Mexico's Energy Reform Will Remain the Law of the Land

5 MINS READOct 18, 2016 | 09:16 GMT
Mexico's Energy Reform Will Remain the Law of the Land
Even if leftist candidate Andres Manuel Lopez Obrador, an opponent of 2013 reforms that opened Mexican energy resources to private investment, wins Mexico's presidency in 2018, he likely will not have the congressional support needed to overturn them.
(YURI CORTEZ/AFP/Getty Images)
Forecast Highlights

  • Mexican presidential candidate Andres Manuel Lopez Obrador has threatened to reverse Mexico's energy reforms if elected, but he would probably lack the votes in Congress to do so.
  • The president can, however, slow the reform through his appointments of the heads of agencies that oversee energy regulation.
  • Even if unsuccessful, this strategy could still deter energy investment by creating uncertainty in the sector.

Left-wing Mexican presidential candidate Andres Manuel Lopez Obrador appears to have a reasonable chance of winning Mexico's 2018 presidential election. His National Regeneration Movement, aka Morena, is part of a crowded field along with the ruling Institutional Revolutionary Party (PRI), the Party of the Democratic Revolution (PRD) and the National Action Party (PAN) in the race, where only a plurality of the vote is required to win.

Lopez Obrador has been a vocal critic of Mexico's landmark 2013 energy reforms, which he has promised to overturn. Although his rhetoric has varied since the reforms were implemented, his statements suggest he would like to reverse Mexico's opening to private energy investment. Morena has also previously floated the idea of giving national oil company Petroleos Mexicanos the ability to assign fields without auctions and awarding Pemex a minimum stake in each new project.

Implementing those policies, however, would probably prove impossible absent dramatic changes in the makeup of Mexico's Congress. A new president must overcome too many institutional obstacles if he wants to block the energy sector from opening to private capital. Accordingly, the constitutional reforms that enabled private investment in Mexico's upstream sector are virtually untouchable, as is some of the secondary legislation supporting them.

Obstacles to Rolling Back Energy Reforms

A divided national Congress will be the main obstacle to any rollback of reforms. In 2018, 128 seats in the Senate and 500 seats in the Chamber of Deputies will be contested. Morena is a relatively new party, meaning it will struggle to win significant representation in the legislature. Except in the unlikely event that voters defect en masse to it from other parties, it likely does not have the electoral infrastructure in place to become a major bloc anytime soon. Even an alliance with the PRD — which opposed the energy reforms in 2013 — probably would not give Morena the two-thirds vote needed in each house to overturn constitutional changes.

Given longstanding voting patterns in Mexico, the PRI and PAN, whose leaders were key backers of the reforms, are likely to retain significant congressional blocs. This means a Lopez Obrador administration would almost certainly face a divided Congress, limiting its ability to alter or eliminate the amendments.

The divisions in Congress likely will also keep the secondary legislation that accompanied the reforms from being overturned. Undoing the current relationship among Mexico's energy regulators would be virtually impossible without touching the secondary legislation through a congressional vote. Other potential changes, such as unilaterally altering local content requirements for energy exploration and production, would also be out of the question if both the PAN and PRI hold on to their congressional delegations. And though Lopez Obrador or his political allies could bring a referendum to amend energy laws, the last time a referendum was proposed to undo energy reforms, in 2014, the Supreme Court struck it down as unconstitutional.

Opportunities for Influence Over Reforms

Constitutional reforms and secondary legislation may be untouchable, but that does not mean that the changes in the energy sector are immune to presidential influence. If Lopez Obrador wins, he could appoint a director of Pemex, a new director of the Security, Energy and Environmental Agency (which is responsible for issuing environmental permits), and a new energy secretary. These appointments could be used to influence energy investment by controlling the pace of environmental permitting and changing the fiscal terms of exploration and production contracts in which Pemex plays a part. This would most likely lead to infighting within the country's energy regulatory agencies, creating uncertainty that could prompt foreign firms to delay investment decisions.

Proponents of reform could respond by challenging the legality of the president's moves in Mexico's federal courts. In another potential safeguard against presidential efforts to derail the reforms, the commissioner of the National Hydrocarbons Commission — which is in charge of organizing bidding rounds — is appointed by Congress, not the president. The commissioner, who must be approved by a congressional vote, serves a five-year term. Nevertheless, the degree of coordination between the commission and the Energy Ministry required to carry out bidding rounds could jeopardize the process if Lopez Obrador chose to appoint an uncooperative individual to head the ministry.

It would be difficult, if not impossible, for a new president to overturn Mexico's energy reforms, but it is possible to slow the reforms via the bureaucracy that regulates the upstream sector. Consequently, while energy reform is likely to remain the law of the land, it could face setbacks if Lopez Obrador reaches the presidency, potentially deterring investors.

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