Mexico’s AMLO Takes Nationalist Tone On Energy During First 100 Days

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(Houston Chronicle, Sergio Chapa, 21.Mar.2019) — Canceled energy auctions, halted pipeline projects, a ban on hydraulic fracturing, a showdown with fuel thieves, political pressure on regulators to resign and plans to build an $8 billion refinery.

The first 100 days in office for Mexico’s new president Andres Manuel Lopez-Obrador are not inspiring much confidence among private and foreign investors in the energy sector south of the border.

Lopez-Obrador’s predecessor Enrique Peña-Nieto oversaw constitutional reforms in 2013 that ended state-run monopolies and opened Mexico’s energy markets to investment and competition from both foreign and private companies.

Over the past four and a half years, Mexico awarded more than 100 contracts to companies from all over the world for projects ranging from offshore oil wells to solar farms. Also as part of those reforms, a number of foreign and private companies opened gas stations throughout Mexico to sell fuel from international brands such as ARCO, Chevron, Exxon, Sunoco, BP and Shell, among others.

Since being sworn into office in December, Lopez-Obrador’s administration has left the gas stations alone but has either canceled or indefinitely postponed energy auctions for oil, natural gas and renewables projects.

Looking to cut imports of gasoline and diesel from the United States and other nations, Mexican Energy Secretary Rocio Nahle announced on Monday that the federal government is moving forward with plans to build an $8 billion refinery in the coastal state of Tabasco.

“For all practical purposes, energy reform in Mexico is dead,” said Tony Payan, director of the Mexico Center at Rice University’s Baker Institute.

Nationalistic tone

Lopez-Obrador’s first 100 days in office have taken a nationalistic tone, Payan said. In favor of opening Mexico’s energy sector to further private and foreign investment, Lopez-Obrador wants to restore financial stability and production numbers at Mexico’s state-owned oil company Petroleos Mexicanos, or Pemex.

However, Pemex faces some tough realities. The state-owned oil company posted a $7.6 billion loss on $88.7 billion of revenue during 2018. Crude oil production in Mexico fell to a 15-year low of 1.62 million barrels per day in January while imports of gasoline and diesel have grown to 80 percent.

Before Lopez-Obrador took office, the average price at the pump was 19.80 pesos per liter, which translates to about $3.94 per gallon. Gasoline prices now average around $4.18 per gallon.

Closing Mexico’s energy sector to investment and competition while propping up an underperforming national company such as Pemex will not reverse those trends and only promises to make energy prices even more expensive, Payan said.

“What he’s doing is dooming Mexico to a backwards energy model for the next few decades,” Payan said. “Mexico’s progress on energy has been compromised for at least 20 years.”

Halted pipelines

The first major sign of trouble in the energy sector happened just a few weeks before Lopez-Obrador was sworn into office.

Calgary-based pipeline operator TransCanada announced in November that it halted two natural gas pipeline projects in the State of Hidalgo citing numerous delays, runaway costs and alleged acts of extortion from local officials.

The company won contracts for the Tuxpan-Tula Pipeline and the Tula-Villa de Reyes Pipeline under the Peña-Nieto administration to supply natural gas to federally-owned power plants but could not complete the last few miles of those projects.

During a Feb. 15 earnings call, TransCanada Executive Vice President Francois Poirier told investors the company holds a contract where it continues to receive revenue on the projects from Mexico’s federal government for circumstances that are beyond its control.

The company, Poirier said, is seeking to work with the new administration to complete the pipeline projects.

“These projects supply much-needed natural gas to the country to supply gas for gas-fired generation, which shall result in significantly lower electricity cost and lower pollution,” Poirier said during the call.

Canceled auctions

Less than two weeks after Lopez-Obrador was sworn into office, his administration canceled two auctions that would have brought large-scale drilling for crude oil and natural gas to the border state of Tamaulipas.

One of the auctions would have brought hydraulic fracturing to the state. However, Lopez-Obrador reiterated his opposition to fracking during his swearing in ceremony.

