Lopez Obrador's economic situation and statism hinder Mexico's oil opening up

Mexico passed an energy reform in 2013 that, with the end of Pemex's monopoly, opened up the oil sector to private and foreign initiative. The aim was to reverse the decline in crude oil production, as well as to obtain the financing and technology necessary to modernise the state-owned company. Opposed to this opening, which he describes as "betrayal of the homeland", Andrés Manuel López Obrador has been pushing for a reversal of this policy since he became president in 2018. At the end of 2021, he presented a counter-reform that, although it focuses more on the electricity sector, also has consequences for the oil sector. López Obrador's statism and an international situation that is more focused on renewables could dampen investor interest in Mexico.

The 2013 'Pact for Mexico', which at the start of Enrique Peña Nieto's presidency brought about various reforms - approved at congress with the support of the then three major political parties (PRI, PAN and PRD) - endorsed the view that, without foreign investment, the Mexican oil sector could not prosper. Having reached a production peak of 3.4 million barrels per day in 2003, which contributed 33 per cent of the state's income, ten years later there was an "inevitable and inexorable decline", as the Wilson Center would later point out. Unless the state oil company, Petróleos Mexicanos (Pemex), obtained the necessary technologies and know-how through agreements with large private companies and foreign investment for new projects, Mexico would make little profit from its hydrocarbon reserves, many of which are in deep water or unconventional formations.

The desirability of opening up the oil industry had been clear for a long time, but in Mexico the idea of national sovereignty over all that is found in the subsoil has always weighed - politically and socially - as already enshrined in 1917 in the current Constitution (art. 27). Since 1938, when the government of Lázaro Cárdenas nationalised the oil industry and created Petróleos Mexicanos, the activities of extraction, processing and distribution of hydrocarbons have been the sole responsibility of this business . Given this 'patrimonialist' conception of the nation's natural resources, shared in many parts of Latin America, it is not surprising that Andrés Manuel López Obrador and his populist Morena party, now in the majority, are once again pushing for state control of the oil and electricity sectors (as far as possible, since there are legally binding agreements already signed with private companies, although the government is prepared in some cases to break them, especially in electricity generation).

The Mexican congress implemented the energy reform by amending the Constitution at the end of 2013 and passing the legislation implementing it in August 2014; the first rounds of new oil field awards for exploration and production took place from 2015 onwards. The Energy Reform Law opened up the possibility that the Mexican nation could award assignments and contracts for the exploitation and extraction of resources to private companies, both in partnership with Pemex and separately. The objectives of the reform, as stated in the executivesummary of project, included "attracting greater investment in the Mexican energy sector to boost the country's development " and "having a greater supply of energy at better prices". At the same time, oil production was expected to increase from 2.5 million barrels per day in 2013 to 3 million barrels per day by 2018 and 3.5 million by 2025, figures that have not been achieved (in 2020, production was 1.7 million barrels per day).

Bad timing

The point is that, delayed for so long, the reform materialised at the worst of times: in mid-2014 there was a collapse in the international price of crude oil and it was difficult to mobilise the expected investments. When the market began to recover, López Obrador's presidency arrived; his proclivity for statism has been favoured by a post-pandemic world context of retraction from the globalism that the planet had embraced. Moreover, the international oil sector itself is facing doubts derived from estimates of a not-too-distant consumption peak - in the midst of the take-off of the electric vehicle - and at the same time is seeing how large energy companies are redirecting their efforts towards renewable generation projects.

This context meant that the investments were not initially as abundant as promised, nor did they bring the benefits that Mexico had hoped for, both for Pemex's development and for the country's economic and social progress, so that the other side of the scale - the partial loss of sovereignty over its own resources - has weighed more heavily for many Mexicans. Some public opinion points out that concessions to foreign companies result in an accumulation of profits that are transferred abroad, with little impact on the country where they are generated.

The case of the Anglo-Dutch company Royal Dutch Shell has been pointed out, business , which in 2017 started extraction operations again in Mexican waters in the Gulf of Mexico after more than 80 years of absence since the oil expropriation. Shell has since reported a gross profit from its global operations (not just in Mexico) of over $226.995 million, transferred directly to its headquarters in The Hague. Inputs earned by other companies are also transferred to their foreign tax headquarters. Critics warn that only part of the fixed cost of transnationals remains within the country, which goes to pay the wages of national workers or to maintain the infrastructure of these companies.

