Publish in Perspectives - Thursday, October 5, 2017
Experts disagree to what degree leftist presidential candidate Andrés Manuel López Obrador threatens Mexico's recent energy reforms. (Photo: Morena)
How will Mexico’s presidential elections affect its energy sector?
BY ENERGY ADVISOR
Andrés Manuel López Obrador, widely known as AMLO, said Sept. 5 in Washington that if elected Mexico’s president, he would review the oil contracts that were signed after the country’s historic oil-sector reforms, adding that he did not trust those who had agreed to the deals on the country’s behalf. Should companies hold off on investing in Mexico’s energy sector until after next year’s presidential elections? What risks are outside investors facing in the run-up to the election, and what protections exist for investors if AMLO or another presidential candidate with similar views about the energy sector is elected? How likely is AMLO to reverse Mexico’s energy reforms if he becomes president?
Remi Piet, senior director at Americas Market Intelligence: AMLO’s promise to revisit the energy-industry opening and contracts should be taken with distance. Such comments are part of his campaign effort to rally his supporters ahead of next year’s elections. His recent declarations were more aimed at underlining potential corruption or arbitrary decisions, rather than a frontal attack on foreign investments. He also confirmed private investments would be needed to reverse declining production and modernize refining capacity. As mayor of Mexico City, AMLO turned out to be more business friendly than initially feared. Moreover, the current Mexican administration seeks to include energy in the current NAFTA renegotiations, a move currently opposed by Donald Trump, influenced by U.S. workers’ unions. The objective is to allow investors to seek third-party arbitration, thus restricting the ability of governments to seize foreign investments, which would make it far more difficult for AMLO to reverse Mexico’s energy reforms, forcing him to pull out of a popular treaty in Mexico that helped drive the country’s economic development. AMLO leads in the polls because he currently has the political field to himself, while other parties are yet to select their candidates. However, he has blown bigger leads in the past (e.g. 16 points in 2006). There is also a growing consensus in the electorate that foreign investment is vital. The awarding of blocks to Chevron, Exxon, Total and CNOOC are not considered controversial by industry watchers. That said, these and other new operators need to build bridges with all three viable parties (Morena, PAN and PRI) to hedge any political risk that comes with a new sexenio.
George Baker, publisher of Mexico Energy Intelligence in Houston: The possible left turn in energy policy after 2018 should be reason enough for investors to ponder taking (or not taking) advantage of current opportunities. Long-term contracts are obligations of the Mexican republic, not of its president. Investors have recourse under NAFTA and the OECD against virtual expropriation of the kind that Metalclad endured in the late 1990s and that Marathon Oil suffered in the early 2000s. As for Andrés Manuel, he would be right to wonder if, as written and executed, the energy reform is good for the country, but he would have no doubt that it is good for the PRI’s narrative about the country. Pemex and CFE are preserved as state corporate icons that are led by appointees of the president of Mexico. In the name of the iconic Lázaro Cárdenas (who expropriated the oil industry in 1938), oil leases have been auctioned, and Pemex now has joint equity in leases with two top-tier oil companies: BHP and Chevron. Once in office, and reviewing the pros and cons of the energy reform, AMLO is likely to find much more to like than to dislike. The risk to investors will arise more from the inexperience of the new cadre of public servants than from the ideology of its members. Their inexperience could show itself in a slowdown of the scheduling and scope of oil leases and power auctions. Pemex and PMI, meanwhile, will continue to enjoy their hegemonic positions in midstream and downstream markets.
James Bosworth, founder of Hxagon and author of Bloggings By Boz: AMLO’s comments on the oil sector were frustratingly vague, leaving observers with the impression that he could undo energy reform completely or just tweak around the edges. That vagueness gives his most militant supporters hope for radical change while allowing his more moderate supporters to believe he will find a market-friendly compromise with foreign businesses. It’s quite likely that AMLO himself is strategically ambiguous as an electoral position and doesn’t yet know what he will do if elected. He is still listening to and being influenced by a large group of individuals pulling him in various directions. His comments about reviewing oil contracts come in the wake of several large corruption scandals including allegations that the former head of Pemex took millions in bribes from Brazil’s Odebrecht. The Mexican public is furious with the political class about corruption, and it has become a key electoral issue. With AMLO so vocal about the energy issue, this anti-corruption climate may push more market-friendly candidates to also consider reviewing contracts. Foreign companies should welcome a reform process by any administration that cleans up and creates transparency in the bidding on contracts while punishing those who previously cheated in order to gain an upper hand.
RoseAnne Franco, head of Oil & Gas Risk at Verisk Maplecroft: Despite the uptick in oil and gas tenders in Latin America anticipated over the next 12 months, we expect Mexico to remain well positioned vis-à-vis peers in the region. For foreign operators, the country’s large hydrocarbon potential and its opportunities are diverse, including deepwater, tight oil, heavy oil and unconventional plays, among others. Andrés Manuel López Obrador did mention his intention to review contracts in his Sept. 5 speech in Washington. However, the larger context was also telling—he cited the recent corruption allegations involving Odebrecht and Pemex totaling a reported $10.5 million in bribes. An anti-graft agenda has been a continuous theme in López Obrador’s campaigns over the years; given the escalation in high-profile cases and growing legal autonomy in other jurisdictions (e.g., Brazil) it’s no surprise that the candidate would once again revisit the issue. However, his stated review of existing contracts does not imply contract revision. Moreover, Mexico City has signed a number of international agreements relating to investment disputes to ensure that businesses’ property rights are respected. While the left-of-center candidate could slow down the pace of development in oil and gas projects in Mexico, we believe that stagnant hydrocarbon output in the near term and the fragmented status of the legislature will insulate the sector from any energy reform ‘snapback.’ And over the medium term, we expect competitiveness in Latin American oil and gas to accelerate through 2022 as governments vie for investment dollars—and an AMLO government would not be immune to these pressures.