By Jeffrey Ball | The New Age of Renewable Energy | The Cairo Review of Global Affairs | Winter 2018
Near the town of Sweihan, in southern Abu Dhabi, construction is underway on what is slated to be the world’s largest solar project, an expanse of metal and glass expected to cover three square miles. At Sakaka, in northern Saudi Arabia, plans are proceeding for a massive solar installation whose electricity appears likely to sell for less than 3 cents per kilowatt hour, one of the lowest prices in the world. Morocco, which has opened at the foot of the High Atlas mountains a solar project composed of hundreds of curved mirrors, each the size of a bus, says that within a decade the country will produce half its electricity from renewable sources.
Renewable energy is undergoing a revolution. It is surging in scale and plummeting in price, and in the process it is deepening geopolitical rifts, upending corporate business models, and reshaping global energy markets. No place illustrates renewable energy’s unexpected rise and unpredictable ripples better than the Middle East and North Africa (MENA), a region in which several countries that for a century have produced epic power with energy from the ground are now finding compelling economic reasons to exploit energy from the sky. It is a shift that would have been unthinkable just a decade ago.
Geologists, investors, and policy makers have known for generations that this sandy patch of the planet brimming with buried fossil fuel also is blessed with vast supplies of wind and sunlight. What is changing is that they now see compelling financial reasons to care. A confluence of economic forces that they either didn’t sense coming or hoped would sputter has power brokers in the MENA region gunning to exploit the money-making potential of a suite of energy sources previously dubbed alternative but now entering the mainstream.
The renewable-energy transformation, still in its early days, begs two questions.
One is economic: who—which countries, industries, and individual companies—will win and lose in the diversification from energy that’s finite to energy that’s not? Another is environmental: will the renewable-energy ramp-up prove big enough to meaningfully help a planet that as a result of human activity has been heating up?
The answers will depend largely on finance and policy—which thus far have been economically inefficient and will have to become vastly more productive if renewable energy is to reach its economic and environmental promise.
The dirty truth about renewable energy is that it isn’t yet making much of an environmental difference. Whether it ends up protecting the planet—whether, that is, it significantly curbs carbon emissions—will depend on whether its costs decline far more radically than they have thus far. As such, a ruthless focus on wringing out excess cost should be the goal of policymakers who want to optimize renewable-energy sources and meaningfully increase their role in the greater economy.
Read more here.
By Jeffrey Ball | Shell Faces "Lower Forever" | Fortune | February 2018
Last March, Royal Dutch Shell said it was selling most of its stake in Canada’s oil sands, a vast project that has extracted millions of barrels of sticky, gooey hydrocarbons from the ground in a process that resembles mining more than drilling. The oil and gas giant announced that it was unloading its oil-sands assets, for $7.25 billion, so that it could double down on businesses “where we have global scale and a competitive advantage.”
Left unsaid was a deeper reason for the divestiture. Months of deliberations behind closed doors at Shell headquarters in The Hague, Netherlands, had led the top brass at the world’s largest non-state-owned oil company by sales to conclude that the energy industry was changing fundamentally—in a way that could turn the profitable oil-sands operation into a liability.
Internal studies by a group of analysts within Shell known as the “scenarios” team had concluded that global demand for oil might peak in as little as a decade—essentially tomorrow in an industry that plans in quarter-century increments. Hastening the peak was an onslaught of increasingly competitive fossil-fuel alternatives, from solar and wind power to electric cars, whose prices were dropping far faster than Shell executives had expected. When the oil-demand peak came, Shell believed, petroleum prices might begin a slow slide, dipping too low to cover the costs of oil-sands production.
This wouldn’t be just another oil-price cycle, a familiar roller coaster in which every down is followed by an up. It would be the start of a decades-long decline of the Oil Age itself—an uncharted world in which, in a phrase gaining currency at Shell, oil prices might be “lower forever.”
If that scenario materialized, and you were stuck holding the oil sands, Jeremy Bentham, the head of Shell’s scenarios team, tells me, reprising in his British lilt the gist of a memo he wrote to his boss not long before the company decided on the sale, “you were—gosh, forgive me—fucked.”
