by 2026 — a level not achieved by Pemex since 2007. The exploration push would see an estimated 20 to 40 new fields a year discovered in the next five years and reserves steadily increasing.

A former senior executive at a private oil company operating in Mexico says the projections are unrealistic. “Not even BP or Exxon or Shell can get 1m barrels of exploration in five years — it’s impossible. There is a serious disconnect between capability, investment and the needs of their portfolio.”

A former independent board member of Pemex also called the production targets “impossible”. “The 20 small new fields will barely compensate for the decline of the big fields,” he says. “You cannot get 1m bpd of additional production; these small fields will never manage that.”

Gonzalo Monroy, an energy analyst, says “the reality and the refinery figures don’t coincide”. Even officials within Pemex have questioned the feasibility of Dos Bocas — especially since Mexico is not projected to have enough of the heavy crude it is designed to process.

Indeed, the whole Pemex business plan, a former senior finance ministry official says, “makes no sense at all.”
Pemex’s press office declined repeated requests for comment.

Rating agencies are also worried about Pemex. Fitch downgraded its debt to junk in June and Moody’s put the company on negative outlook, while S&P is also believed to be considering a downgrade to junk, a move that would force some holders of Pemex debt to sell because their funds mandate holdings in investment grade paper. López Obrador has responded by attacking the rating agencies as unprofessional, accusing them of using “outdated neoliberal methods” in their calculations.

“Amlo’s economic program relies heavily on boosting Pemex’s control over Mexico’s energy sector, to the detriment of the private sector,” says Gustavo Rangel, chief economist for Latin America at ING, in a note. “Alienating the private sector at a time when the federal government’s ability to invest is severely restricted appears to be a high-risk strategy.”

A former senior Pemex executive blames a presidential obsession with production targets for hurting the company’s finances and increasing pressure on its staff to flatter numbers. “No CEO of Pemex is looking for profit,” he says. “They are looking for production because that’s what the president wants?.?.?.?you need to be able to lie a little in order to keep your job.”

For critics of the president, López Obrador’s focus on Pemex as an engine of national development raises questions about the limitations of his broader economic policy. By hitching Mexico’s future growth so closely to the ailing company’s fortunes, the president is significantly increasing the risk of budget shortfalls and problems with the country’s $200 billion of sovereign debt, investors and businesspeople believe.

“Pemex is a great case study for how López Obrador conducts policy,” says a second former senior government official. “He wants to do something big but he doesn’t have a plan which experts believe is credible. It’s the same story with improving security and, again, with the fight against corruption.”

“Something that worries us a lot with this president is the lack of rational administration and the lack of evidence for decision-making,” says Gustavo de Hoyos, head of the employers’ federation Coparmex. “Decisions are erratic. Why do we want a refinery in Dos Bocas?”

A dwindling group of optimists in Mexico hope that if Pemex fails to deliver in a couple of years, López Obrador will be forced to take a more pragmatic approach and restart private sector energy joint ventures.

But more likely, many believe, is a steady deterioration in Mexico’s economy, raising the prospect of “a vicious cycle of stagnation and credit rating downgrades”, said ING’s Rangel.

Luis de la Calle, a former Mexican government trade negotiator and World Bank economist who now runs a consultancy, says: “The main risk with López Obrador is incompetence in three areas: an incompetent ideology; incompetence in the way he governs; and incompetence in the choice of people.

“His chances of success are low,” de la Calle concludes.

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