Energy aftershocks in store after seismic Mexican election

Energy aftershocks in store after seismic Mexican election
© Getty Images

A stunning defeat and a sad day for Mexico. Mexico faced Brazil in the knockout phase of the World Cup and lost. As Mexico mourns their loss, Andres Manuel Obrador (AMLO) is celebrating his electoral win in Sunday’s presidential election.

AMLO won with an overwhelming majority of the votes, and Mexico now confronts a new president who promises to undo policies and practices of the past. 

ADVERTISEMENT
One of the big themes in the campaign was the status of former President Peña Nieto’s energy reforms. The passing of the energy reform in 2013 marked a historic moment in Mexico.

 

It represented the opening of the energy sector to the private sector, the liberalization of energy prices and the end of the 75-year-old monopoly of state-owned oil firm Petróleos Mexicanos (Pemex).

Mexicans supported the constitutional amendment then, but in the years following, people have become disillusioned with the lack of visible results.

Timing wasn’t on Nieto’s side with a global fall in petroleum prices, the devaluation of the peso and Pemex’s decline in domestic energy production going from producing 3.4 million barrels of oil per day (bpd) in 2004 to 1.9 bpd in 2018.

The Mexicans referred an increase in gas prices during Peña Nieto’s administration as the “gasolinazo,” causing anger and protests. High disapproval ratings of the current administration helped catapult AMLO into the lead and over the finish line in first place.

One of the key reasons for the creation of the energy reform, as well as the selling point to the Mexican public, was to “generate more energy, more cheaply for all Mexicans.” To many in Mexico, this promise went unfulfilled; gas prices have increased 64 percent over the past six years and hit some of the poorest regions of Mexico especially hard.  

AMLO’s nationalist and protectionist views make those in the energy sector nervous and suspicious of what he’ll do now that he is in office. He has gone as far as to threaten to rollback the energy reforms to protect the country’s oil wealth from being sacked by foreign companies.

On the campaign trail, he promised to audit all oil contracts for graft and to resurrect Pemex into a strong national oil company, and now it’s time to see if he acts on his words.

Many analysts believe he’ll moderate his views and recognize the risk of any significant rollback to the reforms.

As the energy reform continues to materialize past Enrique Peña Nieto’s tenure, AMLO will be the one reaping most of the economic benefits, with revenue supporting his plan for social sector reform and large-scale infrastructure projects.

According to Energy Minister Pedro Joaquin Coldwell, already signed contracts are likely to bring in some $150 billion.

AMLO proposed building two refineries in the southern states of Tabasco and Campeche worth $6 billion dollars to process crude oil for domestic consumption. The location of these refineries is in line with his focus on bringing economic benefits to the historically impoverished southern regions of Mexico.

Many energy experts argue that this policy makes little economic sense when you can instead import affordable refined energy from the U.S. without the upfront capital expenditure that goes into building two refineries.

Nevertheless, his views suggest that he would focus on fixing Pemex to prevent further declines and bring production rates up again.

AMLO is likely to make it a priority to increase domestic production of oil and gas to gain back the country’s energy resource prosperity that is part of the country’s identity.

Although Mexico is energy rich with 545 trillion cubic feet of shale gas reserves and additional trillions of cubic feet of conventional reserves, the question of whether it can develop its resources in a way that makes sense economically is more complicated.

Having the resource is one thing, but having the technology and infrastructure needed to develop the resource economically makes it a lot more challenging. 

In line with his nationalist views, the president pledged to end oil exports by 2022 while also reducing gasoline and natural gas imports from the U.S.

Similar to Trump’s mantra of energy dominance, AMLO wants to focus on an independent instead of an integrated approach to energy policy.

His domestic policies could have important ramifications on U.S. energy prices, as major production centers like the Permian Basin in West Texas are currently struggling to send their product to demand centers in Mexico due to infrastructure bottlenecks on the Mexican side of the border.

Mexico has already carried out efforts to expand its domestic pipeline distribution network, which includes 12 additional pipelines (3,200 miles) with a total capacity of 9.7 billion cubic feet per day

The former Mexican administration’s energy strategy was to continue importing affordable natural gas and gasoline from the U.S., while working to consolidate its legal framework and lay out the necessary infrastructure that would also be required to connect domestic production centers to end consumers.

At this moment, it makes more economic sense to continue importing energy from the U.S. than to produce it domestically. Given the complexity of the changing energy landscape in Mexico, it will be important for Mexico’s new president to understand the economic implications of cutting imports from the U.S. and spending unnecessarily large sums of capital in boosting production when the time is still not right.

One of the biggest risks for the energy sector is for follow through on some of AMLO’s campaign promises that are in direct opposition to the way liberalized energy markets work. Energy trade between the U.S. and Mexico through the North American Free Trade Agreement has been an essential component in Mexico’s energy transition.

The Mexican public should keep in mind that without the U.S., gasoline prices would be much higher than today’s prices. The liberalization of Mexico’s energy sector is still in its early stages and more time is needed to see the results of a more competitive market, and if AMLO is serious about improving Mexico’s economy, he’ll let the reforms move forward.

Massive jumps for joy created an artificial earthquake following Mexico’s surprise win in the first round of the World Cup against Germany, the reigning champions. The results of Sunday’s election did not yield a similar reaction but you can count on some election aftershocks and a new direction for Mexico.

Carolyn Kissane is an academic director and clinical professor of global affairs at the Center for Global Affairs at NYU School of Professional Studies. She is a non-resident fellow at the Payne Institute for Earth Resources.

Emily Medina is an energy and gas consultant based in Yucatan, Mexico. She is a nonresident fellow at Energy Policy Research Foundation.