Investments

In mid-2018, on the fifth anniversary of the Pact for Mexico, the Wilson Center counted that since signature $160 billion in future investment had been committed. The IMF had lower figures, indicating that up to 2017 the committed investment was 3 billion dollars, although it also spoke of a potential of up to 60 billion dollars. In any case, these institutions specified that the impact on the increase in crude oil extraction, the contribution of tax revenues for the Mexican state and the increase in employment would only begin to be felt from 2020 onwards. However, that year of confinement overturned all economic forecasts.

According to the latest official estimate, foreign direct investment (FDI) in oil and gas extraction totalled 5,954 million dollars between January 2015 and June 2021, and a total of 11,910 million dollars in the electricity sector. Although the annual FDI contributions in this period for the energy sector represent a clear increase compared to those recorded before the reform, the truth is that its growth has stagnated, with reductions in what affects the electricity sector, which is directly more threatened at the moment by López Obrador's plans. His six-year term of office is sample at least flat in terms of attracting investment: in 2013, Mexico recorded total FDI in the different sectors of the Economics, of 48.244 billion dollars; in 2019, before the disruptive confinements began, it was 34.269 billion.

Also in its review of the implementation of the reform five years after its approval, the Mexican Senate in 2018 was waiting for a better perspective in order to be able to make an appropriate evaluation . The high school Belisario Domínguez, the Senate's institution of programs of study , pointed out some issues still pending and indicated, in relation to the promise that citizens could see their consumption become cheaper, that three years after the actual implementation, there was no clear trend in fuel and electricity prices. Subsequently, electricity production costs have fallen, but this is again in question with López Obrador's new plans. On the other hand, the high school Belisario Domínguez, when it reported the estimate of unconventional oil reserves of 13 billion barrels, echoed the social controversy surrounding the 'fracking' technique, which could hinder the development of this specific activity in Mexico.

The Mexican government had originally indicated that the energy reform would lead to economic growth of one percentage point of GDP in 2018 and two percentage points by 2025, as stated in the executive summary of the project energy reform. However, Mexican GDP growth was barely 2.2% in 2018 and in 2019 it decreased by 0.2%, even before the pandemic hit. In 2013, oil revenue was estimated to contribute 5.5% of GDP; the figure had fallen to 3.2% in 2019.

As far as the generation of employment is concerned, it is not easy to determine the issue number of jobs created work . The reform project spoke of half a million by 2018 and two and a half million more by 2025. It is safe to assume that there has not been a major impact on the Mexican labour market due to the limited hiring of national specialists by foreign companies. In any case, the pandemic has meant a reversal in the level of employment in many economic sectors.

Pemex's status

One of the arguments of those who reluctantly welcomed the reform was that the introduction of private companies into the hydrocarbon extractive sector would weaken Pemex, as it would have to share potential expansion space, thus generating uncertainty about the future of the state-owned company. By weakening Pemex, there would be less oil production by the state and therefore less tax revenue, which in turn could force a reduction of the public expense unless the government resorted to further borrowing. In addition, submit to other companies would accelerate the process of depleting strategic fossil fuel reserves. Because Mexico also does not possess the technology to produce enough renewable energy to supply the country's demand, it was alarmistically concluded, the country would lose its energy sovereignty in the coming years.

What is happening is that, as the political consensus that promoted the reform warned, without foreign investment the future of the Mexican energy sector, and in particular that of Pemex, is in doubt. Precisely the rather moderate success of the reform, in terms of attracting foreign investment, affected by external (disruption caused by the pandemic) and internal (the reluctant attitude of López Obrador's government) conditioning factors, has left Pemex to its fate. Despite the president's speech , the company continues its decline: hydrocarbon production every year at leave, which in the case of liquid hydrocarbons was reduced to 1.7 million barrels per day in 2020, and growing liabilities, including a progressive debt that reached 113 billion dollars at the end of 2020.

In addition to the serious problem of fuel theft through the drilling of oil pipelines, an activity known nationally as 'huachicoleo' and which represents significant losses for Pemex, the state-owned company has had to face, like energy companies all over the world, the challenge of the paralysis of economic activity during the Covid-19 containment and its effect on the price of fuel. The recurrent coronavirus pandemic led to an international collapse in oil prices: in 2020, crude oil price volatility reached historic levels, reaching USD 20 per barrel (WTI). For Mexico, this meant a further weakening of the Mexican industry supported by Pemex production. The private sector in Mexico is now experiencing a rapid recovery of its competitiveness, but not Pemex.