Shell—a cash machine that racked up $9 billion in profit in the first nine months of 2017; a colossus that employs 90,000 people in more than 70 countries; a corporation that, were it a nation, would have the world’s seventh-largest carbon footprint, behind Germany; and the No. 7 company on Fortune’s Global 500 list last year, with $240 billion in sales—is in an existential squeeze. It has concluded that oil demand is likely to peak sometime between the late 2020s and the late 2040s because of an epic shift underway in the energy industry: a transition from petroleum to electricity.
Read more here.
By Jeffrey Ball | Germany's High-Priced Energy Revolution | Fortune | March 2017
By Jeffrey Ball
As many generations of Dieter Dürrmeier’s family as he can track have grown vegetables and tended livestock here in Opfingen, a hilly corner of southern Germany near the French and Swiss borders. Over the decades the Dürrmeiers have adapted, ever on the lookout for new ways to make money. In 1963, Dürrmeier’s father exploited cheap government loans to move his 136-acre farm from the crowded village to the outskirts of town. In 1986 the Dürrmeiers stopped raising cows and shifted to the less cyclical business of boarding wealthy city dwellers’ horses. But the family’s current shift has been its most lucrative yet. Though they still grow asparagus and grapes and tend to the equines, the Dürrmeiers today harvest their fattest earnings from sunshine. Thanks to generous checks from the German people, that crop from the sky spins off cash more reliably—and at higher margins—than anything the Dürrmeiers have ever grown in the ground.
On a recent frigid winter night, wearing a red-and-green flannel shirt and mud-caked boots, Dürrmeier takes a break from feeding the horses and chats under the eave of a barn, one of four work buildings on whose roofs he has installed subsidized solar panels. The glass-and-metal sheets, whose production he monitors in real time on a computer in his office, fetch him a steady profit of about 40,000 euros (about $42,000) annually. That equates to about 40% of the earnings from his entire farming operation. As he describes his solar windfall, the balding, barrel-chested 62-year-old is both proud and embarrassed.
“For us it’s a very good business, but for the German people it’s very bad,” Dürrmeier says of the government policy that has turned intermittent sunshine into an all but sure thing for his wallet. Germany’s solar-subsidy scheme pays him a set price for every kilowatt-hour of electricity he produces with his solar panels and sells into the grid. It guarantees him that price, which when he started was several times the prevailing electricity rate, for 20 years.
When he learned of the subsidy more than a decade ago, he says, “I was at first skeptical because it was a bit too good, and I personally objected because I thought that subsidies were generally bad for the economy as a whole. But if it was offered, I had to take it. It was against my beliefs, but as an entrepreneur it was the right thing to do.”
Germany has launched a renewable-energy revolution, and it’s paying a fortune to achieve it. In the past decade its green-minded politicians, backed by green-minded voters, have undertaken an extraordinary energy transition known in German as the Energiewende. At the center of the transformation has been a slate of renewable-energy subsidies that have dramatically scaled up once-niche solar and wind technologies and in the process have slashed their cost, making them competitive in some cases with fossil fuels.
Thanks to Germany’s lavish first-mover spending, a raft of second-mover countries, from the U.S. to China to India, are now installing solar and wind power on a huge scale. If renewable energy ends up significantly helping curb climate change, then history may judge the Energiewende as a remarkable example of global leadership.
The raw ambition of the Energiewende is both mind-boggling and quintessentially German. It reflects the engineering prowess of a country that built the Autobahn, pioneered modernist architecture, and cranks out sleek BMWs and Mercedes. It evokes the environmental ideals of a society that idolizes the Black Forest, led the way in organic farming, and still celebrates Goethe’s nature-loving poems. It bespeaks the moral confidence, both wrong and right, of a culture that created Romanticism in the late 18th century, Nazism in the 1930s, and one of the world’s most generous campaigns to welcome refugees today.
But all that ambition is bleeding Germany. The mounting costs are testing its resolve. Leading politicians, even those with strong environmental credibility, are racing to rein in spending. If they can’t achieve that, then Germany’s near miracle may be remembered as the environmental equivalent of, say, heart-transplant surgery: a worthy endeavor, undoubtedly, but one that remains unattainable for all but the very wealthiest.
Read the full piece here.
