At Stake In Mexican Mid-Term Elections Is Foreign Energy Investment
Emily Pickrell, UH Energy Scholar
MEXICO CITY, MEXICO - MAY 28: Andres Manuel Lopez Obrador President of Mexico speaks on the a ...
Getty ImagesIn less than two weeks, Mexico will hold its mid-term elections.
On paper, voters will choose their new representatives in Congress, but this will also measure support for the current administration's efforts to restore 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 a central goal of his and his Morena party is to restore state control over the oil, gas and energy sectors. Its justification is that Mexico must be energy self-sufficient for reliability and economic success.
"The president's goal is to make Pemex a national entity responsible for serving Mexico domestically," said Derek Woodhouse, energy partner at global law firm CMS, who began his career with Mexico's Department of Energy. "Rather than having Pemex as a means of generating income for the country as it has in the past, his vision is for Pemex to stop losing money and self-producing for Mexican consumption."
It is a sharp reversal of the opening of Mexico's energy sector by the previous Pena Nieto government in 2013.
The energy reform as it is known in Mexico changed the country's constitution to remove barriers to international investment in everything from oil to natural gas pipelines to gas station chains. The changes led to several offshore and onshore tendering rounds as well as investment commitments in the billions.
This constitutional amendment allowed international and integrated and non-integrated energy companies, including ExxonMobil XOM, BP, and Royal Dutch Shell, to invest billions of dollars in Mexico. The desire from energy majors and minors to invest in Mexico has always been there, but constitutional restrictions kept outside investors off the pitch.
In contrast, for the past three years Lopez Obrador has focused on national pride and longstanding suspicions of a global economy to argue that investing in the country's energy sector is more of a problem than an opportunity for Mexico.
"For him, this is all part of the fourth revolution in the transformation of Mexican institutions to eliminate what he calls the mafia of power, the institutional economic establishment and empower poorer sections of society," said Vanda Felbab-Brown, a senior official at the Brookings Institution, in a webinar on the Mexican elections on May 24th.
His plan included building a new $ 14 billion refinery to reduce gasoline imports and increase Pemex's domestic production rates.
His message, however, overlooks the reasons for falling oil production rates in Mexico - that is, Pemex's troubled financial condition, which is an obstacle to further manufacturing investment. It also bypasses Mexico's need for competitive electricity tariffs to support industry and business.
In the 2018 elections, his populist message resonated with a public disappointed with corruption and low economic growth. Subsequently, Lopez Obrador and his party were elected with an unprecedented majority.
"This is something the president has done very smartly when it comes to solving a political problem - the idea that they lied to you," said Lourdes Melgar, the former Undersecretary of State for Oil and Gas in the Pena Nieto Department of Energy -Administration. “He keeps telling the public that 'the only ones who have benefited are those corrupt companies that you have seen no benefit from.' Most people don't see the benefits of reform. "
Now is the time to see how much support he can get and whether it will be enough to steer Mexico back into a state-controlled energy sector - and if so, how permanently he could make that change. An amendment to the Constitution would be essential to achieve this goal.
On June 6, Mexico will hold a national election for its entire House of Representatives (the lower chamber of Congress) and 15 of its 32 governorates. The election will determine whether Lopez Obrador and his Morena party will be able to keep an absolute majority in the house.
An absolute majority is important when considering oil and gas in Mexico, as a two-thirds vote (or absolute authority in the Mexican system) is required to amend the constitution. But both the Senate and the House of Representatives would have to support Lopez Obrador in order to change the Mexican constitution, and these changes would in turn have to be supported by the majority of state houses.
The June 2021 elections won't be the door to make this possible, with no seats in the Mexican Senate to choose from - and getting some Senate seats is still required to get a change to constitutional law through.
Nonetheless, the scenario raises concerns in the international energy community. This is a test of how much domestic political support Lopez Obrador has received in his quest for more control.
So far, his strategy has been to push for laws that can be passed in Congress and reaffirm Pemex and CFE, Mexico's top energy company, whenever possible. He went to great lengths to install regulators to support his changes and those who subscribed to current energy reform laws and competition in the market felt pressured to leave the company.
In 2020, his Department of Energy began creating regulations that give CFE priority for sending electricity. This contradicts the competitive market established in 2013. Companies immediately complained, saying it undermined the competitiveness of private renewable energy companies.
They turned to the courts in response, demanding - and receiving - injunctions that invalidate these laws pending a final court ruling, which in Mexico could take years.
Due to the winter storm and the Texas power outage, Mexico was cut off from Texas’s natural gas supply for several days. Lopez Obrador successfully used the crisis to enforce laws that give priority to state production of natural gas, heating oil and diesel. This effectively robbed private sector renewable energy companies of the customers and the income they could have competitively generated. In April of that year, he went further and passed a law allowing permits to be drawn for those who have already invested in oil and gas in Mexico. The rationale was national security concerns.
"We are suffering from a perverse energy reform approved for looting and theft in favor of a minority at the expense of the suffering of Mexicans who now have to pay more for energy," Lopez Obrador said in a March 22 press conference calling the need the change is explained. "We have to repair the damage in every possible way."
These changes in the law were initially successfully blocked by an injunction.
The question for Mexico - and for energy investors - is whether the Lopez Obrador government will challenge these rulings, which have frozen its proposed changes, and potentially take this to the Supreme Court, which would make a decision final and corporate no further could be challenged.
A widespread debate has surfaced in Mexico over whether the Lopez Obrador final will actually change the constitution or simply assert power over Mexico's energy production for further political control. Again, the upcoming elections show how his movements have played with the public so far.
Should he be looking for a constitutional amendment, the next question is whether the Mexican Supreme Court will take up the cases and possibly repeal laws created in the spirit of the 2013 energy reform legislation. A critical seat in the court will be open in November and some observers believe that Lopez Obrador will have the opportunity to move the court to a seat that is convenient for him the next time he is appointed.
All of this leaves the spirit of these dramatic legislative changes to encourage foreign investment, as well as their technology and investment potential, in a precarious position.
"The energy reform is not dead, but it is badly damaged," said Miriam Grunstein, an energy attorney in Mexico City who has advised the Mexican Senate and Pemex on legal issues.
In practice, energy companies can still do much of their day-to-day business in Mexico, but at the same time have to invest in expensive litigation to fend off these new laws.
Even if the constitutional laws created by the 2013 energy reform remain in place after Lopez Obrador's departure in 2024, energy investors are unlikely to forget this chapter.
"When the sector first opened and we spoke to companies about investing in Mexico, one of the key elements was that they looked for legal certainty, the right laws and the right regulators and the right contracts," said Melgar. "They really needed the security of long-term security - and that really undermined the government."
Emily Pickrell is a seasoned energy reporter with over 12 years of experience in everything from oil fields to industrial water policy to the latest Mexican climate change laws. Emily has reported on energy issues from the US, Mexico, and the UK. Prior to journalism, Emily worked as a policy analyst for the US Government Accountability Office and as a chartered accountant for the international aid organization CARE.
UH Energy is the University of Houston’s center for energy education, research and technology incubation, working to shape the energy future and develop new business approaches in the energy industry.
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