The Nickel Report

After a disappointing showing in Mexico’s recent mid-term elections, President Andrés Manuel López Obrador (commonly referred to as AMLO) and his party (i.e., Movimiento Regeneratión National or MORENA, commonly referred to as Morena) will face greater hurdles to unwinding “la Reforma Energética” (2013 Energy Reforms), the energy policy reforms adopted by the then-ruling party, the Partido Revolucionario Institucional (PRI).

Notwithstanding the unfavorable outcome for Morena, shortly after the election AMLO vowed to continue his efforts aimed at shifting Mexico back towards energy nationalism and prioritization of fossil fuels; goals at the heart of AMLO’s campaigning for Morena leading up to the mid-term elections. Although retaining a majority in the Chamber of Deputies and gaining some new state governors, Morena lost its supermajority and, as a result, very likely also lost the opportunity to implement constitutional changes to reverse the 2013 Energy Reforms and achieve its goal of a nationalized energy sector in Mexico.

Many observers predict AMLO and Morena will have significant difficulty achieving their objectives of renationalizing and energy self-sufficiency, given the low likelihood of obtaining the required support from the PRI or other opposition parties for the constitutional amendments necessary to reverse the 2013 Energy Reforms. Indeed, some go so far as to assert that AMLO’s attempts to roll-back the 2013 Energy Reforms violate the US-Mexico-Canada Free Trade Agreement (USMCA) by favoring domestic companies and undermining Mexico’s ability to meet international environmental and climate treaty obligations. Given these criticisms, it’s also questionable whether Morena can count on support from its ruling coalition partner, the Ecological Green Party of Mexico (Partido Verde Ecologista de México, often referred to as PVE or Verde).

As described in our 2019 update following AMLO’s inauguration, the 2013 Energy Reforms significantly liberalized Mexico’s energy policy, authorizing private and foreign investment in the oil and gas and electricity sectors. The reforms also facilitated a shift to cleaner, less expensive renewable energy sources, such as wind and solar, considered critical to Mexico’s ability to meet its domestic and international climate and environmental goals and commitments.

Prior to the 2013 Energy Reforms, Mexico’s energy market was nationalized, with virtually all hydrocarbon and electricity production controlled by Petróleos Mexicanos (PEMEX) (oil and gas) and Comisión Federal de Electricidad (CFE) (electricity), with very limited opportunity for private investment. During his election campaign, AMLO and his advisors were highly critical of the PRI’s 2013 Energy Reforms. With roots in rural southern Mexico and representing the populist Morena party, AMLO expressed concerns with privatization and its asserted impacts to indigenous communities.

Following his December 2018 inauguration, AMLO and his newly appointed ministers announced aggressive measures to reassess the 2013 Energy Reforms, including a temporary cessation of the hydrocarbon bid rounds (which continues today), criticism of gas capacity contracts viewed as burdensome on CFE, substantial investment in PEMEX refinery expansions (which has occurred and continues), and reconsideration of private energy sector investment (which has occurred). Not surprisingly, these developments have raised significant concern from Mexican and international observers.

Many commercial parties and policy analysts have condemned AMLO’s policy pronouncements and actions, predicting adverse consequences on the Mexican economy and global energy markets. Based on experience in other jurisdictions and on Mexico’s historical operations, technology, condition of its infrastructure and financial results in the energy sector, this criticism generally is considered well-founded. Others have suggested that, given the steady decline of PEMEX’s oil and gas production, the shortage of domestic expertise and capital necessary to resuscitate Mexico’s energy infrastructure, together with AMLO’s competing campaign promises to fund rural social programs, the only pragmatic policy response available to AMLO’s administration is an ultimate acceptance of the 2013 Energy Reforms. Indeed, there have been signs of movement in that direction, such as AMLO’s attempts to reassure private investors, including a softening of his demand that foreign investors renegotiate gas supply contracts obligating CFE to pay for unused pipeline capacity.

In recent months, however, additional concerns have arisen as AMLO and Morena stepped-up their regressive policy rhetoric. One source estimates projects valued over US$35 billion are delayed by permitting impediments resulting from the government’s recent policy reversals; the same source reports private companies have filed over 250 petitions seeking injunctions to clear the permitting logjam. Legislation enacted by Morena also favored CFE and PEMEX over foreign investors, among other things changing dispatch rules to prioritize electricity generated by CFE (largely from coal and gas) over cleaner, cheaper electricity from private companies.

Some analysts have opined that the hydrocarbons industry has fared better than the electricity sector in AMLO’s march toward nationalization of Mexico’s energy industry. These observers suggest this may result from hesitancy by AMLO to risk the consequences of taking on the powerful petroleum industry, and also may result from PEMEX’s very significant debt burden – approximately US$120 billion and growing. PEMEX needs private investment and the technical “know how” of US and international oil and gas companies.