By Jeffrey Ball | Donald Trump and Rex Tillerson: Conflict Ahead? | Fortune | January 2017
By Jeffrey Ball
At first glance, President-elect Donald Trump seems to be making his cabinet in his own image. Exhibit A, the theory goes, is Trump’s secretary of state nominee: Rex Tillerson. Like Trump, the Exxon Mobil CEO is well compensated, confident, and content with a fossil-fueled future. But there are profound differences between the Queens real estate baron and the Texas energy titan. And from the vantage point of this reporter, who spent a few years covering Exxon Mobil. it’s only a matter of time before those differences break into the open—with potentially significant implications for U.S. policy.
Read the full piece here.
By Jeffrey Ball | An Environmental Watershed? | Journal of Corporate Citizenship | December 2016
By Jeffrey Ball | Silicon Valley's New Power Player: China | Fortune | December 2015
By Jeffrey Ball
One of Sonny Wu’s favorite restaurants in the city where he lives is a venerable wood-paneled haunt in central Hong Kong where the waiters wear black bow ties and the menu melds comfort food from the East and West. On a recent Sunday evening, dressed in jeans, an untucked red-and-white checked shirt, and a gold Patek Philippe watch, Wu, a 47-year-old venture capitalist, is attacking dinner in much the same way he attacks whole industries these days: He sits quietly in a corner, snaps up a range of options, and gorges himself.
As he demolishes a platter of barbecued chicken wings and washes it down with hot tea, Wu explains why he’s racing to corner two sectors he believes are primed for explosive growth: LED lights and electric cars. In March, Wu scored his biggest win yet. He beat out such suitors as KKR and Bain & Co. for a $3.3 billion purchase of 80% of Philips’ Lumileds unit, one of the world’s leading LED-light makers. Now he’s preparing to move the California-based arm of the Dutch multinational to China, where he is building factories to scale up the business.
A similar strategy led him in 2011 to buy control of Boston Power, a Massachusetts battery maker that boasted advanced technology but couldn’t commercialize it. He moved the company to China, and then, in 2014, he bought a stake in a little-known Chinese electric-car maker, Xindayang, which today is cranking out bulbous, brightly colored electric cars with Boston Power batteries under the hood. The company has sold about 32,000 electric cars this year—each for about $10,000.
Xindayang’s growth trajectory, Wu claims, puts it on track to soon sell many more cars than Tesla Motors, the California-based maker of luxury electric vehicles that, along with its CEO, Elon Musk, is a global sensation. “Elon Musk is sexy, but Elon Musk is not changing the world,” Wu declares, his fingers glistening with barbecue sauce. “Let’s be frank. The guy who’s making the $100,000 car is not changing the world. The guy who is making the $10,000 electric vehicle is changing the world.”
He pauses, then grins. “You cannot have caviar every day. You have to eat chicken wings.”
Wu—part Chinese, part North American, all audacity—is the model of a new breed of global high-tech financier. He grew up in China and Canada, dropped out of graduate school at the University of California at Berkeley, and speaks unaccented Mandarin, Cantonese, and English. He has luxury homes and offices in Beijing, Hong Kong, and Silicon Valley, and he acts like a local on both sides of the Pacific—a body of water he treats essentially as a puddle, hopping across and back, first-class, more than a dozen times in a typical year. A chauffeur in Beijing ferries him around in a Porsche Cayenne, the desk manager of Shanghai’s five-star Jing An Shangri-La Hotel knows him by name, and Wall Street’s biggest banks now recognize him as a serious player.
The brash investor is quickly amassing an empire that, bankrolled in part by his friends in the Chinese government and among China’s billionaire set, is snarfing up technology companies from across the U.S. and around the world. His strategy is simple, unsentimental, and a sign of the times: Buy Western companies that have good technologies but poor domestic growth prospects and bring them to China, where Wu and his contacts serve up the money and the market to help the firms grow very big, very fast.
China, the world’s biggest polluter, is racing to clean itself up. The skies above its cities have become so poisonously smoggy that what started as a public-health danger has become, for China’s ruling regime, a political threat. That’s why Beijing is cracking down on pollution. The country’s leaders are mandating improved efficiency for coal-fired power plants, rolling out fat incentives for renewable energy and electric cars, and advising government-affiliated banks to help finance this power shift. At the same time, the country sees clean-energy technologies as a huge new market. Just as China cornered the manufacture of T‑shirts and televisions a generation ago, so it is moving to dominate the production of electric cars and solar panels in the near future.
