The Unexpected Holdout to a Global Oil Production Deal
(Bloomberg) -- One of the most dramatic global oil production agreements in history has been left hanging on the approval of an unlikely character: Mexican President Andres Manuel Lopez Obrador.
For weeks Russia and Saudi Arabia, two energy powerhouses, have been sparring over oil, with their dispute sending crude prices tumbling. That drew in U.S. President Donald Trump, with a strong interest in seeing prices stabilize and in supporting America’s shale industry as he campaigns for re-election in November.
And yet when Moscow and Riyadh finally seemed to have found common ground on production cuts, at a meeting on Thursday of OPEC+ nations that followed a flurry of diplomatic activity and high-level calls, it was Mexico that called time.
Lopez Obrador refused to sign off on the deal, even after the other 22 nations inked the pact to withdraw 10 million barrels a day from the market in a bid to tame a price plunge. From his office at the National Palace in Mexico City, the president known as AMLO was worried about only one thing: Pemex.
Mexico’s national oil producer, with debt of more than $100 billion, is the centerpiece of his administration’s efforts to become self-sufficient in energy generation and stem a 15-year decline in production. Slashing 400,000 barrels a day to comply with the OPEC+ deal would put on hold his ambitious plan to return Pemex to its past glory. It was also a response reflective of a leader who has stubbornly gone his own way, including an initial refusal to enact stringent lockdown measures in response to the coronavirus pandemic.
AMLO, a populist who spent his political career decrying the rich and powerful, has relied frequently on his reputation as a president who advocates for his people, especially poorer workers, and who eschews the trappings of high office including a private jet. He’s yet to travel overseas or attend multilateral meetings since coming to power in December 2018.
With Saudi Arabia making the whole deal dependent on the participation of the Latin American country and amid growing irritation by energy officials taking part in a call that dragged well into the night in many parts of the world, AMLO was only willing to offer a cut of 100,000 barrels, or about 5.6% of Pemex’s production.
As the likelihood of a deal faded, Lopez Obrador received a call from someone with much at stake: His friend Donald Trump, with whom he has struck up an unexpected rapport.
Even so, when the U.S. president tried to convince AMLO to accept the OPEC terms, the Mexican leader insisted Pemex wasn’t able to reduce its output that much, said presidential spokesman Jesus Ramirez. In the end, the U.S. seemingly agreed to shoulder an additional 250,000 barrels to cover for Mexico’s position and in theory unlock the general agreement.
“Andres Manuel made the proposal to Trump and Trump accepted it. It was completely cordial,” Ramirez said.
The OPEC+ alliance and Mexico made some progress in their discussions on oil-production cuts on Saturday, the third straight day of negotiations, but cautioned it was unclear whether the group would reach a final deal, delegates said. Saudi Arabia has insisted Mexico cut its production as much as everyone else in the group.
Trump had no choice but to absorb the production cut for Mexico because Lopez Obrador wasn’t willing to budge, said a person familiar with the call who is not authorized to speak publicly. The U.S. president didn’t ask AMLO specifically for anything in return, the person added.
“The United States will help Mexico along and they’ll reimburse us sometime at a later date when they’re prepared to do so,” Trump said on Friday at a White House briefing. The president suggested that compensation from Mexico could be “in the distant future” while arguing there was “no real cost” of limiting U.S. production.
“It’s staying in the ground, you have it, you have it for another day,” Trump said. “It’s actually cheaper than storing it when you take it out.” He also took pains to refer to AMLO as someone with whom he has a “great relationship, great friendship,” saying he could understand where the Mexican president was coming from in his stance on the output cuts.
Mexico’s Energy Minister Rocio Nahle told Radio Formula later on Friday that she didn’t know exactly what Trump meant when he said the U.S. would be reimbursed for the agreement with Mexico to cut production. It’s possible the U.S. president was simply referring to the close relationship the countries have, she said.
Ramirez said that Mexico notified OPEC+ of the side deal with the U.S. after the call late Thursday. Still, a statement issued by OPEC afterward called the broader agreement “conditional on the consent of Mexico.” The compromise backed by Trump will be discussed between the Latin American country and Saudi Arabia on Saturday.
On top of Pemex, AMLO’s stance was probably influenced by his conviction that additional cuts will be needed in the future to halt an oversupply that saw oil prices tumble by half this year, said another person familiar with his thinking who asked not to be named. The president wanted to start the bargain from the highest possible base, the person said.
AMLO’s position was also strengthened by its sovereign oil hedge, the largest of its kind, which protects the government’s budget against crude prices falling below $49 a barrel this year.
“We resisted until the end because it took us a lot of effort to boost production,” AMLO explained Friday during his morning press conference, when he made the deal with Trump public. “We already complied with this matter.”
Still, the president called the production cuts “temporary” and said Pemex will continue extracting oil.
The episode highlights AMLO’s willingness to defy conventional wisdom and put his domestic goals above all else, even if it damages his reputation in the club of oil producers. It comes as he rejects the need for massive stimulus measures to buffer an economy hit by the coronavirus, to the concern of some in Mexico’s business elite.
“This administration has proven that everything that is market standard, internationally accepted, common sense, is not within their playbook if not in line with the president’s will,” said Oscar Lopez Velarde, a law professor at Universidad Iberoamericana who specializes in energy and tax issues.
AMLO has sought to reverse a move by the previous administration to open the energy industry to private investors. Mexico is building the $8 billion Dos Bocas refinery even as international gasoline prices collapse. Nahle took part in the OPEC+ call from AMLO’s home state of Tabasco, where the Dos Bocas refinery is being built, while Pemex’s six loss-making plants are running at less than 30% of capacity.
AMLO’s legendary obstinacy is likely to play well with voters who like his “Mexican people first” message. The hashtag #RocioNahleMeRepresenta, or Rocio Nahle represents me, was trending on Twitter on Friday.
Still, “the nonsense is that this is a favor we didn’t need, as Pemex will not even meet its production goals because of its critical financial situation and shouldn’t be increasing production to avoid higher losses,” Iberoamericana’s Velarde said.
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