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Dec 17, 2018 | 22:49 GMT

3 mins read

Mexico: A Budget Proposal's New Plan for Energy

(Stratfor)
The Big Picture

Mexican President Andres Manuel Lopez Obrador broadly opposed his country's 2013 energy reforms, but he is unlikely to undo them. Rather, his administration is looking for other ways to slow the flow of private capital into the energy sector. The proposed 2019 budget suggests that increasing the efficiency and talent pool of energy regulators — a key component of the 2013 reforms — will not be a priority under Lopez Obrador.

What Happened

Mexican President Andres Manuel Lopez Obrador is working to limit outside influence and control over his country's oil and natural gas sector. According to an early draft of the 2019 budget, he will do this by cutting the budgets of the energy sector regulators empowered by energy reforms in 2013. The National Hydrocarbons Commission (CNH), the federal organization tasked with conducting bidding rounds on developing oil and natural gas resources, will have its budget cut by about $1.25 million, or nearly 10 percent of its 2018 budget. In addition, the Energy Regulatory Commission (CRE), which is tasked with managing permits and overseeing fuel transportation, fuel storage and electricity generation, will have its expenses budget cut by $1.6 million, or 11 percent of the commission's previous annual budget. As the president works to implement his austerity plan, many of the cuts come in the form of salary downgrades for officials earning over $5,300 a month.

Why It Matters

The reductions in funding provide a clear indication of the new administration's priorities on energy policy. The previous administration worked to attract private investment and lucrative contracts by cultivating a talented pool of well-paid regulators tasked with awarding contracts for oil and gas development. However, the new president is hoping to pump the brakes on that plan by limiting the power and resources of energy regulators. The proposed CRE cuts are significant because they suggest that Lopez Obrador is also making changes that could limit the body's ability to award permits for new energy infrastructure. Reducing CRE wages and expenses could reduce regulators' ability to process bureaucratic transactions. However, it remains an open question whether the administration will resort to new legislation favoring Mexico's domestic industries and limiting private investment from abroad.

A pause in bidding rounds — combined with the budget reductions — could be an effort to hobble energy regulators ahead of a push to amend energy legislation. For example, Lopez Obrador's party, the National Regeneration Movement, proposed a measure earlier this year that would place the CNH under the energy secretary. The bill would give the secretary more influence over the CNH — thereby increasing its influence over bids for the exploration and production of oil and natural gas — and would significantly increase the president's control over how and when Mexico awards assets to investors. Moreover, the 2019 budget would increase the energy secretary's funding for expenses from $125 million to $1.3 billion to allow the secretary to help state-owned energy company Petroleos Mexicanos (Pemex) pursue increased exploration and production, as well as upgrade its refineries.

Background

Lopez Obrador's administration intends to adopt a more nationalist approach to managing Mexico's energy sector, particularly when it comes to developing oil and natural gas. The landmark energy reforms of 2013 are unlikely to be reversed, but amendments to the legislation that underpins them are possible. To that end, the government will most likely try to allow private investment only on terms it finds more favorable, and it will push investors to cooperate or partner with federal entities such as Pemex. 

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