Attempt to revise the reform

In an attempt to improve Pemex's position, López Obrador has launched the project to build a large refinery in Dos Bocas, in the state of Tabasco, and in December 2021 he bought the total shareholding of the Deer Park refinery in Texas, in the United States, of which Pemex already had half ownership. As a result, the current refining capacity of Mexico's six refineries (860,000 barrels per day) can be added to that of the Texan plant (340,000). This falls short of the 1.4 million barrels per day of fuel that Mexico consumes, although the figure would be covered when the Dos Bocas refinery (with a planned capacity of 340,000) comes on stream. The commitment to build the latter facilities, with an expected cost of 9 billion dollars, has been seen as a manifestation of López Obrador's lack of interest in pursuing investment in renewable energy, and instead opting for a traditional project , linked to the Mexican state from which he and his family hail. However, while this disinterest in new energy sources is true, increasing Mexico's refining capacity is right for the country. Since 2015, Mexico had become a net importer of petroleum products, mainly by importing gasoline.

An essential point in López Obrador's energy counter-reform is the attempt to take away Pemex's autonomy and turn the state-owned company back into a direct arm of the government. This is stated in the controversial project that the president presented in October 2021, which focuses on the electricity sector. For its approval, the project needs two-thirds of the votes in the congress, a support that López Obrador and his Morena party do not have at the moment. The proposed package eliminates the concept of business productiva del Estado and turns both Pemex and the national electricity company (Comisión Federal de Electricidad or CFE) into another administrative body of the state. It is precisely the further empowerment of the CFE that is at the heart of López Obrador's counter-reform.

That project sets new limits for private companies competing with the CFE, which so far produce 62% of the electricity sold in Mexico. The new rules and regulations wants to reduce this share to a ceiling of 46%, also through contracts with the CFE, which would have a minimum share of 54%. This puts the emphasis more on state control than on efficiency, as the CFE (also Pemex) would no longer be legally obliged to seek economic sustainability and profit, leaving private producers at a clear disadvantage. If project is approved, numerous contracts with private companies would have to be cancelled. In addition, the initiative aims to ease restrictions on electricity generation by burning high sulphur content crude oil, so Pemex could gain an advantage here.

These measures could clash with provisions of the Free Trade Agreement between Mexico, the United States and Canada (T-MEC), in its sections on investment (chapter 14), cross-border services (chapter 15) and state ownership of companies (chapter 22). Washington has expressed concern about the advance of an initiative that goes against the liberalisation that encourages the trade integration of the three North American countries.

Balance

In 2023, Mexico is approaching the tenth anniversary of the 'Pact for Mexico' with an insufficiently satisfactory balance sheet. As far as the energy reform is concerned, several objectives have certainly been met, such as the opening up to private initiative and foreign capital, which have contributed to introducing a little more dynamism in sectors that had become stagnant due to the monopoly Structures . And this multiplication of players in the Mexican energy market has been carried out without infringing on the national sovereignty that Mexicans have always been keen to protect.

Oil production being a central pillar of the energy reform, along with the electricity market, the persistent decline in Pemex's crude oil production, however, leaves unfulfilled one of the major goals that the country had set itself with the political consensus of 2013. A negative international situation - both in the oil sector itself, with the fall in the price of crude oil at first, and then, once prices had partially recovered, with the crisis caused by Covid-19 in almost all areas of the Economics- has prevented greater investment attractiveness. But this was not the only cause, as Pemex and the Mexican government have also failed in their strategy to get the state-owned company back on its feet: elements of corruption have continued and attempts to clean up the company have not been firm. In doing so, the Mexican authorities have shown a lack of capacity management assistant and logistics for the implementation of the reform.

More decisive public action is needed in the implementation of financial measures. For example, there is little regulation of fuel prices, both wholesale and retail, which makes it possible for private companies to manipulate costs and thus compete unfairly with Pemex. It is possible to predict that Pemex, with the current withdrawal of its infrastructure, will continue to maintain a steady decline, reducing the percentage of its sales in the Mexican GDP. Consequently, international companies will also be able to play a greater role in the Mexican hydrocarbons market.

It is precisely the latter that López Obrador is trying to avoid: not by increasing Pemex's efficiency, but by changing the rules of the reform, reversing some of the space given to foreign capital and restoring Pemex's sense of monopoly.