Sábado 12 de Junio 2021
In Facebook Twitter In
Pemex’s collapsing refineries and CFE’s obsolete generators undermine the government's stated goal of energy self-sufficiency. Here the Madero refinery in Ciudad Madero, Tamaulipas - one of six refineries operated by Pemex. (Photo: Pemex)
Wednesday, April 21, 2021
Perspectives

Mexico Energy Reforms Violate Trade Pacts, Paris Accord


AMLO’s energy laws violate USMCA, TPP and the Paris Agreement.

BY ENERGY ADVISOR
Inter-American Dialogue

Mexican President Andrés Manuel López Obrador has submitted to Congress a bill that seeks to bolster the state’s role in the fuels market, including by possibly taking over operations run by private businesses. The move follows another effort by the president to partially roll back the 2013 energy reforms that opened the country’s energy sector to foreign and private investors, through a recently approved law that favors state utility CFE over private electricity generators. What is the reasoning behind López Obrador’s efforts to strengthen state entities in the energy sector? To what extent are upcoming midterm elections, in which Mexicans will choose legislators, governors, state lawmakers and mayors, influencing the president’s recent and intensified moves to modify the energy reforms? What are the measures’ major implications for international and private companies operating in Mexico, and particularly for firms’ carbon emissions reduction goals?

Greg Ahlgren, partner at Diaz, Reus & Targ: AMLO’s policy proposals seek to energize support for his party prior to the midterm elections in June. Consistent with his nationalist approach to economic matters, AMLO is promoting energy independence as a national objective. Not surprisingly from a government that frequently reminds world leaders of Mexico’s sovereignty, AMLO has made a point to consolidate a variety of functions under state-controlled institutions, and his current proposals in the energy sector exemplify this. By favoring the CFE, he will also greatly benefit Pemex (and its huge and unionized work force), which supplies fuel oil for electric generation plants. While other hydrocarbon-rich nations are looking to a future beyond fossil fuels, it seems that Mexico is now seeking to return the country to an energy model that prospered 50 years ago, without seeking creative private-sector solutions to the looming environmental and energy-grid crises. The air contamination in major Mexican cities cannot be prudently ignored, and the random power blackouts must also be addressed on a priority basis.

My overarching concern is that AMLO’s short-term objectives of consolidating power within the national government may bring unwanted consequences that will be difficult to remediate. First, competition will be hurt, damaging the foreign investment climate in general and possibly exposing the country to significant unfavorable arbitral awards. Second, by favoring CFE in its present configuration, the country is only deepening its fossil fuel dependence, and procrastinating on the task of reducing carbon emissions.

Fluvio Ruíz Alarcón, Mexico-based oil and gas analyst: After the energy reform, the previous government wanted to accelerate Pemex’s displacement from the domestic fuel market. In this effort, it reformed the Hydrocarbons Law and granted hundreds of import permits. However, Pemex continued to produce or import almost all of the fuels consumed in Mexico. In the current administration, the penetration of the private sector in the fuel market has grown steadily. Representing a marginal portion (0.1 percent) of fuel sales in November 2018, it now is close to 20 percent of the total volume sold. Its initial growth can be explained by the help received to mitigate the shortage that the government’s measures against theft and illegal fuel trade caused.

However, its subsequent expansion is due to the difficulties Pemex Transformación Industrial is facing. In 2020, this subsidiary had the lowest percentage of crude process in relation to its installed capacity (37 percent) since the closure of the Azcapotzalco refinery in 1992. Meanwhile, there was a 13.1 percent decrease in the number of gas stations within the ‘Pemex franchise.’ In this context, the government’s reform initiative seeks to serve a valve that, on the one hand, modulates the export potential of private oil producers, based on the needs of Pemex refineries; and on the other hand, regulates petroleum imports, in accordance with Pemex’s ability to satisfy domestic demand, thus protecting its participation in the local fuel market.

