Mexico, technical rehearsals for change
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The country expects the upcoming presidential elections to deliver a turnaround in the socio-economic and energy situation through the very reforms that López Obrador, the favorite to win, wants to implement, even at the risk of foreign investments

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History will be made in Mexico on July 1. One of the most consequential elections in a generation will vote in an entirely new Congress, nine state governors, and, of course, the next president. Approximately 89 million voters are slated to participate, the highest number in Mexico’s history.Barring unforeseen circumstances, Andrés Manuel López Obrador – AMLO – will likely be elected the 58th president of Mexico by a wide margin. Recent polling has him ahead of the competition by nearly 20 percentage points. His Morena party is also expected to capture up to five governorships and possibly a majority in both chambers of congress. If polling proves true, AMLO will take office with a decisive mandate to steer the bold reforms that he has pushed during his now third attempt at the presidency. Those reforms have been underpinned by a message of change to the status quo, echoing similar populist sentiments that have pulsated ballot boxes around the world, from Mexico’s northern neighbor to the European Union.

An unsustainable status quo and the disillusionment of voters

For Mexicans, the desire for change reflects a growing disenchantment among voters with the perceived stagnation of Mexico’s political establishments. A barrage of corruption scandals, growing social-economic inequalities, and ongoing domestic security challenges have manifested into AMLO’s seemingly irreversible lead. A popular term that AMLO has used on the campaign trail is the so-called “power mafia” to decry the mainstream parties whose policies, he argues, have overlooked the average Mexican. Ricardo Anaya of the center-right National Action Party – currently in second – and Jose Antonio Meade of the incumbent Institutional Revolutionary Party, are themselves both Ph.d.-bearing technocrats who fit the very profile of the status quo that AMLO seeks to break.

Light and shadow of the energy reform

Breaking from that past means disconnecting with key policies and foremost among them are the energy reforms that have been a centerpiece of President Enrique Peña Nieto’s economic agenda. As transitions from monopoly to competitive markets go, Mexico’s has been swift and fruitful. In the four years since the reform’s implementation, the government has held 11 public auctions for oil and gas blocks and signed 110 contracts for E&P rights that were previously the exclusive domain of Pemex. Seventy-five companies from 20 countries now hold resource development rights. The auctions have brought in around $537 million in investments so far and are expected to generate close to $150 billion in total investments throughout the life of the contracts, according to Mexico’s Energy Ministry. The reforms are not without their setbacks, however. Industry observers describe Mexico as undergoing “growing pains” as the reforms get ironed out. Sectors might be officially liberalized, but open season auctions are seen as lagging. There are still bottlenecks to accessing energy infrastructure. And Pemex remains weighed down by the operational difficulties that the energy reforms are intended, in part, to address. All told, the full benefits of the reforms are years away.

Constitutional protection for new foreign investments

It is those growing pains that have spurred AMLO’s calls to roll back the reforms. He has done so with varying degrees of fervor. He has threatened to see that Mexico’s oil never “falls back into the hands of foreigners” and on other occasions has vowed to review all contracts signed between the government and private industry. While his recent rhetoric has softened, the skepticism and uncertainty that AMLO has engendered do not sit easy with investors. Industry, however, has been investing earnestly in Mexico’s energy opening since late 2016, in parallel with AMLO’s rise. Their interest attests to the strength of Mexico’s institutions and the limits of executive action to undo the reforms. The reforms themselves that allow private participation in the energy sector are constitutionally protected. Moreover, the contracts governing industry investments are overseen by Mexico’s National Hydrocarbons Commission, a constitutionally-established independent body. Any changes to Mexico’s constitution would require a two-thirds majority vote in both houses of congress, itself one of the largest legislatures in the world by members. Although AMLO’s Morena party could capture majorities in both chambers, mustering up the political capital to revise the constitution would be an enormous task.

The problem of energy security and relations with the USA

Economic rationale presumably also factors into industry’s steady approach. Pemex is a weakened institution that is struggling to arrest the declines in its output and, consequently, its fiscal revenues for the state. Revoking contracts and adopting policies that discourage private investment could strip government of billions of dollars to fund the very social programs and spending that AMLO favors. The focus of energy policy should be on the causes of the pain, rather than knee-jerk reactions to the symptoms. Beneath the rhetoric, a theme that underpins AMLO’s position is the need to bolster Mexico’s energy security. And indeed, it is an issue that he would need to address.

Mexico’s energy vulnerability has many dimensions. One that has trended amid NAFTA negotiations is Mexico’s heavy dependence on US natural gas imports. Mexico imports around 60% of its natural gas, the vast majority piped in from the US. This dynamic is the natural result of booming US supply and a complementary gas-hungry Mexican economy. Mexico sits atop rich domestic gas reserves, but the economics of cheap US gas still do not justify large-scale investment to extract them. Until those trade-offs improve, AMLO and other policymakers would be wise to smooth out right-of-way issues between private industry and local landowners. The issue currently afflicts several domestic pipeline projects, but addressing it would eventually benefit energy companies when they come around to developing Mexico’s onshore gas.

Improving infrastructure and breathing oxygen back into Pemex

Infrastructure barriers also challenge energy security. Mexico has five loosely connected gas systems, but southeastern Mexico is almost entirely isolated from the network. The current structure does not allow any gas imports to reach those southern areas. Recalibrating and investing in new infrastructure would create a more fluid and interconnected domestic market, bolstering the security of supply and distribution. Until then, the southeast region of Mexico remains entirely dependent on state oil company Pemex’s dwindling supply of natural gas.

Ultimately, because of Pemex’s deeply woven role in the fabric of Mexico’s finances, a sustained focus should be on improving the company. Alleviating Pemex of its financial and operational burdens would address many dimensions of energy security by allowing the state giant to focus on its core projects. The company appears to be on that path by prioritizing partnerships for the years ahead, farming out non-core assets, and, through market liberalization, allowing outside investors to bite off what Pemex cannot chew.  The large gains from the current first wave of energy auctions will not kick in until the middle part of next decade when most of the new production is expected to begin. At that point a presumed President AMLO will have already left office, but would still benefit from the legacy of enhancing Mexico’s energy profile and putting domestic output on more stable footing. History will be written on Sunday. Should AMLO win, he has many opportunities advance Mexico’s energy future without undoing its past.

 

 

Read our reportage about Mexico


Read our reportage about Mexico