In the U.S., China’s clean-energy push elicits both praise and terror. Environmentalists laud it, arguing that only if China, the world’s biggest greenhouse-gas emitter, goes green will the world have any chance of solving climate change. Nationalists decry it, fearing that China is snagging American clean-energy technologies that could, in the fullness of time, look like lost crown jewels. As for the Silicon Valley entrepreneurs developing these technologies, they’re simply seeking capital to fund their ventures—and finding that increasingly it comes from China.
Read the full piece here.
By Jeffrey Ball | Who Will Pay for Climate Change? | New Republic | December 2015
By Jeffrey Ball
The Munich Reinsurance Company has been in the sober business of managed risk since 1880. Munich Re, as it is now known, helped pay for the devastation caused by the San Francisco earthquake in 1906, Hurricane Hugo in 1989, and the assault on the World Trade Center on September 11, 2001. The company, which in 2014 paid out approximately $45 billion in claims and netted $4 billion in profit, employs some 43,000 people—underwriters, economists, accountants, lawyers, and scientists—all working to predict and plan for the future, and with a shared mission: to make sure Munich Re is never surprised. Risk properly calculated makes money for Munich Re; risk unanticipated could bankrupt it.
These days, the greatest unpredictable risk Munich Re faces is climate change. Like other major insurers, Munich Re follows a standard procedure to ensure its premiums are set high enough to cover natural-catastrophe claims. Much of this work relies on what the company calls “event sets”— databases of past claims for a given type of loss in a given area. The company plots information from the event sets on a graph to form “loss-return curves,” which are used to make informed projections for the future. Assuming the curves are accurate—that future losses occur at a rate and intensity broadly consistent with past losses—all is well. Revenue
from the premiums outpaces the costs of claims, corporate income rises, and investors bid up the stock. This is as it has ever been: Floods are few; insurance policies are many.
But insurance companies are starting to worry that climate change will upend the curves. Munich Re began studying global warming in 1974, when, in response to a global surge in natural catastrophes, it founded what it called the Joint Office for Natural Hazards. Known today as the Corporate Climate Center (CCI), the operation involves in-house geologists, geographers, hydrologists, and other scientists who research climate change and then model the ways it might affect the frequency and force of the natural disasters for which Munich Re sells surety.
Peter Hoeppe, a meteorologist, heads the CCI, and his group has concluded that, for the next few decades, climate change will remain fairly easy to predict and thus to insure. Beyond 2050, though, absent massive cuts in global greenhouse-gas emissions, “We may run into a situation where we have abrupt changes, and things become uninsurable,” Hoeppe told me. Abrupt changes is scientific euphemism for major disasters that Munich Re can’t foresee. That translates into premiums set too low to cover unexpected claims—and, more specifically, losses that could wipe out an alarming chunk of the company’s profits.
Large corporations always have been seen as the villains
of the environmental movement—and with good reason. It was corporations whose cars coughed out smog, whose chemicals produced Superfund sites, and whose coal mining despoiled mountains. But today, in the fight against climate change, big business is emerging, if not quite as a hero, then as one of the world’s most important reformers. Politicians have so far failed to act with anything approaching the seriousness the scale of the problem requires. As governments dither, however, some of the world’s most potent multinationals have concluded that rising temperatures threaten their business. Thus they have begun to respond to global warming in the way they’d respond to any material financial threat: They’re looking to minimize it.
Many of the executives shouting about the perils of climate change from their corporate jets are little more than Madison Avenue marketers, ladling on cheap greenwash to obscure a financial structure that continues to profit mostly by polluting. That’s unsurprising and unlikely to change. What’s significant is that a widening web of corporate powerhouses—most notably in the finance industry, led by big insurers and banks— have begun to demand serious, sophisticated, and specific steps to counter global warming. Big businesses want nothing so much as predictability, and many of them have concluded that climate change is a wild card, one that they must control and ought to exploit.
Auto, oil, coal, agriculture, and other energy-intensive companies have been participating in the climate fight for years. But their intent has rarely extended beyond regulatory capture: The big burners have sought to be seen as reasonable on the issue because perceived reasonableness affords them a seat at the political table at which carbon-emission restrictions are written—with the cleanup burden, hopefully, shifted to someone else.
