Pandemic provides cover as Mexico’s reforms erode
President blocks foreign investment, expands Pemex
The crisis caused by the coronavirus pandemic has allowed Mexico’s President Manuel Andres Lopez Obrador to expand his executive authority and focus it on further eroding the reforms aimed at opening energy markets to competition and foreign investment.
Lopez Obrador, who largely opposed the reforms championed by his predecessor and adopted by voters as a constitutional amendment, has moved recently to expand the monopoly positions of Mexico’s stateowned oil and power companies. Less than a month ago, for example, his administration adopted new rules that make it difficult, if not impossible, for private generators to compete with the state-owned utility Federal Electricity Commission, or CFE.
“A crisis like a pandemic tempts leaders around the world to show an authoritarian face,” said Jose Maria Lujambio, a Mexican energy law
attorney and former senior counsel at Mexico’s Energy Regulatory Commission.
The posture of the Lopez Obrador administration should dash any remaining hopes of U.S. and Texas companies that once saw great opportunity after the government of Enrique Pena Nieto in 2014 opened Mexicos’s huge energy market to foreign investment and competition.
Since Lopez Obrador took office at the end of 2018, his administration has canceled offshore lease auctions that were attracting international oil companies and power auctions luring foreign investment in renewable energy. His government also has canceled bidding for highvoltage transmission lines that would carry the power, and largely dismantled independent regulators set up to oversee the wholesale power market.
The COVID-19 has provided justification for Lopez Obrador to accelerate his efforts to restore control of energy to CFE and Petroleos Mexicanos, or Pemex, the state-owned oil company — a policy that was a key promise in his 2018 presidential campaign. Control of energy resources is a potent issue in Mexico, where the 1938 nationalization of the oil industry is celebrated almost as a second independence day.
Money pit
For Lopez Obrador, who has long viewed oil as the key to Mexico’s development, the need to rebuild the economy after the coronavirus outbreak has provided the rationale for ratcheting up oil production despite low oil prices that are adding to the losses of the company’s moneylosing operations. So far this year, Pemex has produced oil at a loss of about $10 billion.
The administration is also plodding ahead on a new, $8 billion refinery at the Port of Dos Bocas in southern Mexico, even though gasoline demand is at an all-time low and Pemex doesn’t have the money to make sorely needed upgrades for its six existing refineries.
Lopez Obrador has justified these policies as critical to achieve energy independence — especially from its northern neighbor.
“We don’t want to be a colony of any foreign country,” Lopez Obrador said at the groundbreaking for the Dos Bocas refinery in 2019. “We will achieve this with energy independence.”
Political observers say the efforts to bolster Pemex and CFE are aimed at Mexico’s congressional elections in 2021, even as the state-owned companies suck up money that could help workers who lost jobs during the pandemic. The unions of both Pemex and CFE are large, powerful and the base of Lopez Obrador’s support.
“The timing is the key driver for the government,” said Rosanety Barrios, a former senior official in the Energy Ministry in the previous Pena Nieto administration, speaking at an energy panel at a virtual conference sponsored by the Institute of the Americas in La Jolla, Calif. “This government is doing everything to gain time and to focus on the 2021 election.”
Junk bonds
Concerns about Pemex’s $100 billion-and-growing debt led the rating agency Moody’s Investors to downgrade Pemex credit to junk bond status in late April. Moody’s, while acknowledging the impact of the coronavirus on petroleum demand, said the downgrade was largely triggered by concerns that Lopez Obrador’s political goals, rather than sound economic reasons, were driving business decisions.
“We just had too many questions about its ability to adjust production in a climate where the prices are so low,” said Nymia Almeida, lead Pemex analyst for Moody’s Ratings, in a call discussing the ratings change.
More dramatic developments have occurred in the electricity sector. A new rule, introduced on May 15, would no longer require electricity to be dispatched from the lowest-cost generation first, as established by law under the previous administration.
Giving priority to the lowestcost power was critical in attracting renewable energy companies to Mexico, and a key reason for the more than $6 billion invested in the sector in the last five years.
Another rule has complicated the permitting process, making it much more difficult for renewable projects to come online.
“This is a death blow to private sector investment in Mexico, beyond the existing commitments,” said Mannti Cummins, a Texas wind power developer with projects in Mexico. “Their actions are entirely illegal and follow no process in ramming this reform through. It was a political blitzkrieg under the guise of a pandemic.”
Several generators are challenging the new rules, and a federal court last month temporarily blocked the new rules from going into effect. But the administration is asking the court to let the changes go forward.
Even if the rules are overturned, experts say, the administration’s actions create a chilling effect on investment in Mexico’s energy sector.
“What I think they are trying to do is do everything in their power to strengthen the CFE,” said Andrea Calo, the director of Market Intelligence-Mexico at Customized Energy Solutions, which follows regulatory developments in Mexico. “They are obstructing interconnection and permits for renewables, and the ability of the private companies to compete.”
Fallen angel
Analysts said they expect the pandemic to serve as an excuse for a company sorely in need of an overhaul. The company needs to jettison its refining business, focus on producing oil, adopt an independent board and renegotiate labor contracts — changes unlikely to occur under Lopez Obrador, analysts said.
“It is startling to see Pemex become a fallen angel,” said Pablo Zarate, an energy policy expert at the Washington consulting firm FTI Consulting, speaking at the Institute of the Americas conference. “The tools were there to avoid this.”