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Aug 15, 2018 | 09:00 GMT

7 mins read

The Next Mexican President's Nationalist Approach to Energy

A Petroleos Mexicanos (Pemex) refinery processes petroleum in Tula, Mexico.
(OMAR TORRES/AFP/Getty Images)
Highlights
  • Mexico's incoming government is unlikely to try to broadly alter the constitutional amendments that opened the country's energy sector to private capital.
  • The new administration will attempt to use legislation and presidential decrees to mitigate what it considers to be the negative effects of energy reform, such as rising fuel prices.
  • The new government will likely adopt a more nationalist approach in managing the exploration for and production of oil and natural gas, possibly by slowing the pace of bids on exploration or by crafting contracts that maximize benefits for the Mexican government.

Despite his populist rhetoric, the next president of Mexico will largely play by the rules when it comes to the country's energy reforms. President-elect Andres Manuel Lopez Obrador takes office on Dec. 1, and he and his party may have the votes in Congress to challenge the 2013 constitutional changes that opened most of Mexico's energy sector to private investors. But any such move would meet strong resistance at home and from abroad, and it could also damage the country's economy. What the next administration will do is target the parts of the reform that it deems harmful to the people of Mexico, and some of those changes could complicate foreign investment.

The Big Picture

Over the next six years, the administration of Andres Manuel Lopez Obrador will try to right some of the perceived wrongs of energy reform. Ideologically, the new president is closer to leftist politicians and political thinkers who opposed the changes after they were announced in 2012. However, there is no major public pressure for Lopez Obrador to pursue a serious repeal of the reforms, and threatening them could complicate the country's relationship with foreign investors.

Campaign Promises and Reality Politics

On July 1, Lopez Obrador won the presidency, and his party, the National Regeneration Movement, won commanding majorities in both houses of Congress. To safeguard its political gains for future federal elections, the ruling party will need to fulfill some of the populist promises made on the campaign trail. Public opposition to energy reform accounted for some of the voter support for Lopez Obrador, and in campaign speeches, he promised to freeze or lower fuel prices. It’s unlikely that he will try to quickly pave the way for a referendum to limit or reverse the energy reform, which cleared a path for private capital. At some point, however, Lopez Obrador is likely to use legislative or decree powers to limit fuel prices, but he will need to limit his moves to avoid inciting strong opposition.

Domestically, private companies that would be harmed by curbs on the energy sector could challenge the government in federal court. Such restraints could also spark greater anxiety among Mexican business elites over whether Lopez Obrador intends to pursue more nationalistic and populist policies elsewhere. In such an environment, aggrieved elites would launch a public opinion and protest campaign against the president as well. A contest with the powerful private sector would be counterproductive for the president and could cost him allies in Congress and in his political networks. Furthermore, any changes could lose the government greater royalties on future oil and gas production, making alterations less palatable.

A chart compares the rise of U.S. and Mexican gasoline prices over time.

But most importantly, a wide reversal of the reform risks alienating foreign investors. Pushing for a constitutional amendment for even part of the 2013 reforms would damage the confidence of international companies in the Mexican government. The country's economy already faces the risk of declining export revenue due to the threat of U.S. auto tariffs and uncertainty over NAFTA negotiations. If NAFTA talks were to collapse, forcing Mexico to negotiate a bilateral trade agreement with Washington – or if Mexican automotive exports faced additional barriers to the U.S. market – the Lopez Obrador government would be extremely reluctant to add to the economic damage by undermining investor confidence in the energy sector. 

The Less Dangerous Path

Instead of generally targeting the 2013 constitutional amendments, Lopez Obrador will likely pursue more modest changes. These will focus on three major areas: softening the blow of fuel price hikes on consumers, limiting social conflict around energy investments and – most crucially – pursuing a more nationalistic policy in managing the exploration and production of oil and natural gas. In the first area, the Lopez Obrador administration has announced that it will craft a fuel pricing scheme to reduce the volatility of gasoline and diesel prices for consumers. On the second, the government intends to direct the National Commission for the Development of Indigenous Peoples, a federal government body, to review mining and energy contracts to determine whether private companies or the federal government consulted with local indigenous stakeholders. If they did not, energy projects could stall, and local groups across the country could challenge some planned investments in federal courts.

A chart tracks how the Mexican government has subsidized fuel prices over time.

The path of the third policy priority is still uncertain. The next administration hasn't announced how it intends to manage future auctions of oil and natural gas blocks for exploration and production. Lopez Obrador has been largely silent on the matter. He and some of his closest advisers are ideologically opposed to granting private companies a share of Mexico's hydrocarbon resources. For 75 years, the state was solely responsible for the production, refining and marketing of those reserves, and many nationalist politicians were reluctant to cede that monopoly. Lopez Obrador's recent nominations of political loyalists opposed to the energy reform suggest that his administration will look for ways to reduce private investment in exploration and production – or at least to shift to a more nationalist policy.

The nominees to these key government posts will likely back moves that benefit the government and mitigate the energy reform's negative effects on voters. In July, Lopez Obrador selected former political scientist Alberto Montoya as deputy energy secretary. Montoya broadly opposed opening the energy sector to private capital, saying the change allowed foreign companies and the U.S. government to unfairly exploit Mexico's oil wealth. In recent years, he has openly advocated a referendum to reverse the energy reform. Lopez Obrador has also nominated Manuel Bartlett, another prominent critic of energy reform, to head the Federal Electricity Commission.

Nationalist Options

Over the next few years, a nationalist administration could easily enact legislation or alter regulations to interfere with the bidding on Mexican oil and gas blocks set for exploration and development. One way is by raising the percentage of locally sourced content required for certain investments. With this option, the government will likely have to find a balance between requiring higher domestic content (which parts of Mexico's private sector will support) and ensuring some areas it cannot easily exploit, such as deepwater resources, remain attractive to investors. The state-owned oil company, Petroleos Mexicanos (Pemex), lacks the resources to exploit many deepwater areas, which will be crucial to raising oil production and fiscal revenue.

The government could also slow the pace of the auctions for oil and gas blocks. The Energy Secretariat (SENER) plays a large role in the process, because it selects the blocks while the National Hydrocarbon Commission (CNH) organizes and oversees the bidding. CNH officials are relatively free of presidential pressure, because the president cannot easily fire them before the end of their their seven-year terms. But the president holds significant sway over SENER, and he can direct the ministry to slow cooperation with CNH. He can also direct the Treasury Secretariat to craft contract terms more favorable to the government, including higher royalties or a greater share of production from a particular area. Such an approach could slow bidding by reducing investor interest. 

But overall, the Lopez Obrador administration will mostly leave the 2013 constitutional energy reforms unchanged. Partial amendments to the reforms are possible, and changes to maximize the benefits of energy production for the Mexican government and voters are virtually certain. The new administration's energy policy will probably make some oil and gas investors wary, particularly when it comes to altering the bidding for blocks for exploration and production. However, it has little incentive to make huge changes. The next government may trend toward nationalism, but the country is likely to remain open to private investment in the energy sector.

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