Since that time, Tamaulipas Gov. Francisco Garcia-Cabeza de Vaca has been lobbying the federal government to reopen the auctions and convince them that hydraulic fracturing is safe.

Garcia-Cabeza de Vaca hosted Mexico’s energy secretary during a March 5 sightseeing tour of the port city of Tampico. The goal, he said, was to show her the state’s potential to become an energy powerhouse.

“What we’re trying to help the new government see is that things have changed,” Garcia-Cabeza de Vaca said during a recent visit to Houston. “The technology has evolved. Now, this technology doesn’t need as much water. Now they can use treated water. They can use saltwater. It’s more controlled and friendlier to the environment.”

A former federal senator, Garcia-Cabeza de Vaca worked on a committee that helped to create Mexico’s energy reforms. Designed to bring private investment and allow Mexico to retain ownership of its natural resources, he believes that they are critical to the nation’s future.

“It was a hit to all of Mexico because they’re putting the brakes on the development of the energy sector,” Garcia-Cabeza de Vaca said about the canceled auctions. “When it comes to oil and natural gas, it’s no longer just an energy security issue, it’s become a national security issue. We need to have the ability to extract the hydrocarbons that we have in the ground.”

Nervous investors

As a result of the energy reforms, a number of American companies, including some from Texas, have invested in Mexico’s energy sector over the past five years.

Under Mexico’s energy reforms, Houston oil company Talos Energy and Irving-based Exxon Mobil won auctions for offshore projects. San Antonio refining company Valero Energy Corp. is investing on a project that would allow the company import gasoline and diesel at the Port of Veracruz and move the fuel to Mexico City and other lucrative markets.

Although Lopez-Obrador’s Morena party has a supermajority in the Mexican equivalent of the House of Representatives, they do not have one in the Senate — meaning that they cannot undo the energy reforms, the supporting law or regulatory agencies enacted by the Peña-Nieto through a simple vote.

The Lopez-Obrador administration has not canceled or revoked any contracts issued under the energy reforms but has placed them under review. It has also become clear that the new administration does not want to issue new auctions or permits to private or foreign companies.

Duncan Wood, director of the Mexico Institute for the Washington, D.C.-based think tank the Wilson Center, said Mexico has developed a diversified economy with a large manufacturing base. And although Mexico is still viewed a good place for investments with huge potential, Wood said the signals being made by the Lopez-Obrador administration regarding the energy sector are giving some investors pause.

“Investors are not running away from Mexico but they’re not running towards Mexico either,” Wood said. “They’re taking a wait and see approach.”

Evoking the past

It was no coincidence that the Lopez-Obrador administration announced bidding documents for its new refinery on Monday, which marked the 81st anniversary of Oil Expropriation Day when then-President Lazaro Cardenas nationalized Mexico’s oil and natural gas industry on March 18, 1938. During a press conference for the announcement that drew more than 1,000 supporters, an image of Cardenas was part of the background of the stage.

“Oil is part of the national identity of Mexico,” said Gonzalo Monroy, an energy consultant based in Mexico City.

A keen student of Mexican history, Lopez-Obrador is trying to set himself up as a national hero who fights rich elites in the spirit of past presidents such as Cardenas and Benito Juarez, Monroy said.

Cardenas created Pemex in July 1938 and Lopez-Obrador has made rescuing the state-run oil company his fundamental energy narrative at the expense of bringing private investment into the sector and developing more renewables, Monroy said.

During his speech for the refinery announcement, Lopez-Obrador declared that it was the “end of neoliberalism” and that his administration marked the “fourth transformation” of Mexican society. The first transformation was gaining independence from Spain, the second was the Mexican Revolution of 1910 and the third was Cardenas nationalizing the oil industry.

Critics of the $8 billion refinery project say the money could be better spent investing other areas. A lack of infrastructure at proposed site means that costs could potentially balloon up to $12 billion or $20 billion dollars. But the symbolism is too powerful, Monroy said.

“This administration is high on history,” Monroy said. “They try to use symbolism quite a lot. He knows that a project like Dos Bocas is not profitable, but what he knows for sure is that he’ll something to show as a legacy for decades.”

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