(Financial Times, Nick Butler, 10.Jun.2018) Among this year’s many elections — from Iraq to Malaysia to Russia — none is more important for the international energy business than the presidential race in Mexico, which will be held on July 1.
Unless the polls are all badly awry, the candidate of the National Regeneration Movement (Morena) will win easily. Andrés Manuel López Obrador — popularly known as Amlo — was ahead of his nearest opponent by at least 10 points in a recent survey by Consulta Mitofsky. However, his energy policies remain obscure.
Mexico has begun to change the sector in radical ways over the past five years under the banner of the Reforma Energetica. The monopoly position of Pemex, the state oil company, has been eroded. Exploration blocks have been auctioned in an open process that has allowed foreign companies to win access for the first time in 75 years. That has attracted more than $35bn of investment into more than 40 upstream ventures.
The initial results have been positive. A consortium led by the US-based company Talos has made a major discovery in shallow water off the coast of the Mexican state of Tabasco — amounting to 1.4bn to 2bn barrels of oil, according to early estimates. Eni, the Italian group, has also added substantially to reserves in the Amoca field after drilling new wells.
These two finds alone would enable Mexico to reverse the decline in production of the past decade and a half. But the reforms have just begun. Many of the allocated blocks are still to be explored and some 500 more are due to be auctioned over the next three years.
Change is not limited to the oil and gas sector. The electricity monopoly held by the Comisión Federal de Electricidad has been broken by creating new companies. International capital has been brought in to develop infrastructure and help build new renewables businesses, including hydro, solar and wind. The power grid is being extended and a programme of refinery construction and upgrading is under way.
There is no rational reason why Mr López Obrador should halt this process if he is elected. The country needs a strong energy sector. Pemex, once a symbol of national hope, has failed to deliver — oil reserves, for instance, have shrunk from 48bn barrels in 1996 to about 9bn. The latest discoveries underline the company’s failure.
International investors are not getting a windfall — the terms on which they have been attracted are hardly over-generous. Taxes and charges ensure that the Mexican government will secure around 80 per cent of the value of every barrel of oil produced.
But Mr López Obrador has been campaigning as a nationalist. He speaks of Mexicans being exploited by international companies and has attacked the North American Free Trade Agreement for making the country a branch plant for US businesses. His supporters, including some potential ministers, have talked of ending looting and stopping foreigners taking control of Mexico’s natural resources.
No one knows how he will translate words into action if he wins the presidency. Even if he seems unlikely to follow Venezuela’s Hugo Chávez or Nicolás Maduro in driving international capital out of the country, he could still discourage many potential investors by reasserting the role of Pemex and abandoning Nafta.
It would be much better to see Mr López Obrador focus (as he has at times while campaigning) on the endemic problem of corruption. With that on his agenda, Pemex should be broken up and new independent companies created. Pemex holds a huge portfolio of under-developed assets that could be brought into production by new management.
If the reforms endure and exploration success continues, Mexico could be a significant contributor to the goal of North American energy independence. It could be an exporter able to increase trade even more if renewables are developed systematically, replacing existing gas imports and selling more oil on the world market. Its hand in dealing with the US would also be bolstered.Mr López Obrador, a former mayor of Mexico City, has long been a leading figure in national politics, but never before has he come close to real power.
If he wins and combines a degree of populism with a determination to root out corruption, shake up bureaucracy and engage with the global economy from a position of strength, he could offer a new model for countries across Latin America disillusioned with the legacy of the left — especially in Venezuela — and with rightwing military regimes.
His challenge is to demonstrate that populism and pragmatism are not incompatible.
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