Among other recent developments, however, the Mexican government’s recent actions in respect of the Talos Energy/PEMEX Zama field joint ownership suggest that AMLO may not yet be ready to concede his nationalism goals for the oil and gas industry. Just this past July, Mexico’s Ministry of Energy (SENER) unexpectedly notified Talos that PEMEX will operate the Zama oilfied (700 billion barrels), which Talos, a pioneer private operator in Mexico, had been instrumental in discovering. as a related matter, Talos and PEMEX are in disagreement about their Zama field joint ownership percentages.

Other indictors include PEMEX’s recent agreement to purchase Shell’s (its joint venture partner) 50% interest in the Deer Park refinery (Houston, Texas), which will result in PEMEX becoming the refinery’s sole owner, and PEMEX’s pressing ahead with the construction of a new refinery at Dos Bocas (Tabasco, Mexico). The latter project in particular has been central to AMLO’s goal of energy self-sufficiency, notwithstanding significant construction cost overruns and the project’s location on an environmentally “protected” site. Even beyond the Dos Bocas project, Morena’s legislation during the AMLO administration has been widely criticized for its adverse environmental and climate impact as well as its significant chill on foreign investment. In the electricity sector, for example, the legislation spurred a wave of litigation and was enjoined by the Mexican courts pending resolution of appeals on constitutional grounds to Mexico’s Supreme Court.

But despite Morena’s reduced influence following the June 2021 mid-term elections, AMLO recently doubled-down, announcing plans to seek constitutional amendments. On the other hand, some analysts view his recent announcement of a split of approximately 54% and 46%, respectively, between CFE’s allowed capacity to generate and distribute electricity and that of the private sector as a possible recognition by AMLO that compromise between the rights of the government and of the private sector to participate is necessary in order to achieve any significant change from the 2013 Energy Reforms.

Policy pronouncements and political rhetoric aside, as a practical matter it is important to recognize that constitutional amendments will face an uphill battle given Morena failed to maintain its super-majority in the lower house following the mid-term elections. While Morena and Mexico’s Green party (Verde) together hold a simple majority in both houses and hold a majority of the country’s state governor seats, any constitutional amendments will require approval by two-thirds of the members of both chambers, plus approval by a simple majority of the states.  This appears a daunting challenge given fierce opposition by the PRI and its allies, and questions surrounding the strength of Verde’s support for AMLO’s regressive energy agenda – which emphasizes a return to fossil fuel dependency at the cost of environmental and climate policy objectives.

As noted, some observers also assert Morena’s nationalistic policies infringe the USMCA. Indeed, a bipartisan group of Texas Congressional representatives recently urged US President Biden to pressure AMLO to back-off Morena’s reforms, which the US lawmakers view as favoring domestic companies to the detriment of foreign investors. International and domestic environmental communities also have raised concerns that Morena’s populist agenda significantly undermines the country’s ability to meet its environmental and climate commitments. Consistent with the trend toward enhanced focus on the environment, climate and sustainable development in international investment agreements, the USMCA also includes an Environmental Chapter requiring mutual satisfaction of designated multilateral environmental agreements or treaties (MEAs), although the U.N. Framework Convention on Climate Change and Paris Agreement are not specifically included in the USMCA’s list of binding MEAs.

Despite the widespread criticism, many observers expect AMLO will continue his attack on the 2013 Energy Reforms in an attempt to rally his rural progressive base and taint the opposition. Even if ultimately unsuccessful, the political uncertainty engendered by Morena’s regressive energy policy initiatives already have put a palpable, unfortunate chill on foreign investment. Nonetheless, although AMLO’s nationalistic rhetoric currently appears unwavering, his government is under increasing political pressure to moderate its policies from private investors, the international environmental community, the Mexican courts and shifting electoral sands.

This trend of growing resistance to AMLO’s agenda is evidenced by, among other things, Morena’s poor results in Mexico’s mid-term elections, followed by the disappointing turnout for AMLO’s recent referendum asking the public whether former Mexican Presidents should be brought to justice for their illegal acts. Turnout for the referendum was estimated at less than 10% by some reports, a potential sign of wavering support for at least some of AMLO’s objectives. Mexico also could soon find itself the target of sanctions from its trading partners, including the US and Canada, and potential arbitration claims alleging violation of “fair and equitable treatment” standards under the USMCA and other free trade agreements to which Mexico is a signatory.

Thus, in the face of growing criticism and eroding domestic legislative influence, some business and policy analysts are again predicting that AMLO may have little choice but to moderate his rhetoric if current judicial challenges go against Morena as anticipated. Others predict a continuing mantra critical of the 2013 Energy Reforms in an effort to firm up AMLO’s populist political constituency during the march up to the next presidential election. In light of the growing disruption to Mexico’s economy, global energy markets and the country’s climate and environment commitments, combined with an apparent newfound recognition by AMLO that compromise may be necessary to achieve energy reform (albeit developing at a glacial pace), however, there is increasing reason to hope that the former camp will be proven correct.