What’s happening now is different. Firms with comparatively small greenhouse-gas footprints, notably in the financial sector on which the global economy depends, have concluded their profitability is imperiled by climate change itself. It isn’t in their financial interest to minimize climate curbs; it’s to maximize them. Instead of regulatory capture, they want regulatory crackdown.
Read the full piece here.
By Jeffrey Ball | Why the Saudis Are Going Solar | The Atlantic | July/August 2015
By Jeffrey Ball
Prince Turki bin Saud bin Mohammad Al Saud belongs to the family that rules Saudi Arabia. He wears a white thawb and ghutra, the traditional robe and headdress of Arab men, and he has a cavernous office hung with portraits of three Saudi royals. When I visited him in Riyadh this spring, a waiter poured tea and subordinates took notes as Turki spoke. Everything about the man seemed to suggest Western notions of a complacent functionary in a complacent, oil-rich kingdom.
But Turki doesn’t fit the stereotype, and neither does his country. Quietly, the prince is helping Saudi Arabia—the quintessential petrostate—prepare to make what could be one of the world’s biggest investments in solar power.
Near Riyadh, the government is preparing to build a commercial-scale solar-panel factory. On the Persian Gulf coast, another factory is about to begin producing large quantities of polysilicon, a material used to make solar cells. And next year, the two state-owned companies that control the energy sector—Saudi Aramco, the world’s biggest oil company, and the Saudi Electricity Company, the kingdom’s main power producer—plan to jointly break ground on about 10 solar projects around the country.
Turki heads two Saudi entities that are pushing solar hard: the King Abdulaziz City for Science and Technology, a national research-and-development agency based in Riyadh, and Taqnia, a state-owned company that has made several investments in renewable energy and is looking to make more. “We have a clear interest in solar energy,” Turki told me. “And it will soon be expanding exponentially in the kingdom.”
Such talk sounds revolutionary in Saudi Arabia, for decades a poster child for fossil-fuel waste. The government sells gasoline to consumers for about 50 cents a gallon and electricity for as little as 1 cent a kilowatt-hour, a fraction of the lowest prices in the United States. As a result, the highways buzz with Cadillacs, Lincolns, and monster SUVs; few buildings have insulation; and people keep their home air conditioners running—often at temperatures that require sweaters—even when they go on vacation.
Saudi Arabia produces much of its electricity by burning oil, a practice that most countries abandoned long ago, reasoning that they could use coal and natural gas instead and save oil for transportation, an application for which there is no mainstream alternative. Most of Saudi Arabia’s power plants are colossally inefficient, as are its air conditioners, which consumed 70 percent of the kingdom’s electricity in 2013. Although the kingdom has just 30 million people, it is the world’s sixth-largest consumer of oil.
Now, Saudi rulers say, things must change. Their motivation isn’t concern about global warming; the last thing they want is an end to the fossil-fuel era. Quite the contrary: they see investing in solar energy as a way to remain a global oil power.
Read the full story here.
By Jeffrey Ball | Facing the Truth About Climate Change | New Republic | February 2015
By Jeffrey Ball
In June 1975, a Yale economist named William Nordhaus published a paper for the International Institute for Applied Systems Analysis, an Austrian think tank. In the paper, he put forward a theory about a potentially globe-altering climate-change Red Line—a threshold that, if crossed, could result in a fusillade of environmental dangers. Research suggested that a rise in carbon-dioxide emissions from burning fossil fuels might melt the Arctic Sea ice, prompting a “dramatic” increase in rain and surface temperatures. “The consequences of these changes for human affairs are clouded in uncertainty,” he wrote, but the prudent response was clear: Prevent emissions from pushing the mean global temperature more than 2° Celsius above pre-Industrial-Age levels.
In 1990, a United Nations climate change advisory group transformed Nordhaus’s little-noticed notion into a global line in the sand. The two-degree shift “can be viewed as an upper limit beyond which the risks of grave damage to ecosystems are expected to increase rapidly,” the group wrote in a report. “Important scientific uncertainties remain,” it added, but they “must not be used as an excuse to avoid adopting policies” that would avoid breaking through the two-degree barrier. Since then, scientific research, reporting, and economic analyses have centered on this particular number.
