Foreign Investors & Mexican Energy Reform: Changes Likely Following Mexican Election

Andrés Manuel López Obrador, known as AMLO, tells supporters that the supposed economic benefits of reform such as lower gasoline and electricity costs haven’t yet materialized. June 3 2018, Mexico City (photo: Lorne Matalon)

MEXICO CITY — Antonio Godinez Vera makes his living turning golden kernels of Mexican corn into a mash that becomes tortillas. People like Godinez, a small business owner with four employees, are part of a wave that powered Andrés Manuel López Obrador to the Mexican presidency when voters elected a new head of state July 1.

The campaign and its aftermath are being closely watched by U.S. energy companies that have operated in Mexico since the country’s 2014 energy reform. That reform was an opening that allowed foreign energy companies to bid on offshore blocks in the Gulf of Mexico, onshore oil and gas fields, wind and solar production and distribution and electricity generation contracts.

At a rally in suburban Mexico City, consistent presidential frontrunner and now President-elect Andrés Manuel López Obrador told the standing-room only crowd of 10,000 plus people that changes to Mexican energy policy haven’t yet produced lower prices for gasoline and electricity. López Obrador wants a return to more state regulation of the energy industry, a prospect that could jeopardize billions of dollars in current and projected foreign investment in energy.

“’The country hasn’t gained a thing,” Godinez said as he described what he claimed were the current failings of Mexico’s energy reform. Energy data suggest Godinez pays approximately 20 percent more for his electricity than a business does in the United States. Reform’s proponents are confident the benefits will be realized eventually.

Antonio Godinez Vera owns a small tortilla factory. He says the previously twice defeated presidential candidate Lopez Obrador now deserves a chance to lead Mexico. (photo: Lorne Matalon)

In addition to what studies show is voter dissatisfaction with the reform, high levels of violence and accusations of corruption against the outgoing government mean Godinez backed López Obrador “to escape our misery.”

López Obrador leveraged frustration over the cost of energy to highlight other critical campaign issues. He has said that all that has grown since the current government assumed power in 2012 is inequality, insecurity and violence.

Violence was a campaign issue and plagued the campaign Itself. A headline in June 2018 read,”11 Politicians Killed In Eight Days.” More than 100 candidates have been murdered.

The headline reads, “11 Politicians Killed In 8 Days.” Violence has plagued the campaign. (photo: Lorne Matalon)

Corruption and an alleged coverup of the presumed murder of college students were undercurrents of the campaign. This mural refers to a group of students students who were ambushed by municipal police September 26, 2014. Three were killed and another critically injured in the confrontation. Forty three vanished. The disappearances triggered protests across Mexico and made headlines worldwide.(photo: Lorne Matalon)

‘We will end privatization” of energy López Obrador declared at the rally. Words like that echo loudly in the southern Mexican state of Veracruz where much of the country’s energy is either produced or refined.

Ignacio Quesada sits on the board of International Frontier Resources, one of the first foreign energy companies to be awarded a drilling contract in Veracruz after Mexico opened the doors to its energy sector four years ago. “If they start reviewing everything, we are going to slow down, put more regulation, put more roadblocks. Things will get done but at a much slower pace,” Quesada explained. That’s the wrong direction in terms of simplifying the process.”

The shift ends at a petrochemical plant in Veracruz. One of energy reform’s goals is an expansion of Mexico’s petrochemical capacity. (photo: Lorne Matalon)

Much of the drilling expertise that Mexico said it needed to attract when it introduced energy reform was perfected in the oil and gas-rich Permian Basin of Texas. Kirk Edwards, CEO of Latigo Petroleum in Odessa, Texas, said some American energy companies considering Mexico are now sitting out the current election cycle before they commit millions of dollars on projects that typically take years to realize a return on investment.

“Nobody’s going start doing something like that today without the certainty of what may happen in the future,” Edwards said.

Fred Beach is the Assistant Director of Energy and Technology Policy at the University of Texas at Austin’s Energy Institute. Beach says it can take years to see a return on investment in the energy space, perhaps more so in Mexico’s evolving energy markets. “Those are big bets with billions of dollars attached to them. And long term bets, so short term uncertainty and volatility is nothing anybody in that kind of business wants to have to deal with.”

Another element was in play in the Mexican presidential campaign. It is the role played by U.S. President Donald Trump. Tony Payan directs the Mexico Center at Rice University in Houston.

“President Trump is a central character in the Mexican election,” explained Payan. He said Trump’s anti-Mexico rhetoric has lifted López Obrador ardently nationalist campaign. So Payan suggested that U.S. energy companies need be ready now that López Obrador has emerged victorious.. “The rules of the game are definitely going to change,” Payan said.

David Shields is the Director General of Energía a Debate, a widely-followed collective of energy specialists in Mexico. (extended interview with Shields)

“The nationalist view is Mexico should be producing more energy and that ideally more Mexicans should be doing it,” Shields explained. He maintained that despite dissatisfaction in some quarters with energy reform, it is a relatively nascent market with respect to foreign participation. He said there’s another reason that campaign pledges might not translate into the demise of reform. “Neither the Mexican gov’t nor Mexican private industry has the money to take charge of national energy policy,” said Shields. “Mexico will need to look to foreign companies for investment.”

The Mexican gov’t has said foreign energy companies are expected to bring 200 billion dollars to the country’s economy. However López Obrador says it is only those businesses, and not the people, who are seeing the benefits of that investment. At his rallies, López Obrador’s supporters sometimes carry signs that read,”Oil is Mexico’s and Mexico is Ours,” an unsubtle message to proponents of energy market liberalization.

 

 

 

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