David Shields, director general of Energía a Debate: AMLO is pushing a protectionist, statist agenda that touts energy security and self-sufficiency. He seeks market advantage for state-run Pemex and CFE, rather than competition on a level playing field. These entities suffered under recent open-market policies, he argues, so they should get a special deal. He says Mexico should soon no longer export crude oil nor import gasoline. Crude oil output would be just enough to meet the needs of Pemex’s refineries, which, in turn, should greatly increase production of gasoline to fully meet domestic demand. In electricity, he would give priority to dispatching inefficient CFE power plants, not to the cheaper, cleaner energy of private solar and wind farms. AMLO is unconcerned that private and foreign companies will lose market share and cease to invest. He says they received too many privileges under the previous open-market rules, so they must accept the changes. He wants to get his new, anti-competitive energy rules through Congress quickly, before midterm elections in June. He is running up against a wall of opposition, as industry players take legal action to scrap the reforms, which are likely to face lawsuits and arbitration abroad, as they breach trade agreements such as USMCA and TPP. The irony is that Pemex’s collapsing refineries and CFE’s obsolete generators have, in practice, no way of making energy self-sufficiency a reality. Canceling oil exports would eliminate vital revenues for Pemex’s operations, upgrading its refineries and paying its enormous debt. Coherency is in short supply.

Christian Wagner, Americas analyst at global risk analytics firm Verisk Maplecroft: AMLO believes in the state having a leading role, with energy self-sufficiency and sovereignty as priorities. Mexico’s historic oil and gas state monopoly strengthens nationalist pride, which AMLO has relied on to advance his ‘protection of the country’ from foreign exploitation. For AMLO’s voter base, the strengthening of state-owned enterprises—and particularly Pemex—are in defense of the country. For AMLO, it is politically profitable to pursue this stance, despite downsides. Without a guaranteed outcome at the polls in June, AMLO has assured simple majorities in both chambers until then, which explains the timing of reform initiatives. If his party fails to secure a majority in the lower house, he will have already delivered on his main legislative reform pledges. Indeed, the reform debate acts as apparent evidence of his fulfillment of 2018 campaign promises, attracting voters. The recent regulatory changes deter investment; they increase uncertainty over the sanctity of existing contracts and whether the government will allow companies to operate, or compete freely, which jeopardizes profits.

Legal recourse via constitutional injunctions is possible, but it is unclear if companies will be able to rely on the Mexican judiciary and get fair rulings in the second half of AMLO’s term. The Hydrocarbon Law reform would enable authorities to carry out de facto expropriations, without clarity as to the requirements and without having to apply the provisions in the expropriation law. In terms of energy transition and emissions reduction, the changes are substantial.

The government fully intends to favor energy security over emissions reduction, and that entails using the resources more readily available to SOEs: coal and fuel oil.

Companies will actively be prevented, either through direct barring or market tampering, from accessing and investing in clean energy. This will delay Mexico’s energy transition and hinder its compliance with international climate change commitments.

Lourdes Melgar, nonresident senior fellow at the Baker Institute: President López Obrador is redefining Mexico’s energy sector through the ideological lens of resource nationalism and an idealized interpretation of the past. Anew, oil is likened to national sovereignty, and energy sovereignty rests on Pemex’s self-sufficient production and processing. State-owned enterprises must be the main actors, with limited private participants. Redefining rules is the name of the game. Ending oil contracts and power auctions, renegotiating natural gas contracts and undermining the Energy Regulatory Commission were the first steps. Rhetoric turned to action last year, with decrees hindering the dispatch of private plants.

Injunctions granted to generators blocked their application. In February, López Obrador  presented a fast-track initiative to reform the Electricity Industry Law. More than 30 injunctions to the law forced the government to step back. A reform to the Hydrocarbon Law is expected to be voted on in April. Unless the Supreme Court overturns the laws, legal fights and arbitration will follow.

The laws are in violation of trade deals, and of the Paris Agreement. They affect billions of investments in power generation, and in the mid- and downstream. Their application will stall Mexico’s transition to a low-carbon economy and the availability of cleaner fuels. The dispute over energy is underway.

The president has heightened the stakes, with a post-truth narrative defending SOEs. He has announced a constitutional reform, for which he needs to win a two-third majority in Congress and in 16 state legislatures in June. The stakes are high.

 

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor

 

More Energy Coverage

More Mexico Coverage

More Perspectives   

 

 

 

 

  Other articles in : Perspectives
Back to Perspectives