In November 2014, during a meeting in Beijing of the Asia-Pacific Economic Cooperation forum, President Barack Obama joined with Chinese President Xi Jinping to pledge their countries, the world’s two top carbon-dioxide emitters, to clear emission-reduction targets. Xi vowed that China’s rapidly expanding emissions would peak by approximately 2030; Obama committed the United States to cut its emissions at least 26 percent below 2005 levels by 2025. These cuts, Obama said, would help achieve the “deep emissions reductions by advanced economies” that the global scientific community has deemed necessary to prevent “the most catastrophic effects of climate change.”
Admirable goals, but they’re unlikely to have the intended effect. Even with these changes, scientists expect global temperatures to breach the two-degree barrier within the next 20 to 30 years. Last year, a report by the U.N. Intergovernmental Panel on Climate Change (IPCC) said that temperatures are “more likely than not” to exceed 4° Celsius above pre-industrial levels by 2100.
Keeping temperatures within the two-degree window remains possible, but it won’t be easy. It would require slashing man-made greenhouse gas emissions as much as 70 percent below 2010 levels by 2050, according to the IPCC—and then essentially eliminating them altogether by 2100. That is a radically different path than the one the world has chosen. Emissions today, despite impassioned calls by environmentalists, celebrities, and the right-minded, are headed in the same direction as when Nordhaus introduced the two-degree barrier 40 years ago: upward.
Climate change is the hardest of all environmental problems. Its chief cause, carbon dioxide, is invisible, and its deleterious effects play out over decades, thus minimizing the public sense of crisis. It is largely produced by burning fossil fuel—which is to say by doing almost anything. And a meaningful solution would require life-changing action by the largest economies on earth. Little wonder that political inertia has prevailed.
The fossil fuel industry has lobbied hard against climate legislation, correctly seeing it as a threat to profits from coal, oil, and natural gas. Leading Republican legislators continue to dispute that a problem even exists. On January 21, 49 senators, all Republican, voted against a relatively anodyne nonbinding resolution that stated that humans contribute to climate change. In 2012, Oklahoma Republican Senator James Inhofe, chair of the Senate Committee on Environment and Public Works, published a climate change book titled, The Greatest Hoax: How the Global Warming Conspiracy Threatens Your Future.
Key Democratic politicians have professed support for a climate crackdown in theory, but they’ve sprinted headlong from it when confronted with the details of the cost to companies and voters in their districts. West Virginia Democratic Senator Jay Rockefeller is a good example. In 1972, when he ran for the state’s governorship, he campaigned against strip-mining for coal, a stance he described in a subsequent Timeinterview as having “adrenalized” him. In 2003, he voted for a bipartisan cap-and-trade bill limiting carbon emissions. (The bill was defeated.) In 2010, though, with Democrats in control of the Senate, the House approved a climate bill and Rockefeller declined to use his leadership position to pass it.
In China, meanwhile, government planners have been predicting for five years that the country’s emissions will peak around 2030. That’s partly due to China’s slowing growth and is also a by-product of its campaign to mitigate smog. It does cast Xi’s pledge in a decidedly less revolutionary light, however. So does the near certainty that his proposed cuts will not stop the planet from passing the two-degree threshold.
Something has to change. Partisan fighting on either side of the aisle won’t do it. Neither will international climate agreements, which have been easily gamed. A technological breakthrough—a clean-energy silver bullet that would allow the world to decouple economic growth from carbon dioxide—might. But betting on a grand laboratory innovation requires hope for the best; better to hedge against the worst. The means to meaningful change on global warming is within the world’s grasp. It requires smarter climate policy: more targeted and more economically efficient. It requires, in short, getting more realistic.
Read the full story here.
By Jeffrey Ball | The Drama of Mexico's (Black) Gold | Fortune | September 2014
By Jeffrey Ball
Mother Nature long coddled Mexico’s national oil company, blessing it with fountains of homegrown black gold. But in recent years she has gotten ornery, frustrating Petróleos Mexicanos with juicy but recalcitrant fields of oil. One day this spring she played a nasty joke. She unleashed a 6.4-magnitude earthquake on Mexico that caused the 50-story headquarters of the company known as Pemex to sway woozily, like an aging prizefighter struggling not to fall. Inside the iconic but timeworn building, the second-tallest in Mexico City, doors rocked on their hinges, metal blinds banged against windows, and frightened workers braced themselves inside door frames, hoping to ride out a threat they all knew was beyond their control.
