At stake in Mexico’s midterm elections is foreign energy investment

Emily Pickrell, UH Energy Fellow

In less than two weeks, Mexico will hold its midterm elections.

While on paper voters will choose their new congressional representatives, it will also gauge support for the current administration’s efforts to regain control of energy, particularly the oil sector.

President Andres Manuel Lopez Obrador, both populist and left-wing in practice, made it clear early on that one of his central goals and that of his Morena party was to reassert state control over the sectors. oil, gas and electricity. His rationale is that Mexico must be self-sufficient in energy to be reliable and economically successful.

“The president’s goal is to make Pemex a national entity responsible for meeting Mexico’s domestic needs,” said Derek Woodhouse, energy partner at global law firm CMS, who began his career at Mexico’s Ministry of Foreign Affairs. Energy. “Instead of having Pemex as a means of obtaining revenue for the country, as it has done in the past, its vision is for Pemex to stop losing money and produce itself for Mexican consumption. “

This is a sharp reversal of the opening of Mexico’s energy sector in 2013 by the previous Pena Nieto administration.

Energy reform, as it is known in Mexico, changed the country’s constitution to remove barriers to international investment in all areas of the sector, from oil pipelines to gas pipelines to chains of gas stations. The changes have led to several offshore and onshore tenders and billions of dollars in investment commitments.

This constitutional change allowed international, integrated and non-integrated energy companies, including ExxonMobil
, BP, Royal Dutch Shell will invest billions of dollars in Mexico. The desire to invest in Mexico by energy majors and miners was still there, but constitutional restrictions kept outside investors off the playing field.

In contrast, over the past three years, Lopez Obrador has focused on national pride and a longstanding suspicion of a global economy to argue that investment in the country’s energy sector is a problem. rather than an opportunity for Mexico.

“For him, this is all part of the fourth revolution of the transformation of Mexican institutions to eliminate, reduce what he calls the mafia of power, the institutional economic and political establishment and empower the poorest sectors of society” , said Vanda Felbab-Brown. , senior fellow at the Brookings Institution, on May 24 online seminar on the Mexican elections.

His plan included building a new $14 billion refinery to reduce gasoline imports and increase Pemex’s domestic production rates.

Yet his message overlooks the reasons for lower oil production rates in Mexico — that is, Pemex’s dire financial situation, which creates a barrier to further investment in production. It also saves Mexico from having competitive electricity rates to support industry and the economy.

In the 2018 elections, his populist message resonated with a public frustrated by corruption and weak economic growth. Subsequently, Lopez Obrador and his party were elected with an unprecedented majority.

“It’s something that the president has been very astute to make out of a political issue – this idea that ‘they lied to you,'” said Lourdes Melgar, former undersecretary for oil and gas at the Ministry of Oil and Gas. the Energy of the administration Pena Nieto. “He keeps telling the public that ‘the only ones who benefited were these corrupt companies, you didn’t see any benefit from that.’ Most people don’t see the benefits of reform.

Now is the time to see what support he can get, and whether that will be enough to return Mexico to a state-controlled energy sector — and if so, how permanent it might be. For this purpose, changing the constitution would be key.

On June 6, Mexico will hold a national election for its entire Chamber of Deputies (the lower house of Congress) and 15 of its 32 state governorates. The election will determine whether Lopez Obrador and his Morena party can retain an absolute majority in the House.

An absolute majority is important when thinking about oil and gas in Mexico, because to change the Constitution, a two-thirds supporting vote (or absolute authority in the Mexican system) is required. Still, the Senate and House should support Lopez Obrador to change Mexico’s constitution, and those changes should in turn be backed by a majority of state houses.

The June 2021 election will not be the door that will make this possible, as no seats in the Mexican Senate are up for grabs – and winning a few Senate seats is still necessary to pass a constitutional law change.

However, the scenario raises apprehensions within the international energy community. This stands as a test of the domestic political support Lopez Obrador has garnered in his quest to increasingly reassert his control.

His strategy so far has been to push for legislation that can pass Congress, combined with reasserting state corporations Pemex and CFE, Mexico’s main electricity company, whenever possible. He lobbied to install regulators sympathetic to his changes, and those committed to current energy reform laws and market competition said they felt compelled to leave.

In 2020, its Department of Energy began creating regulations that prioritized the CFE for power dispatch, running counter to the competitive market established in 2013. Companies immediately complained , saying it undermines the ability of private renewable energy companies to compete.

They have turned to the courts in response, seeking – and receiving – temporary injunctions that render these laws invalid until a final court ruling is issued, which in Mexico can take years.

Texas’ winter storm and a power outage, cut off Mexico from its natural gas supply from Texas for several days. Lopez Obrador has successfully used the crisis to push through laws that prioritize public production of natural gas, heating oil and diesel. This effectively deprived private sector renewable energy companies of the customers and revenue they could have earned competitively. In April of this year, he went further, pushing through a right which obtains permits for those who have already invested in oil and gas in Mexico. The rationale given was national security concerns.

“We are suffering from a perverse energy reform, which has been approved for plunder, for theft, for the benefit of a minority at the expense of the suffering of Mexicans who now have to pay more for energy”, Lopez Obrador said at a press conference on March 22, explaining the need for change. “We have to repair the damage in any way possible.”

These law changes have been successfully blocked for now by a temporary injunction.

The question for Mexico — and for energy investors — is whether Lopez Obrador’s administration will challenge those injunctions that froze his proposed changes, potentially sending that back to the Supreme Court, which would make a final ruling and could no longer be contested by companies.

Widespread debate in Mexico over whether Lopez Obrador’s endgame is actually about changing the constitution, or simply asserting power over Mexico’s energy production to gain additional political control, has made surface. Again, the upcoming election gauges how his moves play out with the public so far.

If he seeks a change in the constitution, the next question is whether Mexico’s Supreme Court will take up the cases and possibly strike down laws created in the spirit of the 2013 energy reform legislation. A critical seat will be opened on the field in November, and some observers believe that Lopez Obrador will have the opportunity to turn the field to one favorable to him when he is next nominated.

All this leaves the spirit of these dramatic legislative changes intended to encourage foreign investment, as well as its technological and investment potential, in a precarious situation.

“Energy reform is not dead, but it is badly damaged,” said Miriam Grunstein, an energy lawyer in Mexico City who has provided legal advice to the Mexican Senate and Pemex.

In practice, energy companies can still conduct much of their day-to-day business in Mexico, but must simultaneously invest in costly legal battles to avoid these new laws.

Even if the constitutional laws created by the energy reform of 2013 remain after the departure of Lopez Obrador in 2024, energy investors are not likely to forget this chapter.

“When the industry first opened up and we were talking to investment companies in Mexico, one of the key things was that they were looking for legal certainty, good laws, good regulators and good contracts. “, said Melgar. “They really needed the security of long-term certainty – and that’s something the government really undermined.”

Emily Pickrell is a veteran energy journalist, with over 12 years of experience covering everything from oil fields to industrial water policy to Mexico’s latest climate change laws. Emily has reported on energy issues in the US, Mexico and the UK. Prior to journalism, Emily worked as a policy analyst for the US Government Accountability Office and as an auditor for the international aid organization CARE.

UH Energy is the University of Houston’s center for energy technology education, research, and incubation, working to shape the energy future and forge new business approaches in the energy sector.

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