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New Mexican president can't succeed without nation's oil giant

New Mexican president can't succeed without nation's oil giant
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After almost five years of implementation, it is evident that Mexico’s energy reforms have delivered positive results in terms of long-term investment in upstream activities, natural gas infrastructure, competition in the commercialization of gasolines and investment in renewables.

At the same time, aspects such as production of hydrocarbons, refined products and prices of energy commodities are contributing to build the impression that, at least among an important segment of Mexico’s population, the energy sector needs an overhaul.

That is precisely what Andrés Manuel López Obrador (AMLO), Mexico’s president-elect, has pledged to pursue during his mandate.

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As a candidate, AMLO not only ran a campaign based on the fight against corruption, inequality and violence, he also embraced a nationalistic approach that highlighted the need to strengthen Mexico’s energy sovereignty.

 

On the campaign trail, AMLO promised to build two refineries in the states of Tabasco and Campeche and halt crude exports by 2022 with the goal of revamping domestic production of energy commodities and weakening the country’s dependency on imports from the United States.

All in all, such a political platform proved to be alluring to Mexicans, who flocked to the polling stations on July 1 and handed AMLO and his MORENA-led coalition the presidency, control of the Senate and Chamber of Deputies, five governorships — including that of Mexico City — and the majority in several of the local legislatures.

This overwhelming victory, which has been described as a tsunami that washed away the status quo embodied by traditional political parties, put AMLO and his allies in a privileged position of power to shape the future of the 2013-2014 energy reforms.

But unlike current President Enrique Pena Nieto, who appears to just have administered the decline of PEMEX, Mexico's national oil company, AMLO must understand that the building of a more competitive domestic energy industry cannot be fully achieved without a stronger PEMEX.

In other words, PEMEX needs to undergo a series of reforms in order to stop and gradually reverse its decline. Among the many aspects that could be addressed, three stand out.

PEMEX is the largest single tax contributor to the federal government, and that is what in part explains the gradual but steady deterioration of the company’s production levels. PEMEX, for example, has been unable to finance expansion of production capabilities given that a significant share of its revenues ends up in the government’s coffers.

The point is that if PEMEX’s fiscal regime continues to respond to the federal government spending requirements, reversing such deterioration seems more than challenging. That said, is AMLO willing to amend the tax regime of PEMEX even if that puts pressure on public finances? That remains to be seen.  

Moreover, the future of Pemex also requires overhauling its corporate governance. For decades, the federal government has exerted a great deal of influence over its management, even if the company has frequently been promised autonomy in that respect.

It would be reasonable for the administration of AMLO to grant PEMEX greater flexibility when making decisions, which at the same time need to be carried out under a judgement that has in mind the new regulatory environment and allows PEMEX to compete successfully.  

Another important aspect for AMLO to look at is the relationship with the union. Mexico’s oil workers union has traditionally been associated with the PRI, but with that party being crushed on July 1, AMLO is in a powerful position to rearrange the influence of union leaders over the company.

In electoral districts where PEMEX presence is strong and union leaders have for a long time exerted a strong political control (south of Veracruz), oil workers gave AMLO some of his most remarkable victories. In that sense, AMLO can be tempted to use that as leverage vis-à-vis the leaders of the oil workers union.  

Can AMLO and his team reform PEMEX? The victory of July 1 signals that the political conditions are in favor of it.

Adrian Duhalt is a postdoctoral fellow at the Baker Institute for Public Policy’s Center for Energy Studies and the Mexico Center at Rice University. He is also an associate professor at Universidad de las Américas Puebla (UDLAP) in Mexico.