Scant hours later, Pemex’s 39-year-old chief executive, Emilio Lozoya, sits at the head of the massive conference table in his cloud-level office. The Pemex tower has stopped shaking, but the Pemex corporation faces a foundational challenge. In a move that has both shocked and thrilled the global oil industry, Mexico’s government is performing an about-face.
For the first time in three-quarters of a century, it intends to invite international oil firms into the country to sink their drills into its petroleum-rich earth. That decision has infuriated many Mexicans, and it fundamentally threatens Pemex, which has always been a monopoly. As the oil giants prepare to pounce, Lozoya, a Harvard-educated investment executive and an oil industry newcomer, has the task of whipping the bloated behemoth into competitive shape.
“It is, by all means, the most important transformation Pemex has suffered in our entire 76 years,” says the fresh-faced CEO, who speaks excellent English and chooses his words—including his verbs—deliberately. As he talks, he jots talking points onto a small white notepad that has been placed in front of his high-backed chair. By his right hand sits a red phone, a direct line to the office of Mexican President Enrique Peña Nieto, the oil reform’s architect and Lozoya’s friend and boss. Everything about Mexico’s energy opening is being carefully choreographed. But in Mexico’s rough-and-tumble energy business, even the most meticulous plans have a way of getting blown up.
Ever since 1938, when Mexico expropriated its gushing oilfields from foreign companies in a burst of revolutionary nationalism, that bounty has been off-limits to outside producers. The oil has been the exclusive purview of Pemex. Favored by geology as well as by law, the company has had the luxury of getting most of its oil from a couple of huge, easy-to-tap underground formations—known in the industry as “elephants.” Indeed, Pemex has become legendary in the oil world for its factory-like approach to pulling oil from a particularly Mexican type of elephant: fields in shallow water, just off the country’s Gulf coast. But along the way, Pemex has become notoriously inefficient. The company ranked No. 36 among the Fortune Global 500 last year, with revenue of $126 billion. But Pemex also posted a $13 billion net loss. The company is laden with bureaucracy, teeming with superfluous workers, and, by its own executives’ admission, thwarted by corruption. The result is both stunning and not very surprising: In a country that ranks ninth or 10th in global oil production, depending on who’s counting, and that some geologists say contains the largest unexplored petroleum area beyond the Arctic Circle, Pemex has presided over a steep decline in Mexico’s oil output.
That decline—Mexico’s oil production has tanked 25% over the past decade, to 2 million barrels per day—threatens the country’s ability to pay its bills. Pemex’s oil revenue is the single biggest contributor to the Mexican treasury, supplying roughly one third of the national budget. It’s doubly embarrassing for this proud country because it comes as an oil boom is exploding next door in the U.S. That’s why Mexico now is rolling out the red carpet for the international oil firms it once threw out.
If it works, foreign players ranging from super-majors to wildcatters will pour into Mexico and pull up the crude and natural gas that Pemex has failed to tap from Mexico’s increasingly technically challenging fields. Pemex will be guaranteed favored-son status, granted an initial slate of fields in a much-anticipated government decision known as Round Zero that was to be unveiled as this issue went to press. But unless Pemex can prove itself competitive, it will be largely relegated to the relatively simple fields it has learned to exploit well, while foreign companies will dominate the vaster troves of Mexico’s harder-to-get hydrocarbons, from the deep waters of the Gulf of Mexico to shale plays near the U.S. border. The government hopes this race will boost the amount of Mexican oil that flows onto the market—raising the take for the state, which will get a cut of every barrel. Equally important, it hopes the surge in Mexican oil and gas production will have a raft of spillover benefits for the country, slashing electricity prices, attracting industry, and bankrolling services for the people.
But whether Mexico rocks the energy world will depend on whether it can execute its pledge to reform Pemex, a sprawling bureaucracy that for generations has had its hands in every aspect of the country’s oil sector. A few months in, the attempt is hitting major roadblocks. The difficulty is partly that Pemex is a poster child for corporate dysfunction. It’s also that Pemex, however dysfunctional, is seen by much of the Mexican public as the guardian of the nation’s patrimony